The Congress party said RBI’s report was proof that demonetisation had “utterly failed”
According to the Reserve Bank of India’s annual report released on Wednesday, 98.96% of Rs 1,000 and Rs 500 denomination banknotes (by value) that were invalidated on last 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 Rs 15.28 trillion. This compares to the Rs 15.44 trillion of the invalidated notes that were in circulation as of November 8, 2016, according to data provided by minister of state for finance Arjun Meghwal to Parliament on January 21, 2017.
Following Prime Minister Narendra Modi’s surprise announcement on the invalidation of old high value currency notes on November 8, estimates suggested that around Rs 3 trillion would not be returned to the system because it was “unaccounted” or black money.
With RBI’s data showing that most of the money has returned to the system, the opposition was quick to criticise the government. The Congress party said RBI’s report was proof that demonetisation had “utterly failed”.
But “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 his August 15 speech on the occasion of Independence Day, Prime Minister Modi said that more than Rs 1.75 trillion deposited in banks is 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 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,” finance minister Arun 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 demonetisation, although he added that at least some of these could end up being genuine transactions.
Defending demonetisation, Jaitley said its major objectives – a “less cash economy”, digitisation, formalisation 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 have 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 Rs 17.77 trillion on November 8 to Rs 14.75 trillion on August 4 according to the finance ministry.
The invalidation also resulted in an increase in digital transactions. In a note, the finance ministry said that demonetisation had seen the number of digital transactions increase 56% between October 2016 and May, to 1.1 billion.
“Demonetisation did bring about a behavioural change, making people opt for more digital transactions than before...,” said Aditi Nayar, an economist at rating company ICRA Ltd.
RBI detected 762,072 fake notes compared to 632,926 pieces a year ago. However, the total value of these fake currency notes amounts to a meagre Rs 43 crore.
The ministry’s note added that demonetisation 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 demonetisation move such as its costs. The cumulative effect of the decrease in income and increase in expenditure effectively halved RBI’s net profit to Rs 30,663 crore from Rs 65,880 crore a year ago. The central bank transferred almost its entire profit to the government.