One mys­tery solved: RBI got back 99% of banned notes

Mint ST - - FRONT PAGE - BY GOPIKA GOPAKU­MAR gopika.g@livemint.com MUM­BAI *Refers to de­rived num­ber Rs15.44 tril Rs15.28 tril 98. Rs16,000 c 89 mil Rs8,900 c 142 mil Rs7,100 c

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.

PARAS JAIN/MINT

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