One mystery solved: RBI got back 99% of banned notes
The estimated value of the banned notes received was Rs15.28 trillion, says RBI annual report
According to the Reserve Bank of India’s (RBI’S) annual report released on Wednesday, 98.96% of Rs1,000 and Rs500 denomination banknotes (by value) that were invalidated on 8 November had been returned by the end of June.
The numbers put to rest one of the big mysteries surrounding the exercise, which, according to some analysts, was one of the reasons behind the Bharatiya Janata Party’s landslide win in this year’s elections in Uttar Pradesh.
In its report, the central bank said that “subject to future corrections based on verification process when completed”, the estimated value of the banned notes it “received” was Rs15.28 trillion. This compares with Rs15.44 trillion of the invalidated notes that were in circulation as of 8 November, according to data provided by minister of state for finance Arjun Meghwal to Parliament on 21 January.
Following Prime Minister Narendra Modi’s surprise announcement of the invalidation of old high-value currency notes on 8 November, estimates suggested that around Rs3 trillion would not be returned to the system because it was unaccounted or black money. While defending demonetization in the Supreme Court in November, then attorney general Mukul Some of the key numbers around the demonetization exercise in RBI’S report
Total value of demonetized notes as on 8 November Value of notes received by RBI as on 30 June Proportion of notes returned Value of money not returned Number of Rs1,000 notes not returned as on 31 march Share of Rs1,000 notes not returned (value terms) Number of Rs500 notes not returned* Share of Rs500 notes not returned (value terms)* Rohatgi said around Rs4-5 trillion would probably not find its way back into the system.
By December, though, it was clear that tax evaders had managed to legalize their unaccounted money using mules and proxies to make deposits, made high-value purchases using back-dated bills and colluded with bank officials to exchange old currency.
With RBI’S data showing that most of the money has returned to the system, the opposition was quick to criticize the government. The Congress said RBI’S report was proof that demonetization had “utterly failed”.
Measuring the success of demonetization on the basis of how much cash has come into the system shows “an inadequate understanding”, said finance minister Arun Jaitley.
Indeed, “the fact that the entire demonetized money has come back shows black money has been accounted for completely. In that sense, demonetization has been a success”, said R. Gandhi, former deputy governor of RBI. It is now up to the tax department to do its job, he added. In January, the government decided to use data analytics to identify people whose deposits didn’t match their known sources of income. In his 15 August speech, Modi said that more than Rs1.75 trillion deposited in banks after demonetization was under the scanner.
“The trail of deposits” of bank notes “into bank accounts may provide valuable information to the revenue authorities in tracing unaccounted money”, RBI said in its annual report.
Interestingly, RBI’S annual report shows a spike in the number of so-called suspicious transaction reports filed by banks, financial institutions and intermediaries. Banks filed 361,214 such reports in 2016-17, up from 61,361 the previous year. This is evidence that people have been forced to deposit money “illegitimately lying with them”, Jaitley said in a press briefing after the release of RBI’S report.
A banker who asked not to be identified said the spike in suspicious transaction reports was exclusively because of demonetization, although he added that at least some of these could end up being genuine transactions.
Defending demonetization, Jaitley said its major objectives—a “less cash economy”, digitization, formalization of the economy, widening the tax base, curbing terror financing, tracking black money and clamping down on counterfeit currency—had been met. “The effect of demonetization in all these areas has been extremely positive,” he added
According to RBI, the volume of cash in the system has come down by 17%. Total currency in circulation fell from Rs17.77 trillion on 8 November to Rs14.75 trillion on 4 August, according to the finance ministry.
The invalidation also resulted in an increase in digital transactions. In a note, the finance ministry said that demonetization had led to the number of digital transactions increasing 56% between October 2016 and May, to 1.1 billion.
RBI detected 762,072 fake notes compared with 632,926 pieces a year ago. However, the total value of these fake currency notes amounts to a meagre Rs43 crore.
The ministry’s note added that demonetization had resulted in a 24.5% increase in the number of income-tax returns filed till 5 August.
RBI’S report also sheds further light on other aspects of the demonetization move, such as its costs. The cumulative effect of the decrease in income and increase in expenditure effectively halved RBI’S net profit to Rs30,663 crore from Rs65,880 crore a year ago. The central bank transferred almost its entire profit to the government.