Junked Rs 500 and Rs 1,000 notes worth Rs 15.31 lakh crore, out of Rs 15.41 lakh crore in circulation as of November 8, 2016, when the government announced that these notes were no longer valid, found their way back to banks.
As much as 99.3% of the demonetised high-value notes returned to the banking system, the Reserve Bank of India’s annual report for 2017-18 said on Wednesday, a long-awaited revelation that triggered a political slugfest over the efficacy or lack of it of the unprecedented move, which was aimed primarily at curbing the black money menace.
The banned currency notes are referred to as specified bank notes (SBNs).
Junked Rs 500 and Rs 1,000 notes worth Rs 15.31 lakh crore, out of Rs 15.41 lakh crore in circulation as of November 8, 2016, when the government announced that these notes were no longer valid, found their way back to banks. This means only Rs 10,720 crore of the banned notes did not come back into the banking system.
Speaking on the report, economic affairs secretary Subhash Chandra Garg, however, asserted that demonetisation substantially achieved its intended objectives, including curbing black money and terror financing, and promoting digital payments. The cash-to-GDP ratio is lower than the pre-demonetisation level. Had the government wanted to maintain the same cash-to-GDP ratio, some Rs 3 lakh crore additional cash would have had to be injected into the system, he added. Also, due to the introduction of several security features, the problem of counterfeit currency has been addressed to a considerable extent, Garg said. Shutting down of shell companies, expanding the tax base have also been cited by the BJP as the signs of demonetisation’s success, but the opposition pointed out that of the cash that had remained out of the banking system and returned to it due to note ban, how much is black or white could not be known until each case was finally adjudicated.
Former finance minister P Chidambaram, however, said the note ban was an exercise in futility and that the economy lost 1.5 percentage points of growth, which will translate into a loss of Rs 2.25 lakh crore a year.
The government, he recalled, claimed SBNs worth Rs3-4 lakh crore would not return and this windfall gain of the RBI would be transferred to it.
Stating that this has clearly been proven wrong, he added that the government has been shifting the goalpost while it was clear that the exercise hasn’t met the originally declared objectives.
“It is time for the government to say mea culpa,” he told a TV channel.
On an overall basis, the incidence of counterfeiting fell 31.4% year-on-year, with 5.23 lakh pieces of fake notes being detected in FY18, against 7.62 lakh in FY17. Counterfeit notes detected in the SBN category expectedly fell 59.7% and 59.6% in the denominations of Rs 500 and Rs 1,000, respectively, as these notes had gone out of use before the beginning of FY18.
“The processing of SBNs has since been completed at all centres of the Reserve Bank. The total specified bank notes (SBN) returned from circulation is Rs 15,310.73 billion,” the RBI said in the report. Earlier, the central bank had said Rs 15.28 lakh crore worth of SBNs had been collected by the end of June 2017.
Interestingly, fake Rs 1,000 notes continued to be detected in FY18 even after the denomination was done away with altogether, with 1.04 lakh counterfeit pieces being detected.
The supply of bank notes dropped 14% year-on-year to 25 billion pieces in FY18, compared to over 29 billion in FY17. This becomes significant in the light of the cash crunch observed in parts of the country between February and April this year. While the value of currency notes in circulation rose 37.7% between March 2017 and March 2018 to Rs 18.04 lakh crore, the volume of bank notes grew a mere 2.1% to 102.39 billion pieces over the same period.
“In value terms, the share of Rs 500 and Rs 2,000 banknotes, which had together accounted for 72.7% of the total value of banknotes in circulation at end-March 2017, increased to 80.2% as at end-March 2018,” the central bank said in its annual report. This means that in value terms, the share of the two highest denominations in total currency in circulation has fallen nearly 6 percentage points from 86% at the time of demonetisation.
Commenting on inflation, the central bank said there is upside risk to price pressure. Thanks to rising commodity prices, the economy has to contend with the drag on aggregate demand from net exports and cost-push risks to inflation at the same time. “In this context, it is worthwhile to note that India is not able to reap the healing effects of strengthening global trade by expanding exports commensurately,” it said. Headline inflation, which averaged 4.8% during Q1 of 2018-19, is projected at 4.6% in the second quarter; 4.8% in the second half of this fiscal; and 5% in Q1 of 2019-20, it said.
The central bank flagged elevated risks to macroeconomic stability. The current account deficit is widening as imports increasingly replace domestic production in several items, besides the elevation in international crude prices. In this context, aggregate demand pressures emanating from a deviation from the budgeted fiscal deficit of the general government may spill over into higher external imbalances, contributing to a ‘twin deficit’ challenge. Already, some analysts have forecast CAD worsening to 2.5-2.7% of GDP for 2018-19, against 1.9% a year earlier.
However, highlighting some positives, the RBI said economic growth will touch 7.4% in the current fiscal, against 6.7% a year earlier, with risks evenly balanced. Acceleration in growth is expected to consolidate in the second half of this fiscal.
Several initiatives set in motion to secure the soundness of the banking system are expected to reach critical mass during 2018-19. Also, infrastructure holds the key to unleashing the impulses of faster growth. In particular, the reasonable success achieved in the transportation space is worthy of emulation in other areas. During 2018-19, this aspect of the infrastructure mission is set to accelerate.