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Demonetisation: Narendra Modi’s black money figures in I-Day speech are confusing; govt owes an explanation

What is the amount of black money unearthed by the tax authorities post-demonetisation of Rs 500 and Rs 1,000 notes on 8 November? During his Independence Day speech Prime Minister Narendra Modi, said (read full text here) Rs 3 lakh crore that had never come into the banking system before, has been brought into the system after demonetisation. Modi also said black money worth Rs. 2 lakh crore had to be deposited in the banks. In other words, that much of unaccounted wealth has been brought into the formal banking system post-demonetisation crackdown. Not all of this may be “black money” as we know the term. There may be cases of retired people and housewives who have deposited their old cash savings in bank counters.

But, if the prime minister meant the Rs 2 lakh to Rs 3 lakh crore as black money recovered from habitual tax cheats post-demonetisation, more clarity is warranted on these numbers. Although there is no accurate estimates of black money in the economy, Rs 2 lakh crore to Rs 3 lakh crore is good enough to silence the demonetisation critics as the fruit of the programme. At this stage, this claim by the prime minister is a tad confusing.

Union Finance Minister Arun Jaitely defended the figures quoted by the prime minister saying that the latter isn't "writing any article that he will disclose sources," adding, "there isn't any confusion in numbers... there are revenue figures and there are potential revenue gain figures based on internal investigations, notices, responses of the revenue department and CBDT or Central Board of Direct Taxes. It doesn't depend on an RBI report."

There is indeed confusion. There are two parts to the black money hunt post-demonetisation. One, black money extinguished outside the banking system (or old notes that haven’t returned) and second, cases of taxmen finding money that is deposited (including through amnesty-like schemes) in banks post-demonetisation as black money or money that isn’t earned legitimately and taxed by the state. As for the first possibility, one needs to wait for the Reserve Bank of India (RBI) to finish its note counting exercise.

The amount of currency in circulation demonetised on 8 November was Rs 15.44 lakh crore or 86 percent currency in circulation. The RBI is still counting the notes that has returned to the banking system post-demonetisation. The last update on this came just a month after the demonetisation announcement, ie. in the second week of December, till when the RBI said the banking system received Rs 12.44 lakh crore in invalidated high value notes until 10 December. After that there is no information.

Prime Minister Narendra Modi at Red Fort on Independence Day. PTI

Prime Minister Narendra Modi at Red Fort on Independence Day. PTI

According to R Gandhi, a former RBI deputy governor, it will not be before March 2018 when the RBI completes the counting of old demonetised notes that returns to the banking system (Read his interview to CNBC TV18 here). How did the PM know Rs 3 lakh crore is back in the banking system even before the counting of old notes is over?

As for the second possibility, in August, Minister of State for Finance Santosh Kumar Gangwar told Parliament that the income tax department detected undisclosed income worth Rs 13,715 crore in fiscal year 2016-17. Income tax raids at 5,102 places yielded undeclared income of Rs 15,496 crore, the minister said in a written reply to Parliament. These figures are nowhere close to the Rs 2 lakh crore to Rs 3 lakh crore spoken by the Prime Minister in the Independence Day speech. Hence, these figures need clarity.

There is a possibility that the Prime Minister's Office (PMO) may already have information about the black money recovery or these could be mere estimates. In the interest of transparency, the government should clarify the math behind the prime minister's figures. If this whole chunk turns out to be black money and taxmen get their share out of it, certainly it is good news and demonetisation has hit the intended spot.

The demonetisation exercise has certainly helped to widen the tax base and inundate bank counters with fresh deposits. During his speech, Modi also said, the number of new taxpayers filing income tax returns from 1 April to 5 August 2017 is 56 lakhs while in the same period last year only 22 lakh filed returns. Also, over 18 lakh people have been identified, whose income is much higher than their declared income and therefore they will have to clarify this. But, an increase in the number of taxpayers was anyway a given outcome of the demonetisation exercise.

What one should now know is the amount of unaccounted wealth that was returned, identified and confiscated by the tax authorities. To what extent the highly-disruptive demonetisation exercise helped the government recover black money and consequently benefit the state exchequer are two questions that need to be convincingly answered by the government. In fact, the demonetisation exercise has been a major reason why the RBI transferred only less than half of last year’s dividend to the government this year. Modi’s black money figures offered in the Independence Day speech could be the PMO’s estimates. But, these numbers or estimates do not seem to add up at the moment.

Updated Date: Aug 17, 2017 14:39 PM

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