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Demonetisation: RBI says 99% banned notes are back; where is the black money?

Nearly 10 months after Prime Minister Narendra Modi announced demonetisation, the Reserve Bank of India (RBI) has finally come out with provisional figures on the count of old Rs 500, Rs 1000 notes that were returned to the banking system. Evidently, the number would make neither the government, nor the central bank happy. It shows nearly all money has returned.

Subject to future corrections based on verification process when completed, the estimated value of SBNs (specified bank notes) received as on 30 June 2017 is Rs 15.28 trillion, the RBI said in its annual report released on Wednesday evening. The total value of invalidated Rs 500 and Rs 1,000 notes at the time of demonetisation was Rs 15.44 lakh crore or around 86 percent of the currency in circulation. This means 99 percent of the demonetised currency has found its way back to the banking system. Only a little over Rs 16,000 crore of Rs 15.44 lakh crore was not returned.

And, let’s not forget, this is not the final number. The RBI is yet to count old notes received at cooperative banks and old notes submitted by citizens an institutions of Nepal. By the time these numbers too gets added up, the likelihood is that the final figure will be much closer to 100 percent mark. There are other interesting details about demonetisation in the RBI report. It says, RBI’s cost of printing currency post demonetisation (mainly on account of the new Rs 2,000 and Rs 500 notes), escalated to Rs 7,965 crore, more than double the figure in the previous year when it stood at Rs 3,421 crore.

The number of counterfeit notes or fake notes detected during the exercise is only minuscule, just about 7.6 lakh pieces, as compared with 6.3 lakh pieces in the year ahead.

With the figures finally out, it is now safe to conclude that on a cost-benefit analysis, the RBI has only losses due to the demonetisation exercise it ‘recommended’ to the Modi government. No big black money in cash got perished outside the banking system as the government expected initially.  On the contrary, both the RBI and government had to take a hit as far as the cost of this humongous exercise is concerned — one of the major reasons why the RBI’s dividend to the government fell by half this time.

The RBI transferred just Rs 30,659 crore as dividend to the government for the year ended June 2017, less than half the previous year’s levels. Last year, it transferred Rs 65,876 crore to the government. This year, the expectation was Rs 74,901 crore will flow into the government exchequer, partly due to the demonetisation gains.

Did demonetisation fail?

The answer will depend on who you ask the question to.

On 8 November, the originally stated goals of demonetisation were mainly three–a major clampdown on the black money in the system, cash-based corruption and terror funding. There are ample evidence to understand that demonetisation hasn’t impacted corruption and terror (read a report on demonetisation impact on corruption.

With all the Rs 500 notes follow the Rs 1,000 notes returning to bank counters, the theory of black money stashed in cash outside the formal system (that isn’t accounted in any manner) getting extinguished falls flat. That leaves us with only two scenarios.

First, there was no significant black money in cash in India contrary to what a section of top economists had said.

n a jointly authored article written for Mint newspaper on 27 December, renowned economist and Columbia university professor Jagdish Bhagwati, resident senior fellow at the IDFC Institute Vivek Dehejia and Chung Ju Yung distinguished professor of international economics at Johns Hopkins University and deputy director of the Raj Center on Indian Economic Policies at Columbia University Pravin Krishna had accepted this assumption when they defended the Modi government’s demonetisation move.

“Clearly, at least from the perspective of its effectiveness in dealing with the black money issue, success has to be measured by the sum of tax revenue generated and black money destroyed. Suppose we accept the estimate that one-third of the approximately Rs 15 trillion in demonetised notes is black money,” Bhagwati and his co-authors said in the piece.

Based on this assumption, they also worked out the gains the Modi government would have had if demonetisation exercise is successful — around Rs 2,5 lakh crore. Here’s how they arrived at this figure.

“Roughly speaking, the revenue that would have been generated had that income been taxed in the first place is 30% of that (so, Rs 5 trillion times 0.3 = Rs1.5 trillion). Perfect detection of black money should now yield 50% as tax revenue (so Rs 5 trillion times 0.5 = Rs 2.5 trillion), if all black money is returned and identified as such.”

Both the assumption on black money by Bhagwati and his team and the likely gains out of it to the government do not sound convincing if one purely goes by the RBI figures. To begin with, the government never had an estimate of black money in cash in the system. Perhaps, it was poorly advised. The flawed implementation of the programme only worsened the situation.

Demonetisation pain

Demonetisation-resulted cash crunch hit the common man hard, businesses suffered and the economic growth was hit by a significant margin.

The fourth quarter GDP fell to 6.1 percent from 8 percent from the year-ago quarter. The fall in GVA (gross value added) was even sharper to 5.6 percent in the fourth quarter from 8.7 percent in the Q4 period of previous year. Jobs in informal sector were particularly hit. Even the Rashtriya Swayamsevak Sangh (RSS) affiliated Bharatiya Mazdoor Sangh (BMS) blamed the Modi government for this.

“Under the new government, 1 lakh and 35 thousand job opportunities have been created so far but 20 lakh people have lost their jobs,” Baij Nath Rai, BMS President, told the Kolkata-based daily, The Telegraph. “We have reports of job losses in the unorganised sector because of demonetisation, but how deep the impact is has to be ascertained,” Rai was quoted as saying.

Now, the second scenario is that black money holders used demonetisation as a big opportunity to whiten their ill-gotten wealth directly to bank counters either directly or through benamis or in other ways (purchases/refunds/political donations etc). They now face the risk of getting caught by the taxman and possible punitive actions. But, the tax cheats would have thought that it is anyway better to face the risk of paying penalty rather than burning the loot or throwing it down the sewage. Besides, the hopes that an over-burdened tax department would take ages to lay their hands on the guilty, too, would have emboldened the crooks.

Arguably, there are some positives to demonetisation. The Modi government showed its intent to fight against black money. Also, the government and demonetisation supporters have defended the government’s massively disruptive move citing widening tax base, increased compliance, push for digital economy, and asserting that a significant amount of black money in bank accounts post demonetisation is black money. But, until now, no substantial amount of black money has been unearthed from such deposits.

In his Independence Day speech, Modi said Rs 2-3 lakh crore black money has been brought to the banking system post-demonetisation. But, in August, Minister of State for Finance Santosh Kumar Gangwar told Parliament that the income tax department detected undisclosed income worth Rs 13,715 crore in fiscal year 2016-17. Income tax raids at 5,102 places yielded undeclared income of Rs 15,496 crore, the minister said in a written reply to Parliament. These figures are confusing and somewhat contradictory.

Both the government and its tax department will have to work overtime and dig out black money from these accounts to salvage the idea of demonetisation. If the exercise to weed out black money from bank accounts fails to deliver, history would remember demonetisation as a state-sponsored once-in-a-life time opportunity given to crooks to convert their black money into white and get away with lighter penalties.

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