Four weeks in to the demonetized world, we are still scrambling for data. With every passing day, one thing is becoming clearer - the replacement currency will not be exactly equal to the 15 lakh crore withdrawn currency. The talks and press releases are emphasizing on B2B and B2C transactions going online, and unless there is a major upheaval at grass roots; India will learn to live with fewer currency notes.
The amounts deposited have been higher than expectations, and half way in to the available time, more than half of currency notes have been deposited. Therefore, the brown scenario is now unlikely and we'll see nearly 100% of currency notes deposited. What this means is that individuals holding the currency notes have deposited it themselves, or laundered away and got 100s or 2000s.
An easy supply of 2000s and other currency notes would have made it easier for people to launder away the old notes. So, the current shortages faced by citizens were in a way necessary to limit the laundering as far as possible.
How are people managing without the cash? There have been reports of drop in trade, and in some cases drop in production (including production of services). In no reports, this drop is more than 40%. This is a good news, considering the fact that drop in currency is almost 75%. Thus, the pain in the system is not as high as the shortage in cash. It tells us that a large chunk of money was not getting used (except maybe during elections). It also tells us that people have learnt to live without currency notes - through use of credit or through use of other payment systems.
Latest data from RBI about electronic payment systems shows that there is a 40% jump in electronic payments compared to November 2015. Complete data is awaited, but in my judgment, this estimate should hold good even when we get the entire data. This jump was 26% in May 2016 and 27% in September 2016. It would be safe to assume that an additional 10% business has moved online. This figure is approximately 10% of GDP and approximately 100% the currency that was withdrawn (net of new issue). Available data shows that RTGS / NEFT transactions explain most of the jump, and a low increase in transactions using credit / debit cards or using prepaid instruments. One of the reasons behind this could be that the data for credit / debit cards and prepaid instruments is yet to arrive from several financial institutions.
Only time will tell whether the cash crunch will continue in to January and force more people to move to white transactions. Indications from RBI about new 20 and 50 Rs notes imply that they are in no mood to increase the currency in circulation back to 8th November 2016 levels. Thus, I stand by my forecast of 10% GDP growth (official figures) within 1-2 quarters, until 15th December when we see the advance tax figures.
The amounts deposited have been higher than expectations, and half way in to the available time, more than half of currency notes have been deposited. Therefore, the brown scenario is now unlikely and we'll see nearly 100% of currency notes deposited. What this means is that individuals holding the currency notes have deposited it themselves, or laundered away and got 100s or 2000s.An easy supply of 2000s and other currency notes would have made it easier for people to launder away the old notes. So, the current shortages faced by citizens were in a way necessary to limit the laundering as far as possible.
How are people managing without the cash? There have been reports of drop in trade, and in some cases drop in production (including production of services). In no reports, this drop is more than 40%. This is a good news, considering the fact that drop in currency is almost 75%. Thus, the pain in the system is not as high as the shortage in cash. It tells us that a large chunk of money was not getting used (except maybe during elections). It also tells us that people have learnt to live without currency notes - through use of credit or through use of other payment systems.
Latest data from RBI about electronic payment systems shows that there is a 40% jump in electronic payments compared to November 2015. Complete data is awaited, but in my judgment, this estimate should hold good even when we get the entire data. This jump was 26% in May 2016 and 27% in September 2016. It would be safe to assume that an additional 10% business has moved online. This figure is approximately 10% of GDP and approximately 100% the currency that was withdrawn (net of new issue). Available data shows that RTGS / NEFT transactions explain most of the jump, and a low increase in transactions using credit / debit cards or using prepaid instruments. One of the reasons behind this could be that the data for credit / debit cards and prepaid instruments is yet to arrive from several financial institutions.
If one had to judge the situation on the basis of available data, one could say that significant number of previously cash transactions have moved to white payments. Assuming everything else stayed the same, one can see about 10% annualized GDP growth for the month of November, especially if some of the panic transactions that have taken place showing a back-dated invoice (illegally). The story for December could turn out to be a little different, as businesses find new substitutes to cash and when there won't be any back-dated transactions.
I still don't know whether this is going to affect either the stock or flow of black money. The movement to clean society is also dependent on moral stand taken by people and businesses; and the responsiveness and compliance by the state machinery - for instance the income tax department. Till such time, we have no choice but to face the "inconveniences".
Only time will tell whether the cash crunch will continue in to January and force more people to move to white transactions. Indications from RBI about new 20 and 50 Rs notes imply that they are in no mood to increase the currency in circulation back to 8th November 2016 levels. Thus, I stand by my forecast of 10% GDP growth (official figures) within 1-2 quarters, until 15th December when we see the advance tax figures.
