Return of 99 per cent of scrapped notes raises questions about efficacy of exercise

Reserve Bank’s annual report has surprised many by mentioning that as much as 99 per cent or Rs 15.28 lakh crore of the junked 500 and 1,000 rupee notes have come back into the system, raising questions about efficacy of the mammoth exercise undertaken by the Narendra Modi government last year to curb black money. Former Reserve Bank Governor Raghuram Rajan, who was in India in connection with the launch of his book ‘I Do What I Do’, has been of the opinion that short term economic costs would outweigh the long term gains and had appropriately cautioned the government as the then head of the central bank.

The Reserve Bank, which had so far shied away from disclosing the actual number of junked currency deposited after the November 8, 2016, decision, said in its Annual Report for 2016-17 that only Rs 16,050 crore out of the Rs 15.44 lakh crore of the old high denomination notes have not returned. While the counterfeit currency made up for a minuscule number, RBI post-demonetisation spent Rs 7,965 crore on printing new Rs 500 and Rs 2,000 and other denomination notes, more than double the Rs 3,421 crore spent in the previous year.

The Opposition was quick to pounce on the data to attack the government, with former finance minister P Chidambaram wondering if demonetisation was “a scheme designed to convert black money into white”. Finance Minister Arun Jaitley, on his part, vehemently defended the note ban decision, which sucked out 86 per cent of the currency in circulation, curbed economic activity and put common man at much inconvenience, saying the move was not intended to confiscate money but to bring it into formal channels and tax them.

The move, the minister said, was aimed at flushing out black money, eliminating fake currency, striking at the root of terror financing, converting non-formal economy into formal one to expand tax base and employment and giving a big boost to digitisation of payments to make India a less-cash economy. With the return of the money, the owners have been identified, he said, adding that the tax department is scrutinising 18 lakh bank accounts with unusual deposits post note ban that do not match with previous income profile.

To Chidambaram’s criticism, he said “people who had not taken a single step during their tenure against black money have not understood the intent behind demonetisation”. Asked about the then attorney general Mukul Rohatgi’s statement in the Supreme Court that the government had expected Rs 10 or 11 lakh crore to be returned, Jaitley said those were “speculative” statements. “The government had expected all the specified bank notes (of old Rs 500 and Rs 1,000) to come back to the banking system to become effectively usable currency,” the finance ministry later said in a statement. As on November 8, 2016, when the note ban was announced, there were 1,716.5 crore pieces of Rs 500 and 685.8 crore pieces of Rs 1,000 in circulation, totalling Rs 15.44 lakh crore. While it was widely expected that those holding black money may not be able to deposit them in banks during the 50-day window provided, the RBI said just 8.9 crore pieces of Rs 1,000 notes or 1.3 per cent of the scrapped ones have not returned.

It, however, did not give a specific number for the old 500 rupee notes. “Subject to future corrections based on verification process when completed, the estimated value of specified bank notes (SBNs) received as on June 30, 2017, is Rs 15.28 trillion,” the central bank said. After the note ban, old notes were allowed to be deposited in banks, with unusual deposits coming under income tax scrutiny. A collateral damage as a result of rise in printing and other cost was dividend the RBI paid to the government. The central bank said its income for 2016-17 decreased by 23.56 per cent while expenditure jumped 107.84 per cent.

“The year ended with an overall surplus of Rs 306.59 billion as against Rs 658.76 billion in the previous year, representing a decline of 53.46 per cent,” it said. While stating that Rs 15.28 lakh crore have already come back, the RBI said the government has allowed District Central Cooperative Banks (DCCBs) to deposit the scrapped notes accepted by them from their customers during November 10-14. Also, the RBI is in discussions with the government on acceptance or otherwise of those notes held by citizens and financial institutions in Nepal.

The report further said that during 2016-17, the number of suspicious transaction reports filed by banks and other financial intermediaries with the Financial Intelligence Unit “witnessed a quantum jump”. Banks, financial institutions and intermediaries reported as many as 4.73 lakh suspicious transactions in 2016-17 compared to about 1.06 lakh in the previous year. The trail of deposits of the scrapped notes into bank accounts may provide valuable information to the revenue authorities in tracing unaccounted money, it added.

Setting the record straight, Rajan wrote in his book: “I was asked by the government in February 2016 for my views on demonetisation, which I gave orally. Although there might be long-term benefits, I felt the likely short-term economic costs would outweigh them and there were potentially better alternatives to achieve the main goals. I made these views known in uncertain terms.” Rajan said that he had handed over a note to the government outlining the potential cost and benefits of demonetisation as well as alternatives to achieve similar aims.

He further added: “If the government, on weighing the pros and cons, still decided to go ahead with demonetisation, the note outlined the preparation that would be needed and the time that the preparation would take. The RBI flagged what would happen if preparation was inadequate.” What is amply clear it that Rajan was against demonetization and has adequately cautioned the government. Unfortunately he had to go on completion of three years, as his term was not extended by the government.

Rajan was replaced by Urjit Patel who carried forward the massive demonetization exercise in deference to the wishes of the government. It would be very difficult to tell whether the demonetization, which was undertaken at a heavy cost and considerable pain to common people, was a failure or a success. The onus will now be on the government and the tax authorities to scrutinize the funds deposited in banks during the demonetization period. The scrutiny of bank accounts, however, should not be done at the cost of harassing common people who had deposited their hard earned and legitimate money in their bank accounts.

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