The recent final tally by Reserve Bank of India of demonetization drive moved by Prime Minister Narendra Modi in 2016 with the aim of cleaning the system out from money derived of tax evasion came up with 99.3 percent of outlawed high-value banknotes being returned to it. That proves that the move was ill-perceived with the outcome out of the context against the assertion made during the move that the holders of such ‘cash’ would destroy it rather than returning it to banks.
However, there were ‘some other’ defenses ready with the authorities for the move. One such notion was appealing to the financial markets in Finance Minister Arun Jaitley’s words, “Demonetization appears to have led to an acceleration in the financialization of savings.” Many households, according to the statement, appeared to have started using their cash savings into other instruments, like the stock market. This in turn, according to the perspective, would spur economic growth due to the increase in the amount of capital available for companies to deploy and banks to lend.
For these views to be supported in reality, we may find some indicators. In the month of demonetization, Life Insurance Corp. of India experienced a 142 percent increase in premium collection. And Indian stocks have been on a record-breaking run, despite the fact that foreign investors were net sellers so far this year.
But what was not at all expected that Reserve Bank of India too found some grounds as per the hypothesis. In the recently published report along with the result of demonetization, there were other details in favor like a breakdown of savings by households, a category that includes small and unregistered enterprises. As per the details, it turns out that net financial savings for the fiscal year that ended on March 31 were 7.1 percent of overall disposable income which was less than the average for the five years before demonetization.
Adding irony to that, households have started keeping more of their net savings in the form of a case and not less. And their overall net savings being deposited in banks about 50 percent lower compared to five-year average before demonetization. If put in other words, the claim that the move would usher an era of banks getting heavy inflows of household savings to help lend the same to productive parts of the economy has been comprehensively debunked.
According to some, lower interest rates are seen as the problem which cannot be digested so easily due to the fact that, India was one among such few countries which experienced strong positive real rates and savings in bank deposits were, as per the records, of higher fraction of disposable income in 2012-14 when citizens here were dealing with negative real interest rates.
These all can be explained by an actual change in behavior, as most Indians experienced demonetizations was in actual terms losing access to their own bank accounts as we had to stand in queues to get money out of ATMs and during that our withdrawals were looked like rationing systems. And if this is compared to those who had a lot of money piled up were able to easily change them (in the black market).
Where do these all experiences and facts bring us to? Do you want to still place your trust in the banking system that is ready to dance to the tunes of a Prime Minister? In fact, it taught what can banks or digital payments really do for you – that is – they are not trustable means for saving your hard-earned money.
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