Six months after the withdrawal of the legal tender status of Rs 500 and Rs 1,000 notes by the Reserve Bank of India, the impact of demonetisation does appear to be ebbing. However, the full picture on currency withdrawal is not available even now as the RBI is yet to release data on currency which has come back into the banking system.
The government announced the withdrawal of Rs 500 and Rs 1,000 worth Rs 15.44 lakh crore on November 8. While the impact on the real sector has been sharpest in the months of November and December, the recent data on auto and FMCG sectors does suggest a revival in pent up demand. However, the small scale sector is yet to recover. The monetary sector has gone through a challenging phase on the back of the NPA legacy issues and with loan growth at a six decadal low. The availability of currency in the system has been normalised by the RBI but the amount in circulation is still two-third of that in November just before it was announced. Bank deposit rates have fallen because of excess liquidity in the system while banks have lowered their lending rates in a bid to make borrowing easier. However, bank credit growth is still to pick up. Digital transactions got a push from the government but again the momentum seems to have dropped.
Certain industries were impacted because of a shortage of currency and as demand fell and production slowed down, there was a drop in employment, says a Care Ratings study. Household spending declined in November to January but revived slowly after the curbs on cash withdrawal were removed. Overall growth in GVA (gross value added) at constant prices did slow down to 6.6 per cent in Q3-FY17 compared with 7 per cent in Q3-FY16, but picked up later. This can largely be attributed to the negative effects of demonetization which was evident in the case of manufacturing, construction, trade, transport & communications, and finance, real estate & professional services.
Thousands of small-scale units which floundered after demonetisation are yet to fully recover and many have defaulted on loan repayments. Microfinance institutions which witnessed a fall in loan disbursals and collections are yet to come back to normalcy.
The RBI has been remonetising the economy over time and the currency chart has followed a U-shaped trajectory. The rise in weekly average of currency in circulation has been Rs 35,700 cr for the calendar year 2017, says a Kotak Institutional report.
According to financial experts, the success of demonetisation can be gauged only after getting the data on the old currency which was returned to the system in the form of deposits or exchange. The RBI is yet to disclose this data to the public. “We are still compiling the data on the old notes. There are 4,000 currency chests in India… apart from this the RBI keeps the currency in 19 other places. The currency travels between these chests and the RBI. After December 30, the RBI had told banks to compile the data on these old currencies and the RBI team has also finished checking that data on sample basis. The process of reconciliation of the accounts are on. We hope that this will get over in some time,” RBI deputy governor SS Mundra had said.
On March 14, 2017, the RBI lifted all restrictions on cash withdrawals from savings bank accounts imposed on November 8, 2016. The RBI move has come after almost four months since the Prime Minister first announced the withdrawal of high value notes.