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Harvard, IMF researchers assess damage due to demonetisation, claim 3% drop in economic activity

The report says both the RBI and the Centre maintained secrecy prior to the policy’s announcement and that the RBI “did not print and distribute a large quantity of new notes before the announcement”, which led to an immediate shortage of cash

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The Narendra Modi government’s demonetisation move, which turned around 86 per cent of cash in circulation illegal tender overnight on November 8, 2016, led to a significant decline in cash, which lowered India’s economic growth and led to a reduction in jobs by at least 2-3 percentage points in the quarter of the note ban, a new study has found. The study shows that Indian districts that experienced more “severe demonetisation shocks” had much larger contractions in ATM withdrawals, and highlights its effects on the Indian economy. It also talks about the rise of alternative forms of payment options, including mobile wallets, after demonetisation.

The paper, ‘Cash and the Economy: Evidence from India’s Demonetisation’, written by Gabriel Chodorow-Reich, an associate professor of economics at Harvard; Gita Gopinath, the Economic Counsellor and Director of the Research Department of the IMF; and Prachi Mishra of Goldman Sachs and RBI’s Abhinav Narayanan, was done to highlight “the consequences of demonetisation in the cross-section of Indian districts”.

Talking about the effects on economic activity, the paper says the economic activity declined by 2.2 percentage in November and December 2016. “To reach this number, we first cumulate the cross-sectional effects on employment and nightlights over districts. Next, we argue that this calculation provides a lower bound for the aggregate consequences of the cash decline. Such a lower bound arises in our model due to cross-district trade. Combining these two results yields a decline in nightlights-based economic activity and of employment of 3 pp or more in November and December of 2016 relative to the counterfactual path, which translates into a decline in the quarterly growth rate of 2 pp or more,” it said.

The paper also says there was around 2 percentage points or more decline in credit in Q4 of 2016. Talking about the poor implementation of the note ban, the report said both the RBI and government maintained secrecy prior to the policy’s announcement and the RBI “did not print and distribute a large quantity of new notes before the announcement”, which led to an immediate shortage of cash. “Printing press constraints then prevented the government from quickly replacing more than a fraction of this total with new notes. Thus, the total currency declined overnight by 75 per cent and recovered only slowly over the next several months,” said the report.

The study said while the slow replacement of notes led to a decline in the currency, it did not affect the overall size of the RBI’s balance sheet. “The immediate consequence was to increase deposits at commercial banks as households deposited old notes but could not freely withdraw new notes due to the cash shortage,” it said.

The RBI initially required banks to hold these deposits as reserves at the central bank by increasing the cash reserve ratio to 100 per cent on all incremental deposits received between September 16 and November 11, said the report. “Since these reserves paid no interest while banks continued to pay positive interest on their deposits, on December 6 the RBI withdrew the increase in the reserve ratio and instead absorbed the deposits by issuing short-term Market Stabilization Bonds (MSB),” it maintained.

“We conclude that in modern India cash continues to serve an essential role in facilitating economic activity,” said the report.

On November 8, 2016, at 8:15 pm, Prime Minister Modi had announced in an unscheduled national televised address that the two largest denomination notes, the 500 and Rs 1000 rupee, would “cease to be legal tender”, and that they would be replaced by new Rs 500 and Rs 2,000 notes. The Centre said the decision was taken to target black money, reduce corruption, and remove fake currency notes.

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SC seeks Centre, RBI reply on levying interest charges during moratorium

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New Delhi, May 26 : The Supreme Court on Tuesday issued notice to the Centre and Reserve Bank of India on a plea challenging the levy of interest on loan during the stipulated moratorium period.

A bench comprising Justices Ashok Bhushan, S.K. Kaul and M.R. Shah asked the Centre and RBI to file their response within a week.

The plea has been filed by a borrower, who is aggrieved by the March 27 RBI notification. This notification allows interest on the loan to be levied during the moratorium period, which has been extended up to August 31.

Senior advocate Rajiv Dutta, representing the petitioner, contended before the bench that the moratorium has been extended to 6 months, from the initial 3 months. Dutta argued that the final accounting for his client, regarding the interest should be done after the decision of the top court on the matter.

The plea argues the interest on loan during moratorium is unconstitutional, as during lockdown, people’s income has already shrunk and people are under financial crisis.

Dutta, seeking relief, insisted that his client should not be penalized, and interest should not be added to the loan amount during this period,” argued Dutta.

He also informed the apex court that replies were being filed without any formal notice being issued. The bench took this argument into consideration and issued formal notice.

On March 27, the RBI had ordered a 3-month moratorium on the payment of all kinds of installments — EMIs or credit cards or outstanding term loans — for the period between March 1, 2020 and May 31, 2020.

The plea argues the outright “capriciousness” and “arbitrariness” of the RBI notification as it acts as a burden on borrowers like the petitioner, which violates principles of natural justice.

On May 8, the apex court had allowed Solicitor General Tushar Mehta time to seek instructions from RBI and the Centre on the issue.

“While granting the relief of moratorium during the lockdown to borrowers, the action of imposition of interest during the moratorium period is completely devastating, wrong and, in a way, has taken away the benefit of imposing moratorium. This has caused hindrance in right to life guaranteed by Article 21 of the Constitution, 1950 in furtherance of right to life, including right to livelihood, which is a pre-requisite to the fundamental right guaranteed under Article 21 to people of India”, said the plea.

The petitioner said in the present scenario, when all the means of livelihood have been curtailed by the Centre by imposition of complete lockdown pan India, due to worldwide outbreak of Covid-19 pandemic and the petitioner being a citizen of India has no way to continue his work and earn livelihood, imposition of interest during the moratorium will defeat the purpose of permitting moratorium on loans.

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India’s GDP likely to contract 5% in FY 2020-21: Crisil

“We estimate the fiscal cost of this package at 1.2 per cent of GDP, which is lower than what we had assumed in our earlier estimate (when we foresaw a growth in GDP),” it said.

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New Delhi, May 26 : Days after the Reserve Bank of India (RBI) said that India’s GDP growth for the financial year 2020-21 may remain in the negative territory, CRISIL has projected that the country’s economy contract by 5 per cent this fiscal, downgrade from its previous estimate of 1.8 per cent growth.

In a report, Crisil said that although non-agricultural GDP is expected to contract 6 per cent, agriculture could cushion the blow by growing at 2.5 per cent.

It said “things have only gone downhill since” its previous forecast of 1.8 per cent growth on April 28.

The report noted that as per the available data, in the past 69 years, India has seen a recession only thrice, in fiscal years 1958, 1966 and 1980. The reason was the same each time, a monsoon shock that hit agriculture, then a sizeable part of the economy.

“The recession staring at us today is different. For one, agriculture could soften the blow this time by growing near its trend rate, assuming a normal monsoon. Two, the pandemic-induced lockdowns have affected most non-agriculture sectors,” it said, adding that the global disruption also has upended whatever opportunities India had on the exports front.

Laying down the factors for the downward revision GDP outlook, Crisil said that latest studies by the Public Health Foundation of India and the World Health Organization suggest the pandemic spread could peak by mid-July, implying that even if the nationwide lockdown is lifted after May 31, states with high and rising COVID-19 cases could continue with restrictions, which will be a drag on the economy.

It, however, said that on the positive side the Indian Meteorological Department expects the southwest monsoon this year to be 96-104 per cent of the long-period average, which augurs well for agriculture and crude oil prices are expected to average $30 per barrel in fiscal 2021, cushioning the economy.

Talking of the economic package recently announced by the Centre, it said that the package has some short-term measures to cushion the economy, but sets its sights majorly on reforms, most of which will have payoffs only over the medium term (more details in the next section).

“We estimate the fiscal cost of this package at 1.2 per cent of GDP, which is lower than what we had assumed in our earlier estimate (when we foresaw a growth in GDP),” it said.

It said that successive lockdowns have a non-linear and multiplicative effect on the economy and a two-month lockdown will be more than twice as debilitating as a one-month imposition, as buffers keep eroding.

Partial relaxations continue to be a hindrance to supply chains, transportation and logistics, it said, adding that unless the entire supply chain is unlocked, the impact of improved economic activity will be subdued.

“Therefore, despite the stringency of lockdown easing a tad in the third and the fourth phases, their negative impact on GDP is expected to massively outweigh the benefits from mild fiscal support and low crude oil prices, especially in the April-June quarter. Consequently, we expect the current quarter’s GDP to shrink 25 per cent on-year,” it said.

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Bharti Telecom sells 2.75% Airtel stake, raises Rs 8,433 cr

Bharti Group and Singtel, as Bharti Airtel’s largest shareholders, remain committed to the business and long-term prospects of Bharti Airtel, it said.

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New Delhi, May 26 : Bharti Telecom has sold 2.75 per cent stake in Bharti Airtel to institutional investors through an accelerated book building process in the secondary market, raising Rs 8,433 crore.

The allocation was done to over 50 accounts with the top 10 getting two-third of it, Bharti Telecom said in a statement, here on Tuesday.

The sale proceeds would be used to repay promoter holding company’s debt, it said.

Bharti Group and Singtel, as Bharti Airtel’s largest shareholders, remain committed to the business and long-term prospects of Bharti Airtel, it said.

“The strong and wide response received from a diverse mix of investors across geographies, even during challenging global macro-economic conditions, shows the competitive strength and the long-term prospects of Bharti Airtel,” said Harjeet Kohli, Group Director, Bharti Enterprises.

“On the back of such a strong demand from international and domestic investors, the amount raised was increased to $1.15 billion,” he said.

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