The suspense has finally ended with the Reserve Bank of India [RBI] in its Annual Report giving details of the high denomination viz. 1000/500 currency notes in circulation [these were declared invalid on November 8, 2016 by Prime Minister Modi] that came back to the banking system and those which did not.
As against Rs 1544,000 crores embodied in these currency notes as on November 8, 2016, Rs 1528,000 crores had come back leaving a meager Rs 16,000 crores in the hands of public [of these Rs 8900 crores was embedded in 1000 denomination note]. This is just about 1% of value of invalidated currency.
The opposition parties especially Congress are citing this to brand demonetization as a sham. P Chidambaram, finance minister under erstwhile UPA – dispensation has led the tirade against Team Modi. This is encapsulated in his sarcastic comment “economists behind the move deserve a Nobel prize” as the RBI gained Rs 16,000 crore, but lost Rs 21,000 crore in printing new notes.
The critics are taking a very myopic and trivialized view of a step that has far reaching socio-economic ramifications and is expected to lay the foundation of a ‘clean’ and ‘robust’ economy that will traverse in a double digit growth trajectory in the medium to long-term. At the outset, let us look at Chidambaram math.
Rs 16,000 crores is a clear gain to RBI. This is because the currency held by the public is its liability [read what is mentioned on the note “I promise to pay the bearer”]. Since, old 1000/500 notes were declared invalid and of these, notes worth Rs 16,000 crores were not returned by the deadline [March 31, 2017], these get automatically extinguished and hence represents surplus with apex bank.
According to RBI report, the cost of currency printing during 2016-17 was about Rs 8000 crores [replacement of old currency – contingent upon demonetization – happened within that year]. The corresponding cost in previous year being about Rs 4000 crores, the extra expenses attributable to demonetization was therefore, only Rs 4000 crores [instead of Rs 21,000 crores as per ex-FM].
In view of above, even on the very math cited by Chidambaram, the RBI has gained by Rs 12,000 crores [16,000-4000] instead of a net loss of Rs 5000 crores [21,000-16,000] as estimated by him.
What about the big picture? True, the government was expecting that a big chunk i.e. about Rs 300,000 crores won’t come back as the cost of disclosing black cash would be higher [due to heavy penalties in addition to tax plus interest] besides jail term. Yet, if only a pittance did not come, it only shows a deep rooted psyche of hoarders that they are not scared of the government machinery.
This psyche was built over a period of time when successive ruling establishments were soft towards tax dodgers and black money mongers. The former not only turned a Nelson eye to the activities of latter but also colluded with them to get a share in the pie. As a result, the hoarders developed a mindset that they could continue to manipulate and manage the system.
With this mindset, they came in droves depositing the money in banks thinking that this will automatically become white. Hence, 99% of the old currency was back. This is also confirmed by RBI report which says that during November 9 – December 30, 2016, the banks got ‘unusual’ deposits of Rs 280,000 crore – Rs 400,000 crores.
Merely because the money got deposited in the bank, it would be preposterous to believe that it has turned white. Whether black or white depends on the outcome of its scrutiny vis-à-vis returns filed in the past. If, the deposit is out of sync then, clearly the money is black. Using advanced ‘data analytics’ technique, the Income Tax [IT] department has identified 1.8 million such accounts.
In his Independence Day address on August 15, 2017, prime minister, Modi mentioned about unexplained cash of over Rs 300,000 crores of which Rs 175,000 crores were found to be highly suspicious. IT along with other intelligence agencies viz. Central Bureau of Investigation [CBI], Enforcement Directorate [ED] and Financial Intelligence Unit [FIU] is chasing these depositors for tax recovery/interest/penalty as per the law of the land.
The revenue thus collected would be even higher than the amount of these deposits. This by itself will demonstrate the success of the decision. This is far better than a scenario whereby Rs 300,000 crores had not come to the bank and gain [albeit to RBI] would have been limited to that amount only. Plus, there are other positive spin-offs which won’t be available in case of non-disclosure.
First, with additional persons who never paid taxes in the past having come on IT radar [courtesy, demonetization], they will have no other option but to disclose their income in future and become regular tax payers [this would never happen if the hoarders had not brought it to banks]. Already, the e-filers till date about 28 million are 6 million higher than during corresponding period last year.
Second, the disclosures have helped in nabbing shell companies which were being used for laundering black money. As Modi informed, 300,000 such companies are on government’s radar and out of these 175,000 have been de-registered. Action against the others will follow sooner than later. When, the space to park black money gets choked, there won’t be any incentive to generate.
Third, the identification of cash with their real owners [made possible by deposit in the bank] has helped IT department intensify drive against hoarders via searches and seizures [till date, the government has unearthed black money worth Rs 125,000 crores] and initiating action under Benami Act [2016].
Fourth, it has helped integration of the so called ‘informal’ sector [it contributes 50% of GDP] with the formal economy which will bring about greater transparency in transactions, higher productivity, more jobs and boost to tax revenue aided by GST [goods and services tax] launched from July 1, 2017.
Clearly, the demonetization – an extraordinary step never attempted before anywhere in the world on such a huge scale – has achieved the intended objective. Indeed, Team Modi truly deserves a ‘Nobel Prize’ for successfully shepherding it for ‘real’ and ‘sustainable’ gains in the medium to long-term.