Update on growth of Bank Deposits in India after demonetization, 30-11-2016

This is a sequel to my blog post http://obvioustruths.blogspot.in/2016/11/will-ban-on-high-denomination-currency.html

Here is an update on how bank deposits are swelling after the ban on Rs. 500 and 1000 notes. The question is whether a high proportion of the banned notes would be deposited or exchanged. What is not deposited or exchanged will become trash, yielding a bonanza to the Government. You can see from the graph, however, that there is an almost steady increase in deposits/exchanges. A good proportion what can be expected to come in has already done that. 

What is the Govt. going to do about the millions of people who have deposited other peoples' money into their accounts to white wash the moola? Deal with millions of court cases?

I have a suggestion. Allow 50,000 staff members of loss making public sector companies to transfer to the Income Tax Dept! There is work to do there! 

Here is the updated listing of sources of this information: 

How to use any bonanza the RBI/Govt. gets from demonetization?

I was shocked by the article by Swaminathan Aiyar (SA) in the Times of India today.  

http://blogs.timesofindia.indiatimes.com/Swaminomics/now-modi-can-turn-kala-dhan-to-jan-dhan/

I read his column every Sunday and respect him as a serious commentator on economic policies.

Two numbers he quotes are worth repeating here. Rs. Fifteen trillion (also known as Fifteen lakh crores of Rupees) is the value of Rs. 500 and 1000 notes banned by the Prime Minister’s (PM’s) announcement on Nov 8 2016. The second number is Rs. 640 billion rupees (aka Rs. 64,000 lakh crores) is the value to which “Jan Dhan[1] accounts have suddenly swollen”.  SA speculates on what the Govt. could do with any part of the 15 trillion worth of notes that are not deposited in bank accounts. He “suspects” that as much as 3 trillion worth would not be deposited. This is gain for the RBI/Govt. because what is not deposited would become trash, and the banks would not have to issue new currency to replace it.

Now, he comes with this amazing statement that the PM could emerge triumphant by combining “imaginative accounting, populism and good economic sense”. How? – by depositing Rs 10,000 in each Jan Dhan account; as a gift from the Govt? Some regional parties all over India would be turning green with envy! They could never buy vote banks by using Govt. munificence on this scale! There are over 250 million Jan Dhan accounts!

Either SA is kidding, or he suspects that the political temptation to do this would be very high. I am sure that he would have surely read at least summaries of the Economic Survey 2015-16: 

http://www.business-standard.com/article/pti-stories/india-needs-to-push-up-tax-gdp-ratio-spend-on-health-edu-116022600374_1.html 

which says that India should increase the tax/GDP ratio. If there is Rs. 3 trillion bonanza, a fraction of that would clearly be income tax that should have been collected but was not. Another fraction would be loot extorted by corrupt officials and politicians. So, SA, you want this to be used for buying votes?

What happened to your enthusiasm for building infrastructure? Can’t we use the bonanza to fund mass transportation systems? Can’t use it to improve the quality of our education and health services? Or, promote the switch to alternative sources of energy and cut the annual oil import bill? How all this should be done without introducing inefficiency and corruption endemic in every major Govt. effort is worth discussion, but obviously, there are ways of doing that.
  

I am also concerned about the crores of people who stood in the queues in front of banks. Many of them were honest citizens who had come to deposit their own money. However, there were also millions in those queues who were earning 5% or something like that for depositing someone else’s money into their own bank accounts. The goondas who had hired them have probably made 15 to 20% by acting as wholesalers for the operation. Those who stood in the queues were getting training in making easy money through whitewashing other’s ill-gotten wealth. They are not going to forget this training as well as the “working relationships” they developed with the goondas they worked for. They will look for new “opportunities” to make easy money. Many will go far, as far as doing some foreign travel on behalf of hawala operators!

Let me ask my concluding question – to what extent will the bonanza be reduced because of the great big white washing machine that the currency ban has created?

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[1] Bank accounts promoted by the Govt. for purposes of financial inclusion. Many of them were zero balance accounts before the ban on Rs. 500 and 1000 currency notes. 

Will the ban on high denomination currency notes work?

This is a complex question; different political parties will have different answers. Results will be judged by various criteria.

I will focus in this post on how the banned notes are being surrendered through bank deposits. There is no ban on such deposits till Dec 30, 2016; the ban is only in using them for payments outside the banking system. The deposits can be withdrawn in the form of new currency notes. A problem will be faced by those who have unaccounted money; that is wealth, the sources of which cannot be explained to the tax authorities. Of course, any tax due on the money now surfacing will have to be paid. The Income Tax officer can ask those who did not pay tax on similar income in the past to explain how they suddenly earned so much this year!  Such presumed evasion of tax could be penalized heavily. 

This leads to the belief that some of the 14.73 Trillion Rupees that was in circulation in the high denomination notes will not be returned through the banking system. The holders of such cash would be unwilling to face investigation. It is argued by some people that this will reduce the liability of the Reserve Bank of India, and result in a gain for the people of India as a whole. 

If this is true, we should watch with bated breadth deposit flow into the banks as it progresses. Like an election result, the suspense will be great till Dec 30 when these deposits will stop. We will then know whether all the pain and suffering millions underwent while standing in bank queues was worth it. I provide bank deposit information up to Nov 20. The tables are given below, and a graph is near the top of this page. I will add new posts to cover growth of deposits in the coming weeks. Keep watching this blog!

Date	Source of information summarized against that date
08-11-16	http://www.business-standard.com/article/economy-policy/86-of-currency-by-value-in-india-are-of-rs-500-rs-1-000-denominations-116110801416_1.html
12-11-16	http://www.ibtimes.co.in/banks-get-30-billion-deposit-boost-after-ban-higher-currency-notes-703760
14-11-16	http://www.hindustantimes.com/business-news/over-4-lakh-crore-cash-deposited-in-banks-in-five-days/story-CaAvhf0ivEAQkNiKYxYu0L.html
20-11-16	http://www.hindustantimes.com/india-news/live-pm-modi-in-agra-launches-housing-scheme-for-rural-poor-in-up/story-r1S0MqgSXIoGDRwVj2OIbN.html

end 

Surgical Strike on Corruption

The Prime Minister and Finance Minister have taken a bold step to strike against corruption; they have demonetized existing versions of Rs. 500 and Rs. 1000 currency notes. The only way to use them now is to deposit them in your bank and subject the amount to scrutiny by the Income Tax Dept. This is the first major step against wide-spread corruption that I have seen in the last couple of decades. Some of those who deal in real estate, precious metals and jewellery, along with corrupt officials and politicians are going to be among the losers.

Photograph by Sarvagnya from Wikimedia Commons,  published

under  GNU Free Documentation License, Version 1.2

It has been pointed out that banks will face a lot of additional work. There will be some chaos and even, perhaps, some slowdown of our economic growth. I believe this is all worth suffering through. Those below the poverty line are, hopefully, not going to suffer much; surely, they have no hoard of five hundred rupee notes! Those above the poverty line should be willing to pay some price for the nation carrying out a surgical strike against corruption!

This action should, ideally, increase peoples’ willingness to use banks and credit/debit cards for an increasing number of transactions, but the Government must encourage this tendency.  A strike has been made on existing black money, but there is no point in allowing future accumulation of black money in two-thousand rupee notes!

One step the Government could take is to withdraw tax on services provided by banks to retail customers. Credit and debit card transactions should also be free of service tax. All business transaction above a certain limit should be only through banking channels. These long-term measures are essential.

Demonetization is like the Delhi Govt. spraying water on the streets! It controls dust for an hour; do they have enough water to bring down all the pollution of Delhi day after day?