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When Money Returns

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[dropcap]T[/dropcap]he success or failure of Prime Minister Narendra Modi’s higher denomination currency note cancellation drive will be measured by how much of such notes finally fail to come back into the system. Juries are already out on this, variously calculating the figures already banked in the last 3 weeks. Some estimates indicate that Rs 12,00,000 crore worth notes have already been banked in, leaving a paltry Rs 2,00,000 crore to come in the next one month till 30 December. This is cited as a failure of the scheme. In the absence of India’s central bank, the Reserve Bank of India releasing any data on hominy currency notes of 500 and 1000 denominations were in circulation as on 8 November when the demonetisation decision was announced the last available data of 2015-16 is used in all the analyses.

In the absence of data from the RBI, one may use the estimates of India’s largest bank State Bank of India for a quick judgement on the much-debated scheme of the government. According to the SBI chief economist, the currency with the people at the time of demonetisation (8 November) was Rs 15,44,000 crore. This amount does not include the currency with banks, ATMs included, or money in currency chests with banks. According to the RBI, the definition reiterated by the SBI economist, the currency notes getting replaced are those that are in circulation (even if lying inside divan) and coins.

Out of the amount, Rs 8,44,000 crore are back with the banks. In other words, Rs 7,00,000 crore are yet to come into the system. But there is still time — about a month more till 30 December.

SBI estimates suggest that after the end of the exercise, the banking system will see an additional inflow of Rs 12,94,500 crore between 10 Nov and 30 December from deposits of high denomination notes. If the estimate proves correct, there is a possibility of an additional amount of Rs 4,50,000 crore coming into the system. This will leave Rs 2,50,000 crore unaccounted high denomination notes without any base. In effect, the RBI will write off the amount and it will come as an extraordinary dividend to the central لovernment.

demonetisation
People queue up outside banks and ATMs to get money in New Delhi on 13 November. [PTI photo by Vijay Verma]
Of the total Rs 12,94,500 crore high denomination notes deposited, one may assume that 25% will be black money walking back into the system. Since 50% of the same will come back as tax, the government will receive an estimated Rs 1,61,900 crore windfall tax (half of Rs 3,23,800 crore, which is 25% of Rs 12,94,500 crore worth of notes coming back). In addition, there will be another Rs 80,000 crore to be used by the government during its interest-free 4-year lock-in period.

If the estimates of SBI are reasonable, one may conclude that the demonetisation move will enrich the central government by Rs 3,11,000 crore plus Rs 80,000 crore. This will be enough for the Modi government to use during the 2 financial years before the next general election.

Even if one assumes that the entire currency stored will come back to the system, the windfall for the government will be at least Rs 2,80,000 crore plus Rs 80,000 crore.

If certain state governments — like the West Bengal government — don’t allow GST to be implemented, the loss will entirely be of the States. The Union government will have more than enough liquidity to address its vote banks while the States will just agitate and turn even more unpopular by the day.

Whatever be the arguments of select economists like Amartya Sen, Paul Krugman or Kaushik Basu, the political-economic act of the decision will help Prime Minister Modi to launch another spirited election campaign in 2019.

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Sugato Hazra
Public policy analyst based in Delhi

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