Aside from everything else dominating the news cycle, one very significant development over the past week was the publication of the Reserve Bank of India’s (RBI) annual report for 2017-18.
Among other things, the report offered some long-awaited insights into demonetisation, growth and credit forecasts for both the previous and current financial year and the state of the RBI’s finances. Here are 10 major takeaways from the report:
1) The RBI has completed counting the all the demonetised currency notes that have come back into the system. Of the Rs 15.41 lakh crore worth of old Rs 500 and Rs 1000 notes that were in circulation before November 8, 2016, Rs 15.31 lakh crore or 99.3% has come back into the system. Approximately Rs 10,000 crore worth of old notes have not returned.
Whether the income tax department will now process several large deposits that have been flagged for investigation and successfully prosecute those who have deposited black money remains to be seen.
2) The report stated that there was a spike in the number of counterfeit Rs 50 (the new version), Rs 500 (the new version) and Rs 2000 notes. Having said that, the overall number of fake currency notes detected in the system dropped from 762,072 pieces in the 2016-17 financial year to 522,783 in 2017-18. Going by absolute value, the number of counterfeit notes was approximately Rs 23 crore—half of what was discovered the previous year.
3) Demonetisation has not pushed the common citizen away from cash-based transactions. Although “household financial savings as a percentage of gross national disposable income (GNDI) rose from 9.1% in 2016-17 to 11.1% in 2017-18 (the highest in at least the last seven years),” according to Livemint, most of it was in cash (2.8% of the GNDI). This is 2.5 times the average for the five years before demonetisation, says this Economic Times editorial.
Even the spike in household savings are just provisional figures.
4) Nonetheless, digital payments have grown exponentially both in terms of value (rising by 29% in 2017-18) and volume (rising by 45% in 2017-18) of transactions. Although these figures are a touch lower than what we saw for 2016-17, it’s still markedly higher than the growth witnessed across the previous two financial years.
5) The Centre received Rs 50,000 crore as dividend from the RBI in 2017-18 (June to July FY). As per the report, the central bank allocated Rs 14,190 crore as part of its contingency fund in the event of any risks or shocks emanating from the financial system.
While the Centre wants more from the RBI and complains about the money allocated to the contingency fund, Moneycontrol reports “contingency and asset development fund are just 7% of the RBI’s balance sheet compared to 9.2% in 2014.”
6) After the devastating Punjab National Bank scam earlier this year, the value of fraudulent transactions has spiked to Rs 41,000 crore in the last financial year. The number of cases has also risen from a 10-year average of 4,500 to 5835 in 2017-18. Government-owned banks account for 93% of all frauds in the banking system.
7) The bad loan problem will persist and possibly get worse, before we see any light at the end of the tunnel. Rs 12 of every Rs 100 lent by Indian banks turn bad, and going by other estimates these banks could add a further 1.7 lakh crore of bank loans into the system.
Having said that, the report claims “currency in circulation surpassed its pre-demonetisation level while credit growth revived by double digits from a historic low in the previous year”.
It expects a further rise in credit growth considering the relative success of the Insolvency and Bankruptcy Code, a tool the government has used to resolve bad loans.
8) GDP growth, according to the RBI, is expected to hit 7.4% – driven by investments, consumption and exports. India will have to contend with global headwinds like global trade wars, the United States Federal Reserve Bank’s decision to raise interest rates, rising geopolitical tensions in the Asian continent and crude oil prices.
“With India being a net energy importer, the changing demand-supply dynamics in the international crude oil market may impact heavily on India’s trade deficit,” the RBI said.
9) There are risks of rising inflation as well, according to the RBI report.
“On the whole, headline inflation is projected at 4.6 per cent in Q2 of 2018-19; 4.8 per cent in H2 and 5 per cent in Q1 of 2019-20, including the HRA impact for central government employees, with risks evenly balanced,” the report said.
10) The RBI expects foreign direct investments to increase in the foreseeable future, alongside greater expenditure in infrastructure projects (road, rail and ports).
Key fiscal risks in the current financial year, however, are expected to emanate from the states with many of them going in for elections.
Announcements for massive farm loan waivers and rising expenditure on government salaries may affect budget outlays, and thus it’s key for the states to raise their own revenues.
(Edited By Vinayak Hegde)