1. Narendra Modi govt can’t kick-start economy without demonetisation bonanza; check out why

Narendra Modi govt can’t kick-start economy without demonetisation bonanza; check out why

In the absence of specifics of the demonetisation ordinance, it is not clear how large the penalties will be for those who continue to hold on to the old 500-/1,000-rupee notes.

By: | Published: December 30, 2016 6:32 AM
Demonetisation, Cabinet meeting on note ban, RBI, recapitalisation, black money In the absence of specifics of the demonetisation ordinance, it is not clear how large the penalties will be for those who continue to hold on to the old 500-/1,000-rupee notes. (Source: PTI)

In the absence of specifics of the demonetisation ordinance, it is not clear how large the penalties will be for those who continue to hold on to the old 500-/1,000-rupee notes, and whether this could involve a prison term as well—after Wednesday’s Cabinet meeting cleared the ordinance, no details were released.

A penalty, should there be one, will be unfortunate since, as the notes are not legal tender anymore—there is a restricted window to still change the currency—it doesn’t really matter if people hold on to them. Of course, had the government not extinguished RBI’s liability to pay the bearer of the currency its face-value through the ordinance, the central bank would have to carry the liability on its books forever. And that would have ensured the government could not have got a special dividend from the central bank equal to the value of the 500-/1,000-rupee notes that do not come back to the banking system.

Though some former central bank Governors have said the money cannot be transferred to the government by way of a special dividend, the fact that the ordinance has been cleared means the government is determined to get the money. How much it will get is unclear since, though RBI’s official stance is that R12.44 lakh crore—of the R15.4 lakh crore which was demonetised—came back till December 10, FE’s analysis suggests R14.3 lakh crore has come back till December 16; presumably the actual number will be declared by the prime minister in his address to the nation on Saturday.

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Since many of those who will have deposited their black money in banks, but have not been able to launder it, will avail of the second income disclosure scheme (IDS), the real impact of demonetisation on government finances will only be known by March 31—the government could, for instance, get
R1 lakh crore from RBI and another R50,000 crore from IDS-2.

What the government does with this money is not clear, but given the slump in the economy due to demonetisation—most analysts have lowered their FY17 growth estimates by 1-1.5 percentage points—it needs a bonanza to be able to kick-start the economy; whether units which have shut down due to the currency crunch can be revived immediately or how soon demand will return, though, is not clear. Given the poor have been hit the most, channelising the money to them seems the most obvious choice, apart from yielding political dividends. But given how badly banks need funds for recapitalisation, not giving them the money seems like squandering an opportunity.

  1. A
    ashok
    Jan 8, 2017 at 11:47 am
    What about NRI holding old currency. There are 1 crore NRI's. This is day light robbery by the govt. Imagine an average NRI holding rs10000/- of old notes with them . with no time or money to come to india before march these hordes of honest money will be extinguished. This is not fair. Where are we heading as a country where the govt has no clue. This call to demonetize where the hoipolloi PM has coerced RBI to act is deplorable. A terrible mistake and a terrible implementation. It is so important to elect educated skilled and experienced person as PM . Country is now run by amit. jaitley and modi. What a shame
    Reply
  2. P
    Puzzled and
    Dec 30, 2016 at 4:14 am
    Gain of 1.5 lakh crores and loss of 1.5 % GDP which translates to 2.1 lakh crores. How will this bonanze be funded. More borrowings ??
    Reply
  3. d
    drywpande@yahoo
    Dec 30, 2016 at 4:48 am
    Forget advantage of demonetization, the way economy is going to fall down on roller coasters this government has neither talents nor experience to hold on. Come back may take tens of years like MMS has said. Sooner this team gets out of governance better it will be for the country.
    Reply
  4. V
    Veera
    Dec 30, 2016 at 5:43 am
    There is no simple way to clean the system..banks gave loans to political stooges and made NPAs..All big corporates are running their business on bank NPAs only and there is no new money coming into banking system...lot of people are not filing taxes..there is lot of gap between wealth in India and tax filing..how to address this ? Lot of black money came back to india after govt started measures to go after overseas enies..I think demonetization is best thing to happen..only MODI could do it..It caused pain to me too...but there are better reasons for good ...Hope the same commitment will be shown for benami properties also.
    Reply

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