The RBI (Reserve Bank of India) 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. But, this didn’t happen for three reasons. One, as Radhika Rao, economist at Singapore-based DBS bank, points out in her note that demonetisation added to the RBI’s cost burden through additional printing and destruction (of scrapped notes) costs.
Second, surplus domestic liquidity has forced the RBI to mop-up funds regularly on the reverse repo window (yet again mainly due to post demonetisation cash-flood), adding to its costs (the RBI needs to pay interest on this money to banks), in contrast to liquidity being in deficit in prior two years, which saw banks borrow from the RBI and add to latter’s earnings and, third, lower returns on foreign reserves in midst of weak global yields.
It wouldn’t be an exaggeration to say that demonetisation has turned out to be a big spoiler to the government’s earnings from RBI. Under normal scenario, it would have got much bigger share. The poor dividend could make it even tougher for the government to meet its fiscal deficit target of 3.2 percent of gross domestic product for the year ending in March. It will now have to do some smart revenue operations to make up for this notional loss. As far as demonetisation revenue is concerned, now the only hope left for the government is to wait for the counting of demonetised currency to be over and see if there is a substantial gap between the value of currency demonetised and the value of the currency ultimately returned. Here too, it is unlikely that government will turn lucky as it may have to wait for many more months. There is a likely surprise for those who were waiting to see the noteban numbers. It will not be before March, 2018, the RBI completes the counting of old demonetised notes that returns to the banking system, if one goes by the estimates of former RBI deputy governor, R Gandhi.
That will be nearly one and half years since the demonetisation of Rs 500, Rs 1,000 notes were announced by Prime Minister, Narendra Modi on 8 November. About 86 percent of the currency in circulation was scrapped overnight in a bid to check black money, fake currency and terror funding in the country. The last time, the RBI gave a provisional update on the demonetised money returning to banking system was just after a month of the big-bang announcement, in the second week of December. Then, the central bank said it has received Rs 12.44 lakh crore in invalidated high value notes until 10 December. In other words, it took 32 days for the RBI to arrive at the figure of Rs 12.44 lakh crore or about 81 percent of the total amount of currency demonetised. After that the repeated response from the central bank and the government officials has been that the physical counting and tallying of the currency stock is a cumbersome process and will take many more months for the process to get completed. Going by Gandhi’s statement, one will come to know about the final figure of demonetised currency–only a year ahead of the 2019 general elections. For the Modi government and opposition parties, that is an important piece of data to use either way in the run-up to elections. Why this figure is important? This is because the initial expectation of the government was that a good three to four lakh crores of unaccounted old currency will not return to the system. When that chunk of money gets destroyed outside the system, the RBI’s liability will reduce and the resultant surplus will be transferred to the government’s coffers in some form. Now, there are experts arguing both for and against this theory including the fact that whether there is a legal leeway for the central bank to do such transfer.