RBI annual report: Now we know 99.3% of demonetised cash is back; what happened to all that black money?

Finally, three months short of the second anniversary of demonetisation, the Reserve Bank of India (RBI) has completed the counting of banned Rs 500 and Rs 1,000 notes that returned to the banking system post the note-ban. And the results are not too good considering the pain the economy went through post demonetisation. Of the total value of Rs 15,417.93 billion SBNs (specified bank notes) demonetised, currency worth Rs 15,310.73 billion has returned to the banking system, according to the 2017-18 annual report of the RBI released on Wednesday. In other words, 99.3 percent of the total banned notes have returned home, or let’s say almost all cash has been deposited back in the banks, including the notorious black money villain. That is a political setback for the Narendra Modi government, which was initially expecting Rs 3-4 lakh crore of black money to get extinguished outside the banking system post the demonetisation exercise. The counting wasn’t easy, complains the RBI annual report. “This humungous task of processing and verification of SBNs was successfully achieved with the co-ordinated efforts put in by the workforce of the Issue Department of the Reserve Bank. The process involved working in two shifts under strenuous conditions, maintaining detailed records and planning effectively without compromising on other functions of currency management.” [caption id=“attachment_4214857” align=“alignleft” width=“380”]  File image of Prime Minister Narendra Modi. PIB.[/caption] Urjit Patel, the successor to Raghuram Rajan at RBI, had drawn a lot of criticism in the last one and half years for not completing the counting fast enough. The above statement appears like an explanation by the central bank why it had to take its own sweet time to complete the task. The government had flagged the demonetisation exercise as a big weapon to attack black money held in cash. Hence, there was a lot of attention both in India and abroad about the final outcome of the RBI’s counting exercise. At least now we know that 99.3 percent of banned cash is back in the system; the logical question is what happened to all that talk of black money hunting touted as one of the biggest aims of the demonetisation exercise by Prime Minister Narendra Modi in a nationally televised statement on the evening of 8 November 2016? Clearly, the expectation that tax cheats would not take unaccounted money to bank counters have fallen flat. Possibly, crooks used all the tricks, from distributing money in benami accounts to buying gold in bulk to making advance payments to employees and so on, and somehow managed to make the most of their cash. What now? Well, the government can argue that not all money in bank accounts is white and can be traced back to sources to assess the legality. But then after nearly two years, how much has the tax department uncovered? The process is on but there has been no concrete, significant progress so far by the Income Tax Department. A few thousand crores have been unearthed under various raids so far. Only last Sunday, Vice President Venkaiah Naidu asked the I-T department to reveal the data on the two lakh who made high-value deposits post-demonetisation. The government is said to have identified close to Rs 3 lakh crore as potential black money in banks. But, the problem is with finding sufficient proof to nail the culprits and recovering of the black money. If one goes by the past performance of the I-T department, it will take a decade to assess that kind of amount and make some material results. Even then, this amount appears too little compared to what is at stake. According to R Vaidyanathan’s Black Money and Tax Havens, the amount of money Indians have stashed in tax havens could be around Rs 65 lakh crore. Whereas the amount of domestic black money is estimated to be around Rs 15 lakh crore, a good amount of that is in the form of assets such as real estate and financial investments. With black money largely out of reach even after two years of demonetisation, it may be time to do another round of stock-taking of the demonetisation exercise. What did we gain out of the exercise? A more formalised economy, of course. Bank deposits can be traced and we know who deposited where. The tax base would have widened and counterfeit note counters would have taken a knock at least in the short-term. But, is that really the case? No, the business is still intact, only the priorities have changed. According to RBI annual report, there is a decline of 31.4 percent in counterfeit notes seized over the year, with nearly 60 percent reduction in Rs 500 and Rs 10,00 notes. But there was an increase of 35 percent in counterfeit notes detected in the denomination of Rs 100 and a noticeable increase of 154.3 percent in Rs 50. Consider this against the pain of the demonetisation exercise inflicted on the formal/informal economy? The economy has been clearly hit by the note ban, particularly on the informal sector. Supply chains were broken and cash-intensive sectors had to undertake massive job cuts. The gross domestic product (GDP) would have grown at least a percentage point more if demonetisation never happened. Now, that the RBI has finished counting the notes and the money that didn’t return to bank counters is a little over Rs 10,000 crore, can the government offer an explanation to what happened to all that black money?