Modi govt's new demonetisation narrative: Searching 'black money' in notes returned to RBI

With the Reserve Bank of India's (RBI) disclosure that 99 per cent of the demonetised Rs 1,000 and Rs 500 denomination currency notes have returned back to the system, the debate over the purpose of demonetisation exercise has once again gained strength.

RBI has reported in their Annual Accounts that Specified Bank Notes (SBNs) of estimated value of Rs. 15.28 lakh crore have been deposited back as on 30.6.2017.  The outstanding SBNs as on 8th November, 2016 were of Rs. 15.44 crore value. The total currency in circulation of all denominations as on 8th November, 2016 was 17.77 lakh crore whereas total currency in circulation as on 4th August, 2017 was 14.75 lakh crore.

Let us take a quick look at the official response that came immediately after RBI's annual accounts published on 30th August 2017 talked about the SBNs that were returned to the apex bank after its legal tender status got cancelled 10 months ago.

Flushing out black money
Immediately after the demonetisation exercise began, there was a naive feeling that the hoarders of unaccounted money may not be completely successful in ploughing back the entire black money into the banking system. Whatever portion of the money that will get stuck outside the system will become useless, resulting in RBI gaining a windfall, it was expected. The fact that 99 per cent of the money has already returned, with some more left to be counted, it is now certain that the unscrupulous elements had found ingenious ways to plough back black money into the system.

Did the government succeed in flushing out black money? Not yet. But it is certainly trying hard to segregate the 'black' component from the accounted and legitimate money that was deposited post-demonetisation drive. As the finance ministry response states, a significant portion of SBNs deposited could possibly be representing unexplained/black money.  The 'Operation Clean Money' it launched on 31st January 2017 scrutinised of about 18 lakh accounts, which prima facie, did not appear to be in line with their tax profile.

"These were identified and have been approached through email/sms. More than 9.27 lakh responses were received giving information on 13.33 lakh accounts involving cash deposits of around Rs.2.89 lakh crore. Advance data analytics tools were deployed which further identified 5.56 lakhs new cases and about 1 lakh of those cases in which either partial or no response was received in the earlier phase. Besides, about 200 high risk clusters of persons were identified for appropriate action.  The Income Tax Department (ITD) conducted searches on various entities, leading to seizure of cash and admission of undisclosed income. Since November 2016 and until the end of May 2017, a total of Rs. 17526 crore has been found as undisclosed income and Rs. 1003 Crore has been seized.  The investigation/scrutiny is going on," the Finance Ministry said.

It is a different matter that income tax department has been becoming more tech savvy and advance data analytics tools have been throwing out suspicious names, even before demonetisation. However, demonetisation exercise did contribute to a spurt in such data, and it may take several years, and hard work of a highly motivated income tax department to make meaningful interventions.

ELIMINATE FAKE CURRENCY NOTES, TERROR FINANCING
When it comes to this objective, the government has the luxury to claim success. There is no way one can be certain of the possible quantum of counterfeit currency that might have become useless after demonetisation. The only indication that can be given will be based on the counterfeit currency that had entered into the banking system during the demonetisation melee. RBI informs that  during 2016-17, 762,072 pieces of counterfeit notes were detected in the banking system, of which 95.7 per cent were detected by commercial banks.  `

Detection of counterfeit notes was 20.4 per cent higher than the previous year.  Barring Rs.100, the detection of counterfeit notes increased across denominations - notably, Rs.500 and Rs.1000 - during 2016-17.  The study done by RBI shows that the rate of counterfeit detected per million pieces of notes processed at the currency chest level at 7.1 pieces for Rs. 500 denomination and 19.1 pieces for Rs. 1000 denomination, which were higher than the rate of detection at the Reserve Bank (5.5 pieces for Rs. 500 and 12.4 pieces for Rs. 1000).

At the Reserve Bank's currency verification and processing system during 20156-16, there were 2.2 pieces of counterfeits of Rs. 500 denomination and 5.8 pieces of counterfeits of Rs. 1000 denomination for every million pieces of notes processed; which rose to 5.5 pieces and 12.4 pieces respectively during post demonetization period. That is why the government claims that demonetization had resulted in choking of terrorist and naxalite financing.  "No high quality fake Indian currency note was found / seized by intelligence operations, including at the Indo-Bangladesh Border since demonetisation.  Further, it also adversely affected the hawala operators and dabba trading venues," the government claims.

OTHER BENEFITS
The government has also talked about several other benefits like the role of demonetisation in encouraging digital currency, expansion of tax base, formalisation of economy etc. More than demonetisation, it is perhaps the implementation of Goods and Services Tax that is driving several of these changes. The government argues that the move has been immensely beneficial to Indian economy and people, Opposition parties disagree. Both responses are on expected lines, though neither can be considered as the perfect position. That is how political debates have always been.