Needless turmoil

If at all anybody nursed residual hopes that the Modi government’s November 2016 lightning strike on high-value currency notes achieved its objectives, the Reserve Bank of India’s latest Annual Report conclusively dashes those hopes. With the counting of the returned notes done and dusted, the RBI reports that ₹15.3-lakh crore worth of cancelled currency — 99.4 per cent of those withdrawn — returned to its coffers. This demolishes the idea espoused during the note ban that 15-20 per cent of the cash in use was ‘black’ money, which would be permanently put out of circulation. India’s transition to a less-cash economy hasn’t speeded up either, with the currency-to-GDP ratio climbing back to 10.9 per cent in FY18 after dipping to 8.8 per cent in FY17. The report notes that India has ‘amongst the highest levels of currency usage’ compared to emerging market peers. The ban has also failed to unearth significant counterfeits as promised, with the proportion of fake notes detected by banks in FY17 and FY18 amounting to 0.00001 per cent of the notes in use. There has been no further word on the CBDT’s investigation into large bank deposits to nab tax evaders. Therefore, one is forced to conclude that the only material benefit to the economy from demonetisation was the improvement in India’s tax compliance metrics this past year. With the data now at hand, a comprehensive cost-benefit analysis of demonetisation would have been educative for future policy-making. But the NDA seems to be in denial mode, with the report of the Standing Committee on Finance on demonetisation also deadlocked in Parliament.

In recapping the performance of the economy and assessing prospects for FY19, the RBI strikes an optimistic note. Despite flagging external risks such as firming oil prices, rising trade deficit, tightening global liquidity and trade wars, it is sanguine that ‘country-specific factors’ could shield India from the turmoil. It sees strong agricultural output, momentum in manufacturing, renewal of capex and robust consumption demand backing up its prediction of 7.4 per cent GDP growth for FY19. But given worsening macros and India’s vulnerability to whimsical capital flows, one hopes that this isn’t a sign of complacency on emerging global risks.

On the positive side, the RBI’s own finances have posted a quick recovery from demonetisation. With surplus liquidity from banks abating, the RBI saved on interest outgo and increased its income by 27 per cent in FY18. Expenses, helped by lower note-printing costs, plummeted by 22 per cent. This allowed it to increase its surplus transferred to the Centre by 63 per cent to ₹50,000 crore. Here, it is good to see that the RBI has continued with its practice, resumed last year, of putting aside surpluses towards its contingency reserves. Given that these reserves cushion fluctuations in forex reserves, losses on exchange rate operations and systemic risks, skipping the transfer would have sent all the wrong signals this year.

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