What was the purpose of demonetisation? RBI says 99% of banned Rs 500, Rs 1000 notes returned

The RBI annual report has led to a fierce attack on the government from critics over the purpose of demonetisation, after the central bank said almost 99 per cent of the banned currency notes had been deposited in banks between the Prime Minister Narendra Modi's demonetisation announcement on November 8 and June 30, 2017.

Demonetisation, which was done to crack down on black money, significantly affected India's GDP growth, but with almost all of the money now being accounted for there are doubts if the government's action was effective. Demonetisation's long-term impact on the Indian economy is still debated. The government, meanwhile, has defended itself with the Finance Minister Arun Jaitley suggesting that just because the money is back with the RBI does not mean that black money hoarders have not been held accountable.  

RBI data states that out of Rs 15.44 lakh crore worth of currency notes that were taken out of circulation, Rs 15.28 lakh crore have returned to the system and around Rs 16,000 crore is yet to be deposited back to banks. RBI report also says that about 8.9 crore units of the demonetised Rs 1,000 notes worth Rs 8,900 crore, had not come back into the system. There were 632.6 crore pieces of Rs 1,000 currency notes in circulation on the day of demonetisation. This reveals  that just  1.4 per cent of Rs 1000 notes did not return after demonetisation.

Finance Minister Arun Jaitley held a press conference and defended government's demonetisation exercise, saying the real objective of demonetisation was less-cash economy, digitisation, increased tax base and crackdown on black money. In the long run, there will be more formalisation of the economy due to demonetisation, Jaitley said.

The total cost incurred on printing notes stood at Rs 7,965 crore for the current year as against Rs 3,420 crore during 2015-16. The rise in cost of printing was due to introduction of new currency notes after demonetisation, RBI said.

Taking note of RBI's data on demonetisation, former Finance Minister P Chidambaram tweeted, "RBI 'gained' Rs 16000 crore, but 'lost' Rs 21000 crore in printing new notes! The economists deserve Nobel Prize."

According to a CNBC TV report, Parliament Standing Committee on demonetisation has accused RBI Governor Urjit Patel for not sharing demonetisation data with the committee earlier.

The committee severely indicts government's handling of demonetisation while saying people can't be coerced to go digital. It has also raised concern on cyber security.

In value terms, the share of 500 and above banknotes, which had together accounted for 86.4 per cent of the total value of banknotes in circulation at end-March 2016, stood at 73.4 per cent at end-March 2017, RBI report said.

The share of the newly introduced Rs 2,000 notes in the total value of banknotes in circulation as at March-end was a little more than 50 per cent, it added.

On November 8, Prime Minister Narendra Modi had announced demonetisation move to crackdown on black money and to curb cash transactions.

Rs 16000 cr out of demonetised notes of Rs 1544,000 cr did not come back to RBI. That is 1%. Shame on RBI which 'recommended' demonetisation

- P. Chidambaram (@PChidambaram_IN) August 30, 2017

99% notes legally exchanged! Was demonetisation a scheme designed to convert black money into white?

- P. Chidambaram (@PChidambaram_IN) August 30, 2017

Calculations related to the currency that has come back to the RBI

• Currency in Rs.1,000 and Rs.500 denomination in circulation was at Rs.15.44 lakh crore.  6857.82 million notes of Rs.1000 and  17165.06 million  notes of Rs.500 amounting separately to Rs. 685782 crore and Rs. 858253 crore.
• Approximately 98.96% of banned notes in value terms have come back to the RBI after demonetization.  In other words, only an estimated Rs.16000 crore worth of banned notes have not come back to the RBI so far. 
• The RBI's Annual Report informs that Rs1,000 denomination banknotes in circulation were only 89 million pieces (value of  Rs.8900 crore) as on 31st March, 2017. 
• If these figures are subtracted from the total figure of Rs.16000 crore, then it implies that SBNs of Rs.7100 crore of Rs.500 denomination have not come back to RBI so far.  herefore, Rs.1,000 denomination of value of approx. Rs.8900 crore and Rs.500 denomination of value approx. Rs.7100 crore have not come back to RBI.
   

What the RBI did right after demonetisation

The RBI has given an account of the immediate action it took to remonetise the economy after the Prime Minister made the demonetisation announcement on 8th November. The RBI has said that 86 per cent of value of notes in circulation was withdrawn from the system.  "The  Reserve  Bank  subsequently shifted  to  making  available  banknotes  generated from printing presses to currency chests and from there to bank branches and ATMs in the shortest possible  time," it added. 

Between November 9 to December 31, the RBI pumped in 23.8 billion pieces of bank notes into circulation aggregating Rs 5,540 billion in value. 

"The pace of remonetisation continued ceaselessly thereafter also and the notes in circulation as on March 31, 2017 increased close to 74 per cent of the notes in circulation  prevailing on November 4, 2016," it added.

RBI 'gained' Rs 16000 crore, but 'lost' Rs 21000 crore in printing new notes! The economists deserve Nobel Prize.

- P. Chidambaram (@PChidambaram_IN) August 30, 2017