Indians have returned $80bn worth of high-value currency notes to banks since Prime Minister Narendra Modi banned their use this month as part of a crackdown on corruption and tax evasion.
The outlawed Rs500 and Rs1,000 notes are together worth about $220bn, and make up 86 per cent of the cash circulating in India’s economy. Banks have so far dispersed $15bn in new notes to Indians who have withdrawn the cash from banks, ATM machines or exchanged small quantities for new notes.
The Reserve Bank of India released the figures on Monday amid growing controversy over the impact of Mr Modi’s surprise demonetisation on India’s economic recovery and prospects.
Analysts estimate the shock of the currency ban will shave 0.5 to 1 per cent off India’s GDP growth in the current financial year — assuming significantly more cash is pumped into the economy by the end of next month. But a report by Ambit Capital has predicted that India’s growth will collapse to just 0.5 per cent in the second half of the current financial year, from 6.4 per cent in the first half.
“This is a startlingly strong move for an economy which is so cash-centric,” said economist Omkar Goswami, founder of CERG Advisory, a business consultancy.
“It would seem to me it would take two or three months before the cash in circulation gets back more or less to the level that it was before,” he said. “Until that time, there will be stress, and not necessarily from guys who were hoarding ill-gotten wealth but for normal transactions.”
Indians were ordered to stop using high-value currency notes at midnight on November 8 in a government drive to identify those who had accumulated illicit wealth, or evaded taxes in the past.
The banned notes can be paid into bank accounts until the end of the year, but deposits of more than Rs250,000 will be scrutinised by tax officials. Small sums of old notes can also be exchanged over the counter for new valid cash.
In the long run, if things really get cleaned up and growth is able to recover, maybe in a couple of quarters it’s going to look like a really great move
Since the edict Indians have descended on the country’s banks, depositing $75bn in banned notes and exchanging $5bn for new notes.
“It’s actually a pretty fast pace,” said Aditi Nayar, senior economist at ICRA, the Indian arm of Moody’s, the credit rating agency.
But consumers still face a cash crunch, as the government grapples with logistical bottlenecks that have slowed dispersal of cash. New Delhi has retained strict limits on how much money can be withdrawn from banks or ATMs. “There are a lot of perfectly legal, convenient bits of economic activity that are not being able to be conducted right now,” Ms Nayar said.
The disruption is particularly acute in rural areas, where bank penetration is low, and each small branch serves a wide geographical area. On Monday, New Delhi relaxed restrictions on old Rs500 notes to permit farmers to use them to buy seeds from public sector companies, amid concerns about potential disruption to the current sowing season.
Estimates of India’s stock of ‘black money’ vary widely, but most economists — and government officials — believe some of the extant high-value bank notes will not be returned, providing a windfall for the RBI and potentially the government.
“In the long run, if things really get cleaned up and growth is able to recover, maybe in a couple of quarters it’s going to look like a really great move,” Ms Nayar said of the demonetisation. “But certainly right now, the transition isn’t easy.”
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