Comment: Why Modi has to stop counting cash and revive the economy

Shishir AsthanaMoneycontrol ResearchDemonetisation has had many unintended consequences: for commercial banks, it has led to a problem of plenty. As people rush to deposit their old Rs 500 and Rs 1,000 notes, deposits have shot up by Rs 5.44 lakh crore. For a country with Rs 100 lakh crore in bank deposits, the incremental deposit is huge. Many banks have seen two years’ inflow of deposits in two weeks. While the government's intention was to suck out black money from the system, it is now sitting on a pile of cash and needs to think of ideas on how to utilise it.

Banks are happy that their current and savings account (CASA) deposits have surged and their cost of funds have gone down, but they have started worrying that they are sitting on funds with no willing borrowers. Asset-liability mismatches are touching new levels. Under this circumstance, banks lowering lending rates is a given. The question is by how much, and whether it will be enough to kick-start the economy.

The problem is likely to get further aggravated. In a reply to the Supreme Court, the government said that it is confident of collecting Rs 10 lakh crore by end-December through the current demonetisation programme. Inflation is expected to touch the lower band of the RBI's comfort zone. Thankfully, recent liquidity means that the government is not depending on the central bank to nudge bankers to cut interest rates.

With new disclosures, tax collection is expected to improve. The government will have to reward honest tax payers by either cutting tax rates or changing the tax slabs for various tax brackets. This move will help increase consumption, but it is largely an urban affair and will not be broad-based enough to revive the economy.

The hesitancy seen in the private sector toward capital investment, even before demonetisation was announced, is unlikely to improve unless the government announces big incentives.

Now the government will have to move to the second stage of announcing big-bang moves to push the money back into the economy. Unlike in the past where most of the projects were either government-funded or announced and started by public sector companies, policy measures will have to be announced to compel private sector players to invest.

Lower interest rates will bring in much needed consumption, but this has to be met with supply, which will not happen unless the private sector is properly funded.

Banks will have to be given the comfort to lend and stop worrying about their toxic assets. Non-banking finance companies (NBFCs) had taken over the job of lending from the banks, taking a sizeable amount of risk to keep the economy going. They are now taking the impact of demonetisation on their chin, as supply chains across the economy have come to a virtual standstill, threatening to make most of their clients non-performing assets. They need help.

The awe inspired speech by the PM going on air to announce the sudden demonetisation has to be matched by shock treatment for economic revival. Given the way equity markets are reacting to visible signs of a stalling economy, another television appearance by Mr Modi, enumerating a list of measures, should follow soon to head off further bloodletting.