Despite RBI’s figures, the last word on demonetisation is still to be written

If the deposits finally returning to the RBI exceed Rs 15.44 lakh crore, it would be an embarrassment to both the government and the RBI, for it would mean that there is a loss of control on money with the public

opinion Updated: Sep 01, 2017 18:31 IST
demonetisation,note ban,modi
People wait outside the Reserve Bank of India to submit their demonetised banknotes on last day of currency exchange, New Delhi, March 31, 2017(Ravi Choudhary/HT PHOTO)

When political parties find their gambits failing, they try and spin it into something else. And the normal thing to do is to change the goalposts and claim that their real intentions were something else.

On Wednesday, when the Reserve Bank of India reported that 99% of the demonetised Rs 500 and Rs 1,000 notes was back with banks and currency chests, leaving only a presumed Rs 16,000 crore of “black” or forgotten money outside the system, the government put out a statement saying, in effect, “Hey, that was our very intent. We wanted the money lounging as undeclared currency or black money to come into the system, and we achieved that.”

Not in those precise words, obviously, but close. Here’s what the finance ministry said when the RBI put out the demonetisation numbers in its balance-sheet for 2016-17: “The government had expected all the SBNs (specified bank notes) to come back to the banking system to become effectively usable currency. The fact that the bulk of SBNs have come back … shows that the banking system and the RBI were able to effectively respond to the challenge of collecting such a large number of SBNs in a limited time.”

It then went on to note how a “significant portion of SBNs deposited could possibly be representing unexplained/black money. Accordingly, ‘Operation Clean Money’ was launched on January 31, 2017. Scrutiny of about 18 lakh accounts, prima facie, did not appear to be in line with their tax profile.” And so on and so forth, which the taxman will now chase for tax dues through investigations, seizures, raids, et al.

The first part of the statement, that “the government had expected all the SBNs (specified bank notes) to come back to the banking system” does not accord with what was being discussed both in the media and in policy-making circles in early November, in the first fortnight after demonetisation. Rather, the expectation was that a lot of the money won’t come in, and, to this extent, the RBI’s liabilities will be extinguished once the deadline ended. After that, the government could legitimately claim that so many lakh crore of black money had been trapped outside the system and was now mere paper. The money would now belong to the country, including the poor.

Discussions in the media and blogs focused on whether money that did not come in could be declared as RBI profit and given to government as dividend, not that large amounts would not come in. Some economists were, in fact, writing about how the government should distribute this bonanza. Economist Swaminathan Aiyar wrote: “If Rs 3 lakh crore of notes remain unencashed at December-end, this implies a corresponding fall in the RBI’s liabilities, giving it a huge windfall. But Modi can demand — and the RBI Governor will surely agree — to hand over almost all the Rs 3 lakh crore to the government as a special dividend. What will Modi do with this windfall? He can transfer a whopping Rs 10,000 into each of 250 million Jan Dhan accounts that have been opened since he came to power. This will absorb Rs 2.5 lakh crore, leaving Rs 50,000 crore for other purposes like infrastructure.”

But far from having a fiscal windfall, the government actually got a drastic cut in dividend from the RBI, which had to foot the demonetisation bills, including printing millions of new notes. Its dividends to the government more than halved from Rs 65,896 crore in 2015-16 to Rs 30,659 crore last year, which means the government lost revenues of Rs 35,237 crore, mostly due to the cost of running its demonetisation project.

As against this cost, if the RBI now says that barely Rs 16,000 crore didn’t come back, the sheer operational cost of demonetisation was a net loser, not to speak of the GDP loss, the jobs loss and other collateral damage.

But there’s more cause for worry.

The Rs 16,000 crore of liabilities extinguished came after the government literally went back on its commitment to accept the old notes during January-March 2017 at RBI counters. If this window had stayed open as long, it is anybody’s guess how much more would have come in.

The RBI also stopped accepting currency deposited with district central cooperative banks (DCCBs) after 14 November 2016. Thus, another source of inflows was stopped in its tracks.

Plus, Indian rupees held in Nepal – with which India has different currency arrangements – could add more to the pile coming back into the system. In its annual report, the RBI said that of the Rs 15.44 lakh crore of SBNs outstanding with the public as on 8 November, Rs 15.28 lakh crore had been deposited by June 30, 2017.

The RBI annual report notes that its figures are “subject to adjustments to be made after the completion of the verification process of the SBNs received, as also for the notes to be received from DCCBs and Nepalese citizens/financial Institutions.”

Some intriguing possibilities arise.

If the deposits finally returning to the RBI exceed Rs 15.44 lakh crore, it would be an embarrassment to both the government and the RBI, for it would mean that there is a loss of control on money with the public.

This has three possible explanations.

One, more Rs 500 and Rs 1,000 notes may have been printed that what was shown in the RBI’s books as on November 8, 2016. This would be akin to a Telgi scam.

Two, some of the notes that came back could be counterfeits; this again would rebound on the government, for banks may well have let fake notes be deposited between November 8 and December 31, either in cahoots with crooks or due to an inability to carefully check the notes when queues to deposit the cash were long and tempers fraying.

Three, old and soiled notes sent for destruction before 8 November may have come back to the system without being fully destroyed. If this is even a remote possibility, it would again need the RBI to re-examine its security procedures for disposing of old notes.

There is no evidence that any of the above three situations occurred. But if the final number turns out to be more than Rs 15.44 lakh crore, there will be egg on the RBI’s face.

These questions will be with us for some time. The final word on what cash came back after November 8 is still to be written.

R Jagannathan is editorial director, Swarajya.

The views expressed are personal

First Published: Sep 01, 2017 18:31 IST