By Devanshee Dave
8th November 2016 was a historic day, for not one but two reasons. The first one is the election of Donald Trump as President of the United States. The second reason, closer home, is demonetisation of 500 and 1000 Rupee notes. It is now been over nine months since demonetisation but the ripples can still be seen. Only this time, the ripples are positive.
The excess surplus in bank deposits
At the time of demonetisation, 500 and 1000 Rupee notes amounted to 15.4 trillion or 86.9% of the total currency in the economy. The announcement led to a hike in bank deposits. Between October 28, 2016, and January 6, 2017, currency in circulation reduced by approximately ?8.8 trillion. This resulted in a surge in the share of low-cost deposits in the Current Account and Saving Account (CASA) deposits in the bank system.
Demonetisation also increased deposits in the Pradhan Mantri Jan Dhan Yojana (PMJDY) by 48 percent and led to the creation of 18 million accounts. As per RBI’s latest reports, until 26th July 2017, 38.2 million new accounts have been opened since demonetisation. The estimated excess deposits procured to banks due to demonetisation are around 2.8 to 4.3 trillion in the range of 3.0 to 4.7 percentage points.
The changed saving methods of Indian households
A study presented by RBI staff Manoranjan Dash, Bhupal Singh, Snehal Herwadkar and Rasmi Ranjan Behera showed the positive impact of demonetisation on the formal saving channels of Indian households. Equity and debt oriented mutual funds, life insurance policy and non-banking financial companies (NBFCs) have gained popularity. The aggregate balance sheet of NBFC sector expanded by 14.5 percent during 2016-17.
Mutual funds
The tendency to buy debt and equity oriented mutual funds got the lucrative hype with the reduction in interest rate on bank deposits and drop in gold prices. Investments in equity schemes and debt schemes have increased significantly. They were 235.7 billion and 328.6 billion respectively between November 2015 and June 2016. They have now inflated to 670.7 billion and 386.2 billion respectively for the same period in 2016-17 respectively. Assets under Management by Mutual Funds (AUM) also showed a staunch hike of more than 17.5 trillion at the end of March 2017, which further increased to 20 trillion at the end of July 2017.
Life insurance policies
Demonetisation has also doubled the rate of premium collected by Life insurance companies. Alone, the Life Insurance Corporation (LIC) of India has gained 142 percent in November 2016, in which 85 percent of the total collection was through ‘Single Premium’ annual policies. A surge has also been noticed in the collection of premium by private sector companies at around 50 percent.
Non-banking financial companies
In the wake of demonetisation, loan disbursed by NBFCs under different categories like Asset Finance Companies (AFC), Loan Companies (LC) and Micro Finance Institutions (MFI) faced negative shrinking. MFIs, especially, were affected by demonetisation because most of their consumers traded in cash and demonetisation attacked their financial viability. Credits to NBFCs was 5.1 percent in October 2016 which declined to 1.3 percent in November 2016. However, like improvement in AFCs, LCs and MFIs, the credit increased to 10.9 percent in March 2017. Loans and advances by NBFCs also increased in March 2017 at 16.4 percent.
The growth rate
As per an article in The Wire, the hike in investments in the formal sector doesn’t contribute to the expected growth rate since demonetisation adversely impacted the informal sector. In addition to that, the recent regulation by the government, restricting the cattle market (prohibition on slaughtering cows, buffalos and camels) will add itself to lower growth rate of the informal sector, reducing the value of farmers’ livestock. It will affect millions of people in this industry. The formal sector does not provide enough employment opportunities to compensate for these losses.
The growth rate of India in the fourth quarter of 2016-17 was 6.1 percent compared to the expected growth of 7.1 percent. As the effects of demonetisation on the informal sector are likely to be trivialised, the real growth rate may actually plummet.
Featured Image: Visual Hunt
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