Where’s the illegal cash? Indians return almost all banned notes

Modi’s decision to ban high-value currency notes and a chaotic introduction of GST last year, acted as a drag on economic growth

By BLOOMBERG

MUMBAI • Indian Prime Minister Narendra Modi’s efforts to weed out black money through a ban on highvalue currency notes haven’t yielded the desired results.

Of the 15.4 trillion rupees (RM896.05 billion) of cash in circulation that was invalidated on Nov 8, 2016, the government estimated about five 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 yesterday showed 15.3 trillion rupees, or 99.3%, 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 (RBI) after the cash ban, according to the report.

“Demonetisation was a total failure,” said Mohan Guruswamy, chairman of the Centre for Policy Alternatives in New Delhi and a former advisor to the Ministry of Finance.

“We could have been on a higher growth trajectory if demonetisation had not happened. It was a colossal blunder and there will be political consequences.”

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

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

The cash ban had prompted the RBI 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 central bank transferred 500 billion rupees to the government as a dividend in the accounting year that began July 1, 2017.

The RBI in its annual report said it expects the economy to expand at 7.4% in the financial year to March 2019 and inflation to pick up pace.

The central bank 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% 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, recapitalisation 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.