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Will demonetisation puzzle be solved by end of year?

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K Srinivasan
K SrinivasanJan 13, 2017 | 18:28

Will demonetisation puzzle be solved by end of year?

Post the demonetisation announcement by PM Narendra Modi, fact-free opinions have been whirling around. Before one gets diffused, there is another looming - like the recent Cyclone Vardha in Tamil Nadu - threatening to devastate the minds of people. But be that as it may.

There were unconfirmed reports around November 8 and much later too, suggesting the possible return of more than even Rs 15 trillion of the old notes to the banking system by December 30, but all that appears to have stemmed from a gross overstatement by the Reserve Bank of India (RBI).

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Could it be that the RBI overcounted the notes returned since November 8, since the apprehensions raised by finance secretary Shaktikanta Das of possible double counting also resonate the same view?

Well, yet another view is that undetected counterfeit currency was much more than what was believed. Could this be true by any chance?

I, for one, feel the following assumptions are fairly logical:

If the quantum of notes on November 8 was somewhat undercounted, then it would appear that RBI had greater liabilities than it counted.

If this were true, then such liabilities resulting in excess after December 30 require to be reduced by an equivalent amount undercounted, or assets marked up alternatively by the equivalent value discussed above.

If the discrepancy in counting is due to larger than expected stock of counterfeit currency, and that remains undetected even after December 30, then the RBI might like to extinguish other liabilities or mark up some of its assets.

Both scenarios are attributable to overcounting or undercounting, which are but textbook situations not worth commenting on.

Let us then see what possible actions the RBI can take.

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Could it be that the RBI overcounted the notes returned since November 8?

The first thing to do would be perhaps to ratify the correct figures of fiscal gains.

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The next thing to do would be to denotify the old notes by authority of law and not by de facto demonetisation through an ordinance of the RBI Act, which has since been done promptly.

Last but not the least, the thing to do would be that the RBI should simultaneously rectify the resultant asset-liability mismatch on its balancesheet;

a) By extinguishing the liability of old notes by issue of equivalent new notes or;

b) By marking down the equivalent value of assets which will result in an indirect gain.

Then there is the last question of short-run cost versus long-run benefit of demonetisation.

The most important long-term economic effects will be around the increasing digitisation and formalisation of the economy, of which currency exchange is only a small part.

The short-run cost, however, has been said to touch Rs 20,000 crore, according to P Chidambaram, former finance minister.

Considering the large picture of demonetisation, all these bits and pieces of statistics are but bits and pieces of a giant jigsaw puzzle which PM Narendra Modi has boldly set out to resolve.

That all experts and thinktanks at work will converge to solve the puzzle successfully at least by the end of 2017, is the hope and anticipation with which the whole nation is waiting.

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Last updated: January 13, 2017 | 18:28
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