Even as the Narendra Modi government has been struggling hard to manage the post-demonetisation tremors after withdrawing 86 percent of the currency in circulation (by value) and although 10 days on, the common man is still in a trance-like state pondering whether to praise or curse the prime minister for the currency ban, two mysteries remain unexplained.
First, how does one explain a dubious, record spike in bank deposits in the July-September period?
There has been an increase of close to Rs 6 lakh crore in bank deposits in the three months leading up to September — the highest ever recorded quarterly jump in the past 19 years at least, according to an analysis by Firstpost's research team. How do the government and the RBI explain the unusual surge in bank deposits in the July-September quarter, something that has surprised most economists given that in the previous quarters, most banks reported a negative growth in deposits, and the economy is still in a slowdown phase.
Take a closer look.
Going by RBI data, there has been an increase in the broad money supply (M3) to the tune of Rs 5.9 lakh crore between June and September. If one looks at the M3 internals, it is quite evident that the surge in M3 is on account of a significant jump in the demand and time deposits in the banking system, while the currency in public circulation has largely remained where it is.
To be precise, between June and September, the currency with the public actually declined — from Rs 16,567.5 billion to Rs 16,560.5 billion. Let’s say this number is static for this period. But, the time deposits (fixed deposits) have increased from Rs 92,734.2 billion to Rs 96,968 billion — an increase of Rs 4,233.8 billion. Similarly, the demand deposits have gone up from Rs 9,931.7 billion to Rs 11,590.9 billion.
Together, there has been a total increase of Rs 5,893 billion or Rs 5.89 lakh crore till 30 September.
What does it mean?
As said earlier, the jump in M3 has been on account of surge in bank deposits, which is dubious indeed given the unprecedented spike.
“Certainly, there is an issue here as to what is the source of this deposits. There needs to be an explanation from the RBI,” said Naresh Malhotra, former DGM with the State Bank of India, in an exclusive interaction with Firstpost. Ever since this spike was first reported by CNBC-TV18, Union Finance Minister Arun Jaitley has played down the issue saying this was because of the payment of arrears in the Seventh Pay Commission that may have been channelled into the bank accounts. But even if one factors in these arrears — Rs 70,000 crore — and adds any other inflows including subsidies, the figure would not exceed Rs 1.5 lakh crore at the most.
The finance minister's explanation isn't good enough to clear the confusion.
Also, this is happening at a time when the economy is in a downturn. There isn’t much economic activity on the ground. There are no substantial rise in employment or wage increase in the private sector. Fresh private investments haven’t picked up, which could have translated into more savings with corporations and individuals. In fact, except what the government has been spending through its various schemes, including the wage increases associated with the Seventh May Commission, OROP and other subsidy payments, there has been no major money flow into then system.
Also, foreign remittances have been on the decline in the recent quarters as this VC Circle article shows. The report says that India has seen a fall in remittance inflows for the past five quarters starting April-June 2015, even though the country continues to be the biggest recipient of capital sent by its nationals working overseas.
Then what is the source of these deposits?
That brings us to the strong possibility is that our black money-hoarder, who received some kind of tip-off or signal about the government action, smartly managed to push at least a part of his unaccounted cash in Rs 500, Rs 1,000 notes into the banking system to make it legit.
Now, why should he do that? Isn’t he exposing himself to tax sleuths by bringing the hidden funds to the banking system?
Well, consider this: If the black money-holder didn’t do that, he stands to lose his entire stock of his ill-gotten wealth or income for which he never paid tax (or for which he doesn't have a source to show). He will have to simply dump it in a roadside dustbin or simply make a bonfire out of it and spend the night lamenting his lost fortunes, provided he didn’t find an alternative to hide this money, say in other assets such as gold or real estate or in hawala schemes. Yes, now he will be exposed to the system and will have to pay tax, even face prosecution, but it is better than losing everything at one go.
Economists and financial experts are perplexed by this sudden spike.
They also point out the possibility that our faceless black money-hoarder would have even used benamis to put the unaccounted cash into different bank accounts to escape tight scrutiny and tax penalty implication that would happen on such deposits post the demonetisation announcement. The government has warned that cash deposits above Rs 2.5 lakh threshold during the 50-day window could attract tax plus a 200 percent penalty in case of income mismatch.
If the demonetisation exercise was indeed leaked, the Modi government will have to answer to the public how it happened, whether it is deliberate or, simply, an accident?. If it is the former, a good part of the black money (unaccounted money) has already entered the system. This needs to be investigated.
Having addressed the first mystery, let's take a look at the second one.
How did Reserve Bank of India (RBI) governor Urjit Patel’s signature appear on the new Rs 2,000, Rs 500 notes now in circulation when the government reportedly claims the printing began in August-September, whereas Patel officially took over as new governor only on 5 September.
Was Patel’s signature used in bank notes even when Raghuram Rajan was still the governor of the Central bank? Or is it that, the government only started printing notes after the first week of September, not months in advance as reports appeared to claim. The logical assumption here is that the whole process of printing new notes started only post the first week of September.
Had this process started earlier, as the government claimed, the public would probably not have been subjected to the kind of cash-crunch and chaos they are facing now. This part needs to be explained by the government.
These two questions are important for different reasons. Whether the demonetisation process was leaked to the crooks and cronies in advance, and, second, whether the government acted late on printing new currency notes as the Patel signature mystery shows.
The Modi government and RBI owe an answer to the public on both these questions, sooner or later.
Kishor Kadam contributed to this story