Skip to main content

Neither Modi, nor Jaitley, nor those in PMO or Finance Ministry had any idea about the immediate after-effects of demonetisation

By Venkateshwar Rao jr
Prime Minister Narendra Modi and Finance Minister Arun Jaitley can continue to indulge in the rhetoric of demonetisation, but the Reserve Bank of India’s Annual Report for 2016-17 tells an absorbing story of economic disaster management. Modi’s November 8, 2016 televised announcement of withdrawing Rs 1000 and Rs 500 notes from circulation was nothing but an act of bravado, meant to take the bulls of black money, counterfeit currency and terror funding by the horns as it were, but basically an empty attention-grabbing gesture.
Neither Modi nor his government had any clear idea about the extent of counterfeit currency, black money and terror funding in the money circulating in the system. It is quite unlikely that the government would put the information in public domain for sanctimonious reasons of state even if it had specific information at the time.
But the information about currency in circulation and the money available in the banks is known through the Reserve Bank of India’s weekly statistical supplements. On March 31, 2016, the currency with the public was Rs 15,972.5 billion, and on November 11, 2016 it was Rs 15,262.3 billion. It was at a high of Rs 17,013.8 billion on October 28, 2016. It came down to Rs 9,119.1 billion on November 25.
And the bank’s annual report for 2016-17 says that currency in circulation declined by Rs 8,997 billion on January 6, 2017, “which resulted in a large increase in surplus liquidity with the banking system, equivalent to a cut in the CRR by about 9 per cent.” (CRR or cash reserve ratio is the mandatory cash that the banks have to maintain apart from their daily turnover.)
The bank used “unconventional measures” like market stabilisation scheme (MSS) by issuing securities of short-term duration. Apparently, the bank had asked the government to increase the limit on issuance of securities from Rs 300 billion to Rs 6,000 billion. Cash management bills (CMBs) under MSS were used between December 2, 2016 and January 13, 2017. And the bank managed to deal with excess liquidity in the system. “With fast paced remonetisation surplus liquidity in the system declined by mid-January 2017,” the bank’s annual report notes.
It looks like that neither Modi nor Jaitley nor those in the Prime Minister’s Office (PMO) or those in the Ministry of Finance seem to have had any idea about the immediate after-effects of demonetisation. The RBI identifies five phases in the post-demonetisation period to deal with the flood of liquidity in the banking system unleashed by demonetisation. In the first phase, from November 10, 2016 to November 25, 2016, the RBI used various measures of reverse repo. That is, the central bank borrowed money from the banks which were now flush with cash at variable and fixed rates.
According to the bank, it absorbed Rs 5,242 billion on November 25, the peak. In the second phase, from November 26 to December 9, the bank absorbed up to Rs 4,000 billion through Incremental Cash Reserve Ratio (ICRR) of 100 per cent, which meant that banks’ CRR rose from existing 4 per cent to 8 per cent and more. In the third phase, from December 10, 2016 to January 13, 2017, the bank it used Cash Management Bills (CMBs) under the Market Stabilisation Scheme (MSS), and it took in Rs 7,956 billion on January 4, 2017.
In the fourth phase, from January 14, 2017 to end-March,2017, the bank fell back on the traditional reverse repo to drain the excess liquidity from the banks. This measure peaked on March 6, 2017 with the bank absorbing Rs 5,522 billion, and it declined to Rs 3,141 billion by the end of March. But the bank report says that surplus liquidity persisted through March as a result of which the government maintained cash balances and the banks kept excess CRR.
In the fifth phase, beginning with the new financial year in April 2017, the bank anticipated that surplus liquidity will persist through 2017-18, the bank provided for MSS and reverse repo measures of up to Rs 1 trillion and it had auctioned Treasury Bills for Rs 1 trillion in April and May, 2017.
There is an interesting twist to the story of demonetisation. While post-demonetisation witnessed unprecedented excess in liquidity, the period from April,2016 to November 8, 2016, the RBI injected Rs 2.1 trillion to move from liquidity deficit of Rs 813 billion in Quarter 1 from April, 2016 to June, 2016 to a liquidity surplus of Rs 292 billion in Q2 (July, 2016 to September,2016) and to a surplus of Rs 64 billion in Q3 (October,2016 to November 8,2016).
The tacit assumption behind the demonetisation argument was that there was excess liquidity in the system, which the subversive elements were manipulating, and therefore there is a need to drain that excess. It turns out that the assumption was wrong. There was no excess liquidity in the system. And the RBI’s statistics reveal the exact volumes of liquidity in the system. While Prime Minister Modi revelled in demonetisation, the RBI had to step in and carry out remonetisation operations and that too in double quick time.
And the bank assures, “The continuing increase in currency in circulation on the back of remonetisation is likely to reduce the magnitude of the liquidity overhang during the course of the year.” The disruption, and let us be clear that there was nothing clear about it, that Modi has caused through demonetisation had to be repaired by the RBI through the remonetisation measures. The argument for a less-cash economy is so much of baloney. It is possible to split hairs about cash and liquidity, and how they are not the same, and how draining out cash from the system is not the same as creating a liquidity crunch.
The RBI report makes it clear that there is not much of a theoretical difference between the two, and less cash translates into less liquidity. The banks cannot handle too much liquidity or cash, and people cannot do with less cash. And there is a moral in all this: Fools venture where angels fear to tread!
---
Source: http://parsareport.blogspot.in/2017/09/modi-demonetised-rbi-remonetised.html

Comments

TRENDING

Arrest of Fr Stan Swamy: UN makes public letter seeking explanation from Govt of India

Counterview Desk In a letter to the Government of India (GoI), three senior United Nations (UN) officials – Elina Steinerte, vice-chair of the Working Group on Arbitrary Detention; Mary Lawlor, special rapporteur on the situation of human rights defenders; and Fernand de Varennes, special rapporteur on minority issues – have said that the arrest of veteran activist Father Stan Swamy in October 2020 marks “the escalation of harassment the human rights defender has been subjected to since 2018.”

Swami Vivekananda's views on caste and sexuality were 'painfully' regressive

By Bhaskar Sur* Swami Vivekananda now belongs more to the modern Hindu mythology than reality. It makes a daunting job to discover the real human being who knew unemployment, humiliation of losing a teaching job for 'incompetence', longed in vain for the bliss of a happy conjugal life only to suffer the consequent frustration.

Farm laws 'precursor' to free trade deal envisaged by US corporates to allow GMO

By Rajiv Shah Did the Government of India come up with the three farm laws, first rushed by promulgating ordinances in June 2020, to not just open the country’s agricultural sector to the corporate sector but also as a precursor to comply with the requirements of the United States for a Free Trade Agreement (FTA), as envisaged by the outgoing US president Donald Trump?

Modi govt 'implementing' IMF-envisaged corporate takeover of Indian agriculture

By Bhabani Shankar Nayak* The surge of wealth of Indian billionaires and the Modi-led BJP government’s onslaught on poor, marginalised and farmers continue to grow simultaneously as masses face annihilating pandemic of coronavirus. There is 90 % rise of Indian billionaire’s wealth over last one decade. It is not accidental.

A new fad in India, coding-for-toddlers culture needs to be 'nipped' in the bud

By Aditya Pandey* We are all aware of the dire consequences of subjecting young kids to intense academic pressure from an early age. In India, we have coaching institutes like FIITJEE and Resonance offering programmes for 6th standard kids to prepare them for “NTSE, IJSO, PRMO and other Olympiads”. The duration of these programmes is around 175 hours – hours that could've been spent playing games and making friends instead.

New trend? Riots 'expanded' to new rural areas post-2002 Gujarat carnage: Report

A VHP poster declaring a Gujarat village part of Hindu Rashtra  By Rajiv Shah  Buniyaad, a Gujarat-based civil society organization, engaged in monitoring of communal violence in the state, in a new report, “Peaceful Gujarat: An Illusion or Truth?” has said that a “new trend” has come about in communal violence in the state, where the parts of Gujarat which didn't see communal riots in 2002 are experiencing “regular bouts” of communal violence.

Differing from Ambedkar, Kancha Ilaiah holds a 'different' theory of caste system

By Banavath Aravind* I was introduced to Kancha Ilaiah’s work when I was about 20 years old. He was then in the midst of a controversy for a chapter in his book "Post-Hindu India: A Discourse in Dalit-Bahujan, Socio-Spiritual and Scientific Revolution", which termed the Baniya community as social smugglers. During many of his debates, I had come to notice his undeterred fighting spirit in trying to bring up certain fundamental social issues that were hitherto undiscussed. I eventually came across some of his works and started reading them silently. I’m deliberately stressing upon the word ‘silently’ here, as this was the kind of silence particularly associated with sensitive social issues like caste, religion, etc. But, as I write this essay, I feel silences on sensitive issues should be broken. Ilaiah opened up an entirely new debate that had the vigour and strength to counter the systemic Brahmanism. His methods of research were also novel in terms of going back to the roo

Savarkar 'criminally betrayed' Netaji and his INA by siding with the British rulers

By Shamsul Islam* RSS-BJP rulers of India have been trying to show off as great fans of Netaji. But Indians must know what role ideological parents of today's RSS/BJP played against Netaji and Indian National Army (INA). The Hindu Mahasabha and RSS which always had prominent lawyers on their rolls made no attempt to defend the INA accused at Red Fort trials.

More than 5,200 Gujarat schools to be closed down, merged, says govt document

RTE Forum, Gujarat, releasing fact-sheet on education By Our Representative A Gujarat government document has revealed that it is planning to close down 5,223 schools in the name of school merger. The document, dated July 20, 201 was released by the Right to Education (RTE) Forum, Gujarat. It shows that the worst-affected districts because of this merger are those which are populated by marginalized communities – especially tribals, Dalits and minorities, said RTE Forum’s Gujarat convener Mujahid Nafees.

Consumption pattern, not economic shock behind 'poor' child health indicators

By Neeraj Kumar, Arup Mitra* The findings of the latest round of National Family Health Survey (NFHS-5) conducted in 2019-20 covering 22 States/UTs under Phase-I  present a somewhat disappointing picture of children’s health in India. Majority of the experts, based on prima facie evidence, just highlighted the deteriorating sign of child health in terms of increase in proportion of stunted and underweight children in most of the phase-I states/UTs over last two rounds of NFHS (2015-16 to 2019-20).