Demonetisation to cost Rs 1.28 lakh cr, cost to companies Rs 61500 cr | business-news | Hindustan Times
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Demonetisation to cost Rs 1.28 lakh cr, cost to companies Rs 61500 cr

business Updated: Nov 24, 2016 10:54 IST

Prime Minister Narendra Modi announced on November 8 that that 500 and 1,000 rupee -- 85 percent of the cash in circulation -- would cease to be legal tender in a crackdown on fraud and tax evasion. (AFP)

On November 8, the government announced its decision to stop the circulation of R500 and R1,000 notes. The total outstanding value of demonetised currency is around R14.2 lakh crore as of March 31, 2016. Of this, the government is expecting around R4-5 lakh crore to be unaccounted cash.

According to estimates by the Centre for Monitoring Indian Economy (CMIE), the cost of demonetisation during the 50-day window till December 30, 2016 (the deadline for converting all your old banknotes into new ones) would be R1.28 lakh crore.

Businesses are expected to pay the biggest price of the demonetisation exercise, and the immediate impact could be around R61,500 crore, almost 50% of the total cost of demonetisation, according to CMIE.

“This immediate impact would be a fall in sales. Households would reduce discretionary consumption spending during the 50-day period. The annual consumption expenditure of households is estimated at R31 lakh crore. Most of the.discretionary spending is in cash. We expect this market to take a 50% hit during the 50-day period. This translates into a loss of R61,500 crore,” said Mahesh Vyas, managing director and chief economist of CMIE, in the research note.

“All estimates are admittedly conservative, and limited to the 50-day window. However, the impact of low liquidity, broken supply chains and loss of confidence in consumers are likely to impact the economy over a longer period.”

After enterprises, it will be banks in the pecking order. They are expected to bear around R35,100 crore (27% of the total cost for demonetisation ). This includes cost of recalibration of ATMs, overtime salary to bank employees and other sundry expenses during the 50-day window.

According to a SBI research note: “RBI had spent R3,762 crore in printing notes in 2014-15. If the notes of these two denominations are withdrawn, the cost of printing notes for RBI would also multiply”.

According to CMIE, the government (including RBI) would have to shell out an additional R16800 crore for printing and transporting the new currency to banks. Disposing the old currency also has a cost attached to it.

The households are also expected to be hit badly. The cost of demonetisation for them is estimated to be around R15,000 crore.

“The exact cost owing to the demonetisation exercise is uncertain as of now... it can be assessed only in the next few weeks,” Soumya Kanti Ghosh, chief economic adviser, State Bank of India, told HT.