With demonetisation coming to an end formally last month, it is compelling to evaluate the costs which, though speculative in nature, would broadly indicate the value of benefits required to recover them.
With demonetisation coming to an end formally last month, it is compelling to evaluate the costs which, though speculative in nature, would broadly indicate the value of benefits required to recover them. If the perceived benefits are higher, then there is a net gain. The approach must be different given it was an economic measure with high moral undertones.
Conjecturing the cost of this exercise is tricky as a large part of the perceived effects is not transparent enough, given the discreetness required. The attempt here is more to lay a framework to be used by the reader to plug in numbers and evaluate the same. Some of the numbers derived are based on assumptions reached after speaking to bankers who were not willing to talk on the specifics. The other imputations made are from a theoretical point of view and, hence, subjective.
The costs are broadly the following. The first is the potential loss of GDP due to this exercise, different analysts providing varying estimates. Conservatively, a drop of 0.5% has been assumed. Second, the cost of printing new notes is assumed based on the o/s currency in 500- and 1,000-rupee denominations being R7.8 lakh crore and R6.3 lakh crore as of March 2016. This would amount to 2,200 pieces of currency. While all will not be reprinted, RBI has been printing more R100 notes. It is assumed that the same number would be printed at a cost of R3.50 per note.
Third, 2.2 lakh ATMs have been calibrated at a cost of Rs 2,000 per machine. Fourth, with around 1.3 lakh bank branches in the system, the minimum cost of overheads, on an incremental basis, is taken to be R1,000 per branch and has been assumed to have been spent on each of the 50 days of demonetisation. Fifth, the movement of currency to ATMs and branches was spruced up. It is assumed that each van would be serving 15 touch-points and the additional 15,000 trips a day would incur the cost of van, security and technical personnel, estimated at R10,000 per day. Costs for multiple trips have been ignored for this purpose. Sixth, movement of old notes to centralised bank location and subsequently to RBI at different points of time has been reckoned for the 1.3 lakh branches @R10,000 a day. This also includes the cost of destruction of old notes, eventually
There are some interesting indirect costs, too. First, almost every household spent two days at branches and ATMs during the period and hence 25 crore households have spent 50 crore man-days. If the value of time is taken at the lower end of our per capita daily GDP, the valuation would be R15,000 crore. Second, banks have been working overtime these 50 days, and with a conservative average of 2-3 hours a day, it works out to around 5 extra days. The salary bill for a year has been scaled down to R425 crore a day which is imputed for this purpose (annual bill of R1.18 lakh crore for around 280 working days).
Third, banks have gotten R15 lakh crore of deposits, and assuming 40% leaves in the form of withdrawals, R9 lakh crore is to be invested in GSecs at 6%, while the average lending rate is 10%. The implicit opportunity cost of 4% is adjusted for four months, after which the funds could return to normal lending. Fourth, the downturn in economic activity will definitely mean an increase in NPAs. With o/s bank credit at around R73 lakh crore, it is assumed that NPAs increase by just 0.1%, or R7,300 crore.
Fifth, there have been significant waivers on electronic payments. Here, it is assumed that the total volume of transactions would be twice the GDP which, for two months, would be around R45 lakh crore. Assuming half was transacted, the opportunity loss for those who would have received the fee such as card companies, banks, merchants, etc, has been reckoned as 0.1% of total. Now, how does the complete picture look?
The total cost of this operation appears to be around R1.3 lakh crore on a very conservative side. It is assumed that there are no imputations for job losses, deaths and injuries, costs for government and RBI in implementation, cost of carrying out over 60 new directives over the period of time, etc. Given that the main objective of this exercise was to curb black money, the amount rooted out from the system would have been a measure of immediate success. However, with there being another income disclosure scheme, logically all money should be back into the system. Hence, the disappearance of money will not be appropriate for caluclations. The amount of disclosed black money taxed at 50% or penalised if caught, at 85%, would be an objective gain for the system. As the first income disclosure scheme got declarations of just R60,000 crore, the possible amount this time could go up to R1 lakh crore of which R50,000 crore will go back as tax collections. There would also be regular tax flows in the coming years as undetected black money would enter the tax stream. But, one can never tell.
The balance of R80,000 crore, or whatever the final number is, can be treated as the cost of curbing terror funding, counterfeit currency and eliminating existing black money. The challenge would be to prevent a new black economy, and for this, we need to spruce up our systems and ensure there is less human interface when dealing with laws and regulation, failing which, we will be back at the starting line.
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