News Desk |
In a new report that will possibly turn into a major disaster for the Indian government, the country’s central bank has revealed that 99.30% of the currency demonetized in November 2016 is back in circulation.
According to the Reserve Bank of India’s annual report for 2017-18 released on Wednesday, almost all of the Rs. 500 and Rs. 1000 notes demonetized, which made up 86% of currency at that point, were exchanged for new currency or deposited into banks. While the government had early indicated it expected Rs. 4-5 trillion in “black money” would not return to the system, RBI has said that of the Rs.15.4 trillion in demonetized notes, Rs. 15.3 trillion had been returned and only Rs. 107 billion purged.
Nearly all of the currency removed from circulation in a surprise 2016 attempt to root out illegal hoards of cash came back into the financial system, India’s reserve bank has announced, indicating the move did little to slow the underground economy.
Prime Minister Narendra Modi’s currency decree, which was designed to destroy the value of billions of dollars in untaxed cash stockpiles, caused an economic slowdown and months of financial chaos for tens of millions of people.
Modi announced in a shock November 2016 TV address that all 500-rupee and 1,000-rupee notes, then worth about $7.50 and $15, would be withdrawn immediately from circulation. The banned notes could be deposited into bank accounts but the government also said it would investigate deposits over 250,000 rupees, or about $3,700. The government eventually released new currency notes worth 500 and 2,000 rupees.
In theory, the decree meant corrupt politicians and business-people would suddenly find themselves sitting on billions of dollars in worthless currency, known here as “black money.”
“A few people are spreading corruption for their own benefit,” Modi said in the surprise nighttime speech announcement of the order. “There is a time when you realize that you have to bring some change in society, and this is our time.”
But even as the decree caused turmoil for those in India who have always depended on cash — the poor and middle class, and millions of small traders — the rich found ways around the currency switch. In the months after the decree, businesspeople said that even large amounts of banned currency notes could be traded on the black market, though middlemen charged heavy fees.
The reserve bank report said in its Wednesday report that 99.3 percent of the $217 billion in notes withdrawn from circulation had come back into the economy. Some officials had originally predicted that number could be as low as 60 percent.
“Frankly, I think demonetization was a mistake,” said Gurcharan Das, a writer and the former head of Proctor & Gamble in India. He said that while it did broaden the country’s tax base, it was a nightmare for the immense, cash-dependent informal economy.
“You can’t overnight change that in a country which is poor and illiterate. Therefore, for me it’s not only an economic failure but a moral failure as well,” Das said.
The government had then argued that at least ₹3 trillion of the old currency will not be returned to the banking system for fear of scrutiny.
A finance ministry official tacitly admitted as much in an incredulous response to a question at a press conference convened at North Block, which houses the finance ministry. “I think demonetization has achieved its objectives quite substantially,” said Subhash Chandra Garg, secretary of department of economic affairs, and then added, “How is not the question. If you have a counter-narrative just tell me.”
In September 2017, a research report by the State Bank of India (SBI) stated that India is currently undergoing a slowdown with gross domestic product (GDP) growth rate being affected, beginning second quarter of FY2017. The continued fall in GDP since Q2FY17 has raised the specter of whether growth slowdown is currently temporary. This along with a slowdown in demand and languishing capital formation shows that the Indian economy is in urgent need of a fiscal push now to shore up growth.
Many experts and economic figures such as manufacturers attribute this slowdown to Modi’s policies. The most significant being his demonetization and the more recent imposition of GST. This recent revelation could as well be a final blow to the incumbent BJP government who is set to face reelection in 2019. It could also be dangerous for Indo-Pak relations as the BJP may try to divert domestic attention by focusing attacks on its arch-rival in the west.