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DeMo marks a structural shift in the long term

Author: Rajendra Prasad/Wednesday, November 8, 2017/Categories: Economy

DeMo marks a structural shift in the long term

In the last one year post demonetisation, one can see the tangible and intangible benefits as well as the pitfalls. But the long term benefits of demonetisation could outweigh the drawbacks in the short term. Tangible benefits are surge in bank deposits, increase in tax collection and spike in digital payment transactions and shift in investment preference to equity markets which rallied to all-time highs.

Surge in bank deposits led to lower interest rates: Demonetisation has led to surge in bank deposits by around 11% to Rs 1.09 crore. Surge in bank deposits coupled with slower pace of credit growth at 7.7% has resulted in steady decline in deposit and lending rates at Indian scheduled commercial banks.


Increase in taxpayer base and tax collection: Demonetisation and mandatory deposit of high value cash in bank accounts had led to surge in personal income tax collection and jump in the number of income tax returns filings. As per the CBDT press release in August 2017, the number of income tax returns filings has increased by 24.7% and advanced tax collections of personal income tax registered a growth of 41.79% over the corresponding period in the previous year.


Status-quo in gold purchases: Gold purchases for weddings and festive occasions were not severely impacted post demonetisation, but clearly it discouraged the purchase of physical gold for parking unaccounted money. In the last one year, gold price has depreciated around 5%.


A shift in investment preference to equities: Surge in liquidity and lower interest rates on bank deposits as well as unattractive returns in other asset classes like gold and real-estate had led to money flowing into equity markets. Indian equity markets have appreciated over 24% due to a steady inflow of funds from domestic institutional investors (DII) to the tune of around Rs 97,000 crore even though foreign institutional investors (FII) remained net sellers to the tune of over Rs 60,000 crore in the last one year. This clearly shows the shift in investment preference by the domestic investors towards equities and mutual funds.


Demonetisation has brought in some in-tangible benefits like the financial system was re-booted and started almost on a clean slate. All transactions are traceable from that period with the linking of Aadhaar number and bank accounts. Also, demonetisation has sent a message that it is just the beginning of tracing unaccounted money and more steps towards the same could be taken with very short notice. It seems to curtail terror funding to a certain extent. Also, there has been a drop in major corruption allegations involving huge amounts of money at the central government.   


However, one of the major pitfalls of demonetisation are reissuing higher denomination notes like Rs 2,000 which goes against the initial intent of the move. Another impact is cash transactions going back to pre-demonetisation levels after a year.

Overall, demonetisation can be called the beginning of a structural shift towards a formal economy in the long term, which created hardships for the people operating in the informal economy in the short term. This could be seen as the necessary pain incurred in the hope of a rewarding system in the long term.

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