Economic Survey II: Did the note ban meet its intended objectives?

Demonetisation impact: Cash sucked out, digital transactions up, tax base expanded

While there is still no clarity on how many old currency notes were deposited back into the banking system, some progress has been made on achieving the other stated objectives of demonetisation, the Survey has found.

Principal among these objectives was a reduction in the use of cash in the economy, increasing the use of digital modes of transaction and expanding the tax base. 

On the “equilibrium” level of cash, the Survey reveals that as of July, the cash holding was about Rs 3.5 lakh crore or roughly 20 per cent less than what would have been the case had the pre-demonetisation trends prevailed. Cash holdings as a percentage of gross domestic product (GDP) have declined by 1.6 percentage points, falling from 11.3 per cent of the GDP to 9.7 per cent. 

“So far, reliance on cash appears to have declined sharply. This decline suggests that a considerable portion of cash holdings was used for savings, which has now been transferred to the banking system,” says the Survey. 

On the shift to digital modes of transaction, the Survey notes that while the immediate surge in digital transactions has moderated in some cases, the “level and pace of digitalisation are still substantially greater than before demonetisation”. This change in behaviour has moderated the usage of cash as a medium of exchange. 

The impact on the real estate sector though is not as clear. Data presented in the Survey shows real estate prices were falling even prior to demonetisation. And while there was a further reduction in prices after November 8, the decline has since then been reversed, with prices rising. “It remains to be seen whether the impact of demonetisation on the housing market will be permanent,” the Survey says. 

On the expectation that demonetisation would help expand the tax base, data presented in the Survey affirms an expansion in tax fillings. An analysis of taxpayer data between November 9, 2016, and March 3, 2017, reveals after demonetisation, the taxpayer base grew by 45 per cent, as compared to 25 per cent over the corresponding period last year. This increase, which amounted to 540,000 taxpayers, led to an increase of about Rs 10,600 crore in reported taxable income. 

Despite this surge, its impact on boosting tax revenues was muted. This is because the average income of these taxpayers was Rs 2.7 lakh, only marginally higher than the existing tax threshold of Rs 2.5 lakh. “The full effect on collections will materialise gradually as reported income of these taxpayers grows,” the Survey says. 

To gauge the impact of demonetisation on the informal economy, the Survey uses work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) as a proxy for measuring the health of the sector. It finds demand for work under (MGNREGS) rose from early November, especially in the less developed states of Bihar, Chhattisgarh, Rajasthan, Jharkhand, West Bengal and Odisha. This suggests the informal sector was badly hit by demonetisation.