A Bank Employee counting the bundles of the received currency of old 1000 & 500 notes at cash counter at a Punjab National Bank branch in Chennai on Wednesday (Source: PTI)

Where's the Illegal Cash? Indians Return Almost All Banned Notes

(Bloomberg) -- Indian Prime Minister Narendra Modi’s efforts to weed out black money through a ban on high-value currency notes haven’t yielded the desired results.

Of the 15.4 trillion rupees ($218 billion) of cash in circulation that was invalidated on Nov. 8, 2016, the government estimated about 5 trillion rupees wouldn’t be returned to banks because it was stashed illegally to avoid tax.

However, data from the central bank’s annual report on Wednesday showed 15.3 trillion rupees, or 99.3 percent, of the banknotes were returned, suggesting there was hardly any unaccounted wealth held in cash.

An amount of 107 billion rupees hasn’t yet been received by the Reserve Bank of India after the cash ban, according to the report.

“Demonetization was a total failure,” said Mohan Guruswamy, chairman of the Centre for Policy Alternatives in New Delhi and a former adviser to the Ministry of Finance. “We could have been on a higher growth trajectory if demonetization had not happened. It was a colossal blunder and there will be political consequences.”

The demonetization exercise has achieved its objective substantially, Subhash Chandra Garg, economic affairs secretary in India’s finance ministry, said in New Delhi, adding that newer notes with more security features have helped weed out fake notes.

Growth Drag

In a series of tweets, former finance minister P. Chidambaram said economic activity was hit due to the cash ban and millions lost their jobs.

The cash ban cut India’s GDP growth rate by 1.5 percentage points, translating to a loss of 2.25 trillion rupees a year, Chidambaram said. More than 100 lives were lost in the panic to exchange old notes for new ones, millions of daily-wage earners lost their livelihood for several weeks, thousands of small and medium enterprises were shut down and many jobs were destroyed, he said via Twitter.

Modi’s decision to ban high-value currency notes, along with a chaotic introduction of the goods and services tax last year, acted as a drag on economic expansion with provisional data showing growth slumped to a four-year low of 6.6 percent in the fiscal year 2018. Growth has since rebounded to 7.7 percent in the quarter ended March 2018.

Read more on our coverage of the cash ban:
  • India withdraws high denomination bills in graft crackdown
  • Guide to banknote revamp
  • Modi’s political base shows how economy is stalled
  • Modi turns to old tricks as cash experiment hurts
  • Five times to the moon and back: scale of junked India bills

The latest gross domestic product data is due Friday and economists forecast expansion of 7.6 percent in the three months through June from a year earlier.

The cash ban had prompted the central bank to print new currency, reducing its profit and cutting the annual dividend payout to the government by half to 306.6 billion rupees in the year through June. The RBI transferred 500 billion rupees to the government as a dividend in the accounting year that began July 1, 2017.

Where's the Illegal Cash? Indians Return Almost All Banned Notes

Economic Recovery

The RBI in its annual report said it expects the economy to expand at 7.4 percent in the financial year to March 2019 and inflation to pick up pace. The RBI appears confident that the domestic economic recovery is well entrenched with various indicators suggesting that economic activity has continued to be strong. It raised interest rates twice this year in a bid to curb inflation, which is hovering above the 4 percent midpoint of its target band.

“Going forward, the up-tick in credit growth is likely to be supported by the progress” being made under the insolvency code to help address stress on balance sheets of both corporates and banks, recapitalization of public sector banks, and a positive outlook on the economy, the RBI said.

Nevertheless the risks to the growth outlook are formidable: as the world’s fastest-growing oil consumer, higher crude prices will widen the current-account deficit, while global trade tensions threaten exports and investment.

©2018 Bloomberg L.P.