A customer withdraws money from his bank account linked with his Aadhaar or Unique Identification (UID) number during a Digi Dhan Mela, Hyderabad (File Photo)(AFP)
A customer withdraws money from his bank account linked with his Aadhaar or Unique Identification (UID) number during a Digi Dhan Mela, Hyderabad (File Photo)(AFP)

Four clear benefits that prove demonetisation is a success

From demonetisation to digitisation and from financial inclusion to improving transparency, the Narendra Modi-led NDA government’s structural transformations of the economy since 2014 are starting to show results
By Soumya Kanti Ghosh
UPDATED ON NOV 08, 2017 03:49 PM IST

India has been on the path of major structural transformation since 2014 with the current government introducing key reforms in areas of financial inclusion, taxation, ease of doing business, digitisation, bankruptcy and insolvency laws and housing among others, in order to foster enhanced transparency, accountability and formalisation of the economy. The recent increase in the ease of doing business ranking released by World Bank is a testimony to this. Additionally, the recent announcements on recapitalising the public sector banks is an addition to a long list of changes.

How are such structural measures stacking up? The only issue is that they are always long-term in design, and hence some short-term pains are inevitable. Interestingly, the experience of OECD and European countries shows that the actual benefits on growth, unemployment and consumption of such long-term measures begin to manifest after two years. In essence, there could be some postponement of immediate consumption leading to negative impact in the short term.

One of the most commonly discussed initiatives regarding transparency was the demonetisation move. I would like to mention four clear benefits of this move. First, post demonetisation, registration of companies with a smaller capital is gaining pace. Second, the trend in income tax e-filing shows that for the five-year period ended FY14 approx 5 million people were filing returns on an annualised basis — that has increased to 7.7 million (FY14-FY17) and could have expanded further. Third, the share of small currency notes in circulation that was 28% in FY09 (54% in FY04) and declined to 13% in November 2016 has now increased to 28% by March. A larger percentage of smaller notes improves transparency in cash dealings. Fourth, gross financial savings has increased from 10.9% of gross national disposable income (GNDI) in FY16 to 11.8% of GNDI in FY17, a notable climb of 90 bps.

A word on digitisation. The exorbitant increase in number of point of sale (PoS) terminals has resulted in an increase in debit and credit cards transactions at PoS terminals by 38% between October 2016 and August. Further, digital payments through the Unified Payments Interface (UPI), has crossed 16 million transactions in volume and Rs 50 billion in value within 11 months of its launch.

Following the footsteps of India, Venezuela also adopted demonetisation in December 2016, but it turned out to be catastrophic. People of India thus must be saluted for their patience during the entire exercise.

The other reform initiatives of the government have been in the areas of financial inclusion through a series of initiatives on Jan Dhan accounts, Mudra and Suraskha schemes. The attempt was to formalise the economy and the numbers do suggest a huge transformational change. As a result, 300 million families have now been linked to Jan Dhan accounts with Rs660 billion of deposits, disbursal of Mudra loan to 92 million units with Rs5 trillion disbursement and issuance of 140 million insurance policies for the masses. With the Jan Suraksha schemes a success, the insurance penetration in India increased from 3.3% in 2014 to 3.6% in 2017.

Such policies also brings with it huge social transformation. In a study of a random sample of Jan Dhan accounts (Agarwal, Alok, Ghosh and others: 2017) it has been empirically established that in regions having high exposure to Jan Dhan accounts, reliance of households on non-banking sources of credit (moneylenders, chit funds, etc) has declined, an increase in household medical expenditure, a decline in expenditure on intoxicants and a smoothing of consumption expenditure on food and fuel (the Ujjwala scheme may also have played a role). In a similar vein for the Mudra scheme there is evidence of preponderance of disbursement for women entrepreneurs across the southern and eastern India/laggard states.

Apart from financial inclusion, the government has been pushing for improving transparency and accountability in public life. The results are visible with India moving up substantially in the Corruption Perception Index. Additionally, the trend in total number of actions taken by the central vigilance commissions suggests that during the last two years, the number of outside complaints received by CVC is significantly declining reflecting the public faith in cleaner administration now.

Soumya Kanti Ghosh is group chief economic advisor, State Bank of India

Twitter: @kantisoumya

The views expressed are personal

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