The publication of Reserve Bank of India’s (RBI’s) annual report has rekindled the debate on the costs and benefits of demonetisation. The fact that more than 98% of the invalidated high value notes came back to the banking system is widely used as evidence supporting the view that demonetisation has failed to curb the black money menace. Supporters of demonetisation cite facts such as a close to 20% decline in currency in circulation, increase in the number of tax payers and identification of large number of shell companies to claim that demonetisation has succeeded.
In this context, it is critical to emphasize that demonetisation was a unique event, and hence, drawing inferences based on theory, armchair analysis or even short-term data, could lead to misleading conclusions.
The danger of jumping to immediate conclusions can be easily illustrated using the latest numbers released by the RBI and the data relating to composition of post-demonetisation deposits presented by the finance minister during the course of his budget presentation. Based on recent RBI data, it is reasonable to infer that the government did not realize any short-term windfall gain due to demonetisation…Read more.
Author: Prasanna Tantri, Senior Associate Director, Centre for Analytical Finance at ISB
Source: This article is extracted from Livemint dated September 11, 2017.