The Reserve Bank of India has released its annual report for 2017-18 with forecasts for the current financial year, updates on demonetisation and the state of its own finances. The key takeaways are as follows:
1) The counting of demonetised notes is complete. RBI said that Rs 15.31 lakh crore has been returned, a tad above the interim number of Rs 15.28 lakh crore it revealed in last year’s report. That is 99.3 percent of the 15.41 lakh crore of old Rs 500 and Rs 1,000 notes that were in circulation as on 8 November 2016. In other words, only about Rs 10,000 crore worth of old notes haven’t been returned. It isn’t that much of a surprise since last year’s annual report revealed that pretty much 99 percent of the money had returned. That would suggest that tax evaders managed to legalize their ill-gotten gains. However, the jury is still out since the taxman has opened probes into several large deposits which is likely to be embroiled in litigation for some time to come.
2) The new currency notes are susceptible to counterfeiting, just as the old ones were. There was a jump in the number of fake notes detected for the new Rs 500 and Rs 2,000 notes, as also for the Rs 50 denomination. However, the overall number of fake currency notes detected fell to 522,783 pieces in 2017-18 compared to 762,072 pieces a year ago. That amounted to Rs 23 crore of counterfeit notes in 2017-18, half the value of what was detected a year earlier.
3) Demonetisation hasn’t succeeded in pushing people away from cash. RBI data shows that in 2017-18, households added currency worth 2.8 percent of gross national disposable income (GNDI). That was because there was dis-saving of cash to the extent of 2 percent the previous year. Overall, household savings in financial instruments also rose to 11.1 percent of GNDI. But these are provisional estimates and should be taken with a pinch of salt. For FY2016-17, RBI had estimated household financial savings at 11.8 percent of GNDI, which has been revised to 9.1 percent now.
4) Despite the increased cash holding and currency in circulation, demonetisation has boosted digital payments. In 2017-18, non-cash transactions rose 45 percent by volume and 29 percent by value. The volume rate of growth, while lower than that of 2016-17, is still higher than the average 25 percent seen in the two financial years prior to demonetisation. The trend is similar for value growth too.
5) RBI paid Rs 50,000 crore as dividend to the government in 2017-18 (June to July fiscal year) including an interim dividend of Rs 10,000 crore paid earlier in 2018. The central bank set aside Rs 14,190 crore towards its contingency fund, which is used for meeting contingencies, includingdepreciation in the value of securities, risks arising out of monetary/exchange rate policy operations, systemic risks etc. The Centre, which is pressing RBI for more dividends, had reportedly questioned high allocations to the contingency fund. However, the annual report showed that contingency and asset development fund are just 7 percent of RBI’s balance sheet compared to 9.2 percent in 2014.
6) After the Punjab National Bank fiasco, the value of frauds in the Indian banking system has expectedly risen to Rs 41,000 crore in 2017-18. However, the number of cases has also jumped to 5,835 in FY18 from an average of 4,500 over the past 10 years. State-owned banks accounted for 93 percent of the frauds.
7) At the end of March 2018, twelve out of every Rs 100 lent by Indian banks had turned sour. The annual report said that this number is only expected to increase by the end of the current financial year. It is not entirely unexpected. The power sector is in a mess and estimates from external agencies suggest it could add as much as Rs 1.7 lakh crore (or about 1.7 percent of bank credit) to banking sector bad loans.
8) The annual report projects GDP growth of 7.4 percent for fiscal 2019-20. That is unchanged from the August monetary policy statement. This growth will be driven by three engines of the economy – consumption (both rural and urban), investment and exports, the report said.
9) There was an increase in the flow of financial resources from banking to the commercial sector in fiscal 2017-18. Banks accounted for 43 percent of all fund flows to the commercial sector in 2017-18 compared to 26.7 percent a year earlier. Credit growth follows economic growth and there is scope for credit absorption. But for that, the bad loan problem has to be tackled and (public sector) banks sufficiently recapitalised.
10) RBI’s inflation outlook, too, is unchanged from the 1 August monetary policy statement. It projects retail inflation at 4.6 percent in July to September 2018; 4.8 per cent in October to March and 5 percent in the first quarter of the next financial year.