Transaction cost of demonetisation estimated at Rs.1.28 trillion

by Mahesh Vyas

The announcement of November 8 that rendered Rs.500 and Rs.1,000 currency notes bereft of any value unless they were exchanged for other currency notes through banks comes with an unstated transaction cost. The exercise to force conversion of all old currency notes into new ones through the banking system is with a stated aim of unearthing unaccounted cash stashed away by the unscrupulous.

We know that the outstanding value of all Rs.500 and Rs.1,000 currency notes was Rs.14.2 trillion as of March 31, 2016. Cash that is not exchanged through the banking system by December 30, 2016 is rendered worthless. And only those who cannot account for it would let it be rendered useless.

Reportedly, the government told the Supreme Court that it expects to unearth about Rs.4-5 trillion of unaccounted cash. Estimates made by economists range from Rs.5 trillion to Rs.2.5 trillion. Most estimates gravitated towards Rs.3 trillion initially.

Our effort here is to estimate the transaction cost of this exercise. Unaccounted cash worth at least the transaction cost should be unearthed to claim that the exercise was worth the effort.

Our estimations show that the transaction cost during the 50-day window till December 30, 2016 would be Rs.1.28 trillion.

If the government succeeds in unearthing even Rs.4 trillion unaccounted cash, then the transaction cost of this exercise would be about 26 per cent. It would be over 43 per cent if the unearthed cash is Rs.3 trillion.

Households that stand in queues to exchange their old currency notes with new ones bear 12 per cent of this total cost. They stand to lose Rs.150 billion for foregone wages during the 50-day period.

Banks lose a lot more. Wage levels of bankers are much higher than than that of an average person in the queue and banks suffer overheads and operational costs in terms of recalibrating ATMs. Banks would do little else during this 50-day period and we estimate that they would bear a cost of Rs.351 billion during this period.

The government and RBI are estimated to bear a cost of Rs.168 billion. This is largely because of printing of new currency and transportation of new currency to bank branches, ATMs and post offices.

Enterprise stands to pay the biggest price for this transaction, by way of loss of business.

A steady stream of news reports of empty mandis, low footfalls at malls and drop in business in restaurants, stressed factories, etc paint a grim picture of the effects of a sudden withdrawal of liquidity from markets. Trade bodies have made their estimates of loss of business. We estimate the direct impact on business in terms of the drop in discretionary spending by households. This alone adds up to more than half a trillion rupees during the 50-day period till end of December. Enterprise stands to lose Rs.615 billion or 48 per cent of the total transaction cost of this exercise of demonetisation.

All estimates are admittedly conservative. All estimates are limited to the 50-day window. However, the impact of low liquidity, broken supply chains and loss of confidence in consumers is likely to impact the economy over a longer period. Therefore, the transaction cost of this exercise is more than the Rs.1.28 trillion estimated here, which is limited to only the 50-day window till 30 December 2016.

CMIE STATISTICS
Unemployment Rate
Per cent
5.5 -0.0
Consumer Sentiments Index
Base September-December 2015
94.7 0.0
Consumer Expectations Index
Base September-December 2015
96.5 0.0
Current Economic Conditions Index
Base September-December 2015
91.9 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Mar 16 Jun 16 Sep 16 Dec 16
New projects 3.31 1.54 2.34 1.42
Completed projects 2.26 0.90 2.15 0.76
Stalled projects 1.04 1.32 0.35 0.44
Revived projects 0.63 0.42 0.51 0.17
Implementation stalled projects 0.92 0.50 0.57 0.79
Updated on: 23 Feb 2017 9:20AM
Quarterly Financials of Listed Companies
(% change) Mar 16 Jun 16 Sep 16 Dec 16
All listed Companies
 Income -0.2 -0.9 2.1 6.4
 Expenses 0.9 -0.4 1.8 6.7
 Net profit -29.1 -3.5 15.3 36.9
 PAT margin (%) 4.9 6.9 7.0 6.0
 Count of Cos. 4,395 4,353 4,313 4,204
Non-financial Companies
 Income -2.1 -2.5 0.6 6.1
 Expenses -3.9 -2.9 -0.2 7.7
 Net profit 4.8 10.3 27.5 21.0
 PAT margin (%) 6.2 7.4 7.0 6.1
 Net fixed assets 3.8 -9.2
 Current assets 3.1 8.1
 Current liabilities 10.6 11.5
 Borrowings 6.7 3.1
 Reserves & surplus 7.9 8.6
 Count of Cos. 3,455 3,426 3,393 3,316
Numbers are net of P&E
Updated on: 23 Feb 2017 9:28AM
Annual Financials of All Companies
(% change) FY13 FY14 FY15 FY16
All Companies
 Income 11.9 9.3 4.3 0.2
 Expenses 12.1 9.2 4.3 0.3
 Net profit 1.0 -4.2 2.7 -12.1
 PAT margin (%) 3.6 3.2 3.3 3.4
 Assets 14.1 12.2 8.9 7.7
 Net worth 9.5 9.4 8.2 6.2
 RONW (%) 6.8 6.0 6.1 5.7
 Count of Cos. 23,087 20,259 18,916 14,317
Non-financial Companies
 Income 11.1 8.9 3.3 -1.1
 Expenses 11.4 8.6 3.4 -1.9
 Net profit -8.9 -5.6 -3.6 14.1
 PAT margin (%) 2.4 2.1 2.2 3.1
 Net fixed assets 12.9 11.3 12.3 10.8
 Net worth 7.7 8.3 6.6 5.0
 RONW (%) 5.4 4.8 4.8 6.1
 Debt / Equity (times) 1.1 1.1 1.1 1.0
 Interest cover (times) 2.0 1.9 1.9 2.1
 Net working capital cycle (days) 71 69 68 68
 Count of Cos. 17,721 15,860 14,813 11,415
Numbers are net of P&E
Updated on: 21 Feb 2017 3:48PM

Low government spending and low consumer expectations to keep growth subdued

Modest increase in capital expenditure; no incentive to private players

Rs.5.34 trillion or 3.2% of GDP