The Reserve Bank of India (RBI) Wednesday disclosed that almost 99 per cent of Rs 500 and Rs 1,000 currency notes which were withdrawn from circulation on November 8, 2016 has returned to the central bank, confirming what the government’s critics had been pointing out about the weak economic rationale for demonetisation. This also raises questions about the overall gains and the impact on the economy, especially the informal sector, because of the disruption it caused.
The figures imply that a very small amount of unaccounted money was held in cash by those trying to conceal it. It also belies expectations of the government that a significant amount held by people wouldn’t come back to the banking system. Nine months after Prime Minister Narendra Modi announced demonetisation of Rs 500 and Rs 1,000 notes, the RBI finally revealed in its annual report that notes worth Rs 15.28 lakh crore were deposited by people as on June 30, 2017. This indicates that notes worth only Rs 16,000 crore were not returned since the value of Rs 500 and Rs 1,000 notes in circulation was Rs 15.44 lakh crore on the day demonetisation was announced.
“Until June 30, 2017, SBNs (special bank notes of Rs 500 and Rs 1,000) were received by the Reserve Bank either directly or from bank branches/post offices through the currency chest mechanism. Some of these SBNs are still lying in the currency chests,” the RBI annual report stated. Subject to future corrections based on verification process when completed, the estimated value of SBNs received as on June 30, 2017 is Rs 15.28 lakh crore, it stated.
The withdrawal of notes created a liquidity shortage in the country with long queues outside banks for new notes and hardship across the country. It roiled the economy with demand falling, businesses facing a crisis and GDP growth falling close to two per cent. Small units are still to emerge from the crisis with many incurring huge losses even after nine months. This year’s mid term economic survey had indicated that the impact from demonetisation is between 1/4 and 1/2 percentage points relative to the baseline of about 7 per cent while pegging GDP growth for FY18 at 7.1 per cent.
The RBI introduced new Rs 500 and Rs 2,000 notes but the pace of remonetisation remained slow. The government, while announcing the demonetisation, had cited checking counterfeit notes as one of the reasons for the move. On Wednesday, the RBI reported that detection of counterfeit notes was 20.4 per cent higher than the previous year. The value of the fake demonetised Rs 500 and Rs 1000 notes in 2016-17 was Rs 41 crore - a figure which is again bound to attract criticism.
However, the cost of printing new notes was Rs 7,965 crore during the period July 2016-June 2017, which means the RBI spent nearly half of Rs 16,000 crore, not returned after demonetisation, on printing new notes to replace the demonetised notes. The government’s initial expectation of a special dividend from the RBI also did not materialise. This is because the initial estimate of over Rs 300,000 crore worth demonetised notes not coming back to the system was belied after people queued up to surrender the notes.
Defending demonetisation, the Prime Minister had earlier this month said that around Rs 300,000 crore, which was earlier out of the banking system, had come to banks. Over Rs 200,000 crore black money reached banks, while around Rs 175,000 crore deposited by people post note-ban was under suspicion, he said, adding that around 18 lakh people with disproportionate income were under government scrutiny.
Soon after demonetisation, former Prime Minister Manmohan Singh had criticised the move saying that it would hurt small industry, the farm sector and the informal sector while reckoning that it would lead to a decline of two percentage points of GDP. He had termed the move by the RBI as a case of “monumental mismanagement.”
After demonetisation, currency in circulation declined by about Rs 899,700 crore (up to January 6, 2017), which resulted in a large increase in surplus liquidity with the banking system, equivalent to a cut in the cash reserve ratio (CRR) by about 9 per cent. “This, in turn, posed a formidable challenge to the Reserve Bank’s liquidity management operations,” the RBI said.
According to the RBI, the total notes in circulation increased rapidly to Rs 15.06 lakh crore as on June 30, 2017, which was about 85 per cent of the notes in circulation as on November 4, 2016. “Remonetisation continues to progress at a steady pace with enhanced focus on printing and distribution to meet the currency demand,” the RBI said.
As on November 8, 2016 - the day demonetisation was announced - there were 1,716.50 crore pieces of Rs 500 and 685.80 crore Rs 1,000 notes in circulation. The notes withdrawn accounted for 86 per cent of the cash in circulation. The government allowed people to deposit and exchange these notes at bank and RBI branches until December 30. The facility of exchange of old notes was stopped at bank counters on November 24.
On December 28, two days before the deadline for depositing old Rs 500 and Rs 1,000 notes expired, the Cabinet approved promulgation of an Ordinance to make possession of a large number of scrapped banknotes a penal offence that would attract a monetary fine. The Specified Bank Notes Cessation of Liabilities Ordinance makes holding of old Rs 1,000 and Rs 500 notes after March 31 beyond a threshold amount a criminal offence that will attract a monetary fine of Rs 10,000 or five times the cash held, whichever is higher.