D M Deshpande
The latest RBI report has reported that most of the notes banned in November 2016 have been returned to it. Except for quantifying the actual numbers, there’s nothing new in it. The last year’s annual report of the RBI had pretty much said the same thing and that it will come out with final figures after the arduous task of counting is completed. True to its words, it has now revealed that, of the total banned notes worth Rs 15.4 lakh, except for Rs 10,720 crore rest of the demonetised notes have come back in to the custody of RBI! In terms of percentage this works out return of 99.3% of the total currency that was withdrawn by a fiat overnight by the Government.
The decision to demonetise was taken by the NDA Government. By all known accounts, neither the RBI was consulted nor was it a privy to the decision. But its role came in to play in post demonetisation period. It had to oversee return of old notes and issue of new currency. It made rules; it was forced to change them subsequently and it almost became an object of ridicule. It was called by names such as ‘Reverse Bank’. However, counting such huge piles of cash was no ordinary task; there were 1,716.5 crore Rs 500 notes and 685.8 crore of Rs 1,000 notes in circulation that were returned to RBI!
The Government thought that at least 15 to 20% of the banned notes would not come back in to official channels; that has not happened. Consequently, the Government did not get the bonanza that it thought the RBI would give it. This has, in fact, baffled many experts. How could almost everyone with black money come out boldly and deposit the same in banks? True, as some have been arguing right from the beginning, that not all black money is held in cash. Another explanation could be that some black money has been channelised through Jan Dhan and such other accounts.
To reduce, if not wipe out entirely, unaccounted money, the better weapon is the introduction of GST. Linking of Pan cards and Aadhar cards has helped to create trails whereby it is increasingly becoming difficult to hide black money. DeMo has not succeeded in eradicating the menace of black money; GST may do it because it has honesty in-built in the system and secondly, it keeps paper trails of every transaction at every stage of manufacture and sale. Since the exercise of note ban and implementation of GST came in quick succession, it is difficult to say the impact of one on black money or payment of income taxes.
One of the stated objectives of demonetisation was to reduce reliance on cash in the economy. Here again, DeMo has failed. During the days people struggled to get new notes, there was no other alternative. But since the completion of the remonetisation exercise, we are back to square one. Our cash to GDP ratio is amongst the highest in comparison with other emerging nation economies. Supporters of the note ban argue that less cash objective has been achieved; otherwise, considering the growth in nominal GDP, there would have been an additional demand for cash to the tune of 3 to 4 lakh crore!
Whether DeMo has added to the tax base in the economy has to be examined closely. Numbers of tax assesses has indeed gone up by 1.5 crore; it is by no means spectacular. These numbers have been going up over recent years though this year it might have improved marginally a bit more. Perhaps, going forward, it would further improve; there are some 18 lakh persons who have deposited Rs 1.75 crore without giving satisfactory explanation of the source where money came from. DeMo seems to have had some sanguine effect on tax buoyancy in the economy.
There is a lot of merit in the argument that it disrupted the informal economy in a way that crippled the economy, hurt a lot of people in terms of incomes and livelihoods and at the end achieved precious little. The RBI has made it clear that there will be no fiscal bounty from its side to the Government. Initial projections were that the DeMo would give a ‘dividend’ of around $45 billion by reneging on debt to holders of banned notes. The Government’s view was that the RBI would no more be responsible to pay back the sum for notes that were not returned to it. In any case now the amount is a much less, $1.5 billion that the RBI has classified as miscellaneous liability. So all in all, DeMo will be remembered as a massive exercise with little to show in terms of actual achievement.