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Is The Objective Of Demonetisation Lost In Dark Smoke? - Outside View by PersonalFN

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Is The Objective Of Demonetisation Lost In Dark Smoke?
Sep 5, 2018

The government's decision to discontinue high-value currency notes from circulation has been debatable ever since it was announced.

Hopefully, after the RBI's latest revelations, debates on the effectiveness of demonetisation will end.

It's crystal clear now.

Demonetisation was an ill-thought-out and poorly implemented strategy to tackle the problem of black money and counterfeit currency.

[Read: Surgical Strike On Black Money, Really?]

When Modi Sarkar demonetised Rs 500 and Rs 1,000 notes from the midnight of November 08, 2016, it thought crooks and black money hoarders won't return their illegitimate money to banking system.

But contrary to its expectations, 99.3% of the discontinued currency (in value terms) has returned to the system, as reported by the Reserve Bank of India (RBI).

Soon after RBI divulged this crucial data, Mr P. Chidambaram, a former finance minister and one of the prominent faces of the UPA government, took a pot-shots at the Modi government.

He alleged that the government caused the country to suffer a dreadful shock, "So, government and RBI actually demonetised only Rs 13,000 crore and the country paid a huge price. Over 100 lives were lost. 15 crore daily wage earners lost their livelihood for several weeks. Thousands of SME (small and medium enterprise) units were shut down. Lakhs of jobs were destroyed."

Rebutting such arguments, a spokesperson of BJP claimed that demonetisation helped in formalising Indian economy. "In 2017-18, the net collection of direct taxes increased by 18%. Collection for 2016-17 was also higher than the previous year. More than 3 lakh shell companies have been closed. Another 50,000 are in the pipeline. This is a big step towards formalisation of Indian economy."

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The Economic Survey 2017-18 had highlighted that the number of taxpayers has increased post demonetisation. It claimed, "Taking seasonality into account it is found that there is a 0.8 per cent monthly trend increase in new tax filers (annual growth of nearly 10 per cent). The level of tax filers by November 2017 was 31 per cent greater than what this trend would suggest, a statistically significant difference. This translates roughly into about 18 lakh (1.8 million) additional taxpayers due to demonetisation-cum-GST, representing 3 per cent of existing taxpayers."

The critical question is: Was demonetisation the only remedy to eradicate black money and shell companies; or would have rigorous regulatory checks produced the same results?

If the objective of demonetisation was to toss away black money, it's failed big time. Besides, it also disrupted economic growth of India.

[Read: How Demonetisation Move Instils Speed Breakers For India's GDP]

But if the objective was also to nudge people to change their spending and saving habits, it has achieved some success. Again, the question is, was demonetisation the only option left to make India a 'less-cash dependent' economy?

Let's look at the impact of demonetisation on citizens' routine life in detail ...

Impact of demonetisation on spending habits of Indians

The only tangible benefit of demonetisation is the growing popularity of digital payment options.

According to the RBI, non-cash retail payment volumes increased 56.6% and 44.9% respectively in FY 2016-17 and FY 2017-18. The volume of Immediate Payment Service (IMPS) transactions rose 3.6 times between FY 2015-16 and FY 2017-18. The volume of transactions executed using credit cards, debit cards, and digital wallets have increased 78.8%, 184.9%, and 362.4% respectively.

And the impact on saving habits...

A slosh of liquidity in the banking system helped many banks build a base of low cost deposits, post demonetisation. As a result, banks slashed interest rates on term deposits considerably. Cash sitting in bank accounts showed some stickiness initially.

However, soon after the system got adequately remonetised, bank deposits became extremely unpopular with households.

Table II.1.1: Financial Saving of the Household Sector

As revealed by RBI data, in the financial household savings chart above, 'shares and debentures' have increased over the last two financial years. But, the growing share of currency with households and falling share of deposits in the financial savings is unnerving. Moreover, the share of financial liabilities is on the rise which is a cause for concern. Overall, net financial savings of households are dipping.

Household savings are moving away from conventional bank deposits in search of better returns. Increasing participation of retail investors in equity mutual funds and aggressive hybrid funds confirms this shift. From 5.06 crore in September 2016, the count of mutual fund investor accounts grew to 7.46 crore in June 2018-a massive surge of 47.4%.

Increase in Investor Accounts

Demonetisation would be a burning issue until India votes its next prime minister in 2019.

Therefore, instead of getting into politically motivated debates and heated arguments, wouldn't it be wise to increase your financial discipline based on these findings?

It seems lower interest rates post-demonetisation prompted many borrowers to borrow more. Are you one of them? Did you apply for a cheap car loan, or bought a car just because you were getting a cheaper auto loan?

If 'yes' is the answer, it's time to rethink!

Here's what you could do to inculcate financial discipline...

  • Borrow less
  • Use digital payment options for convenience but don't become an impulsive buyer due to convenience they offer
  • Save more (but don't hoard cash, invest wisely)
  • File your tax returns on time
  • Create a contingency reserve (at least equivalent to 6 months of household expenditure)
  • Set your financial goals and clearly define a time horizon to achieve them
  • Assess your risk appetite
  • Based on your financial goals, time horizon and risk appetite, chalk out a personalised asset allocation
  • Invest in various asset classes such as equity, debt, gold, and real estate as per your personalised asset allocation chart
  • Don't move your money away from any asset class abruptly just because it looks unattractive in the short-term

Mutual funds can help you achieve your financial goals and facilitate disciplined saving habits as well. Equity-oriented mutual funds can help you create a long-term wealth. If you want to experience their effectiveness, you should start a Systematic Investment Plan (SIP) in the right mutual fund scheme.

Don't forget this:

  • Be careful while selecting a mutual fund
  • Pay attention to the track record of the scheme. And assess its performance on various quantitative and qualitative parameters
  • Don't forget to review your portfolio at least once a year

[Read: Investing In Mutual Funds Can Help You Achieve Your Financial Goals]

Always make it a point to assess mutual fund schemes based on various quantitative as well as qualitative parameters for a comprehensive selecting process.

Read about the comprehensive mutual fund rating methodology followed by PersonalFN, here.

Watch this short video on selecting mutual fund schemes:

Source: PersonalFN

Editor's note:

Are you wondering which mutual funds would be ideal to accomplish your financial goals?

PersonalFN can do this job for you.

In fact, PersonalFN's unbiased premium research service-FundSelect is just meant for investors like you-who don't have the time, expertise, or both to select worthy mutual fund schemes.

PersonalFN's FundSelect has 15+ years of impeccable track record.

PersonalFN follows the S.M.A.R.T. score matrix:

S - Systems and Processes

M - Market Cycle Performance

A - Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

FundSelect has one simple motto: "Be steady. Be alert. Be winning."

Every month, our FundSelect service will provide you with an insightful and practical guidance on equity funds and debt schemes - the ones to buy, hold or sell, thus assisting you in creating the ultimate portfolio that has the potential to beat the market. Subscribe to FundSelect today!

Happy Investing!

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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