Five Years of Demonetisation: Black money continues to thrive
By Dr. Santosh Kumar Mohapatra*
Demonetisation-the act of stripping a currency unit of its status as legal tender- announced around 5 years ago was a monumental blunder. On the evening of November 8, 2016, (Monday) in a 40-minute-long televised address Prime Minister Narendra Modi announced the demonetization otherwise known as “note ban” or “note bandi “of existing notes of Rs 500 and Rs 1000, which were replaced by new Rs 500 and Rs 2,000 notes.
Calling the demonetisation a ‘mahayagna’ in the “fight against corruption, black money, fake notes and terrorism”, the Prime Minister called upon every citizen to participate in that “Imandari ka Utsav” (festival of honesty) and “Pramanikta ka Parv” (celebration of authenticity). This was the movement for “purifying” the country, the Prime Minister asserted.
The objectives of demonitisation were never spelt out clearly and the narrative kept changing in the course of the following years. Initially, demonetisation measures aimed at curbing black money flows/corruption, eliminating counterfeit currency, choke terror financing. When above-stated objectives were not realised, for face-saving, later, objectives of “cashless economy”, “promoting digital payments”, “formalisation of the economy”, “bringing more people to tax net” were added. Even, when a cashless economy was not feasible, it was changed to a “less-cash economy”.
Black money refers to cash that is not accounted in the banking system or cash for which tax is not paid to the state. Unsurprisingly, there were strong reactions both in favour of and against the unexpected move. While some hailed it as a bold step against impropriety that was aching the economy, others saw the move itself as catastrophic for the economy.
Besides being understandably judged “drastic’ and “radical” the policy has also been condemned as being coercive, illegal, theft of property, unconstitutional, tyrannical, breach of trust, and depraved – by eminent persons ranging from the renowned economist Prabhat Patnaik to Nobel laureate Amartya Sen and former prime minister and economist, Manmohan Singh, to Steve Forbes in the January 2017 issue of the US financial magazine. Dr. Manmohan Singh described it as –legalised plunder, organized loot.
When the act of demonetisation was criticised, the government and so-called intellectuals defended the decision stating that demonetisation is a sort of surgical strike against corruption and in the long run it will prove productive. But after 5 years, none of the stated objectives have been realised. Rather, things have gone from bad to worse. Five years later, it’s even clearer that demonetisation was a government-inflicted disaster. Cash is still the mainstay of the economy; corruption, graft and black money continue to thrive.
What the ruling party thought was a masterstroke turned out to be human-made economic devastation. It proved not only a draconian measure but an epic failure, a monumental blunder. That is why, the government did not celebrate five years of demonetisation as it would open the wound and the nation will recall the horrible experience of the demonetization process.
The biggest promise of demonetisation was that it would purge black money – unaccounted cash – in the system, with those hoarding forced to deposit it in the banks. The implied idea was that those who had unaccounted cash with them would be forced to either declare it to the tax authorities or just get rid of it.
In reality, demonetisation could not curb black money, rather helped the rich to convert black money into white in the system. The Reserve Bank of India (RBI), which has taken an awfully long time to count the currency, demolished all arguments of the Modi government in favour of demonetisation in its various Annual Reports.
Just before demonetisation was announced, on November 4, 2016, there was nearly Rs 17.74 lakh crore of currency in circulation. The scrapped currency notes of Rs 1,000 and Rs 500 constituted Rs 15.41 lakh crore which was 86 percent currency in circulation (CIC) at the time of demonetisation. On behalf of the government, the attorney general had argued in the Supreme Court that cash worth Rs 4-5 lakh crore will be “neutralised”. In other words, the government expected a third of the currency not to come back to the banking system, giving it a huge dividend.
The chief economic advisor of the SBI, Soumya Kanti Ghosh had also argued that since 25 per cent of the proscribed currency notes did not return to the banking system during the 1978 demonetisation episode, it is reasonable to assume that 25-50 per cent of the proscribed currencies will not be exchanged in the present instance. He projected that currency notes’ worth between Rs. 2.5 to 4.8 lakh crore, in which illicit wealth was stored, would not return and consequently, RBI’s liabilities will get “extinguished” by an equivalent amount, which can then be transferred as surplus to the government, in order to spend on infrastructure et al.
But by June 30, 2017, RBI had reported that almost 99 percent of the proscribed or demontised currency notes of 500 and 1,000-rupee denomination had returned to the banking system. Again, in its 2018 report, the Reserve Bank of India said that approximately 99.3 percent of the demonetised banknotes, or Rs 15.30 lakh crore (out of scrapped Rs 15.41 lakh crore) were deposited with the banking system.
The banknotes that were not deposited were worth Rs 10,720 crore only leading to the inference that the effort had failed to flush out black money from the economy. Instead, black money holders converted their black money into white money. In fact, the Rs 2,000 note, introduced to curb black money, has itself been stopped from printing for the same reasons.
Further, after demonetisation, banking frauds and NPAs – a different form of corruption – has increased at a faster rate. As per RBI data, the number of cases identified as bank fraud has increased over the years. Data from the recently released annual report for 2020-21 indicates that the total amount in reported cases of bank fraud increased by over three times in the 5 years between 2017-18 and 2020-21.
According to RBI data, from 2016-17 to 2020-21, the total number of bank frauds involving a minimum of Rs. 1 lakh went up from 5,076 in 2016-17 to 5,917 in 2017-18 despite demonitisation. It further increased to 6,801 in 2018-19, 8,703 in 2019-20, before marginally declining to 7,363 in 2020-21. In other words, the number of reported cases of fraud went up by 71% in three years between 2016-17 and 2019-20 and then dropped by 15 percent in the pandemic year, 2020-21. A total of 33,860 cases of bank fraud involving at least Rs. 1 lakh have been reported from 2016-17 to 2020-21. It should be remembered that the data for 2020-21 is only for a period of 9 months, unlike the other years.
In terms of the amount involved in frauds, the total amount witnessed a massive rise – from Rs. 23, 934 crores in 2016-17, to Rs. 41,167 crores in 2017-18, a 72 percent rise. It further rose to Rs 71543.02 crore in 2018-19, Rs. 1.85 lakh crores in 2019-20 before marginally declining to Rs. 1.38 lakh crore in 2021-22. From 2016-17 to 2020-21, a total of Rs. 4.60 lakh crores were involved in bank frauds. The total amount involved in fraud could be much higher since the RBI report only considers cases of fraud involving Rs. 1 lakh and above. Recently, it was reported that cumulatively, banks in India suffered frauds worth Rs 4.92 lakh crores as of March 31, 2021, or nearly 4.5 percent of the total bank credit.
The gross NPAs which were Rs 2, 14,549 crores in 2014-15 (When Narendra Modi rode to power) had increased to Rs 7.9 lakh crore in 2016-17. Despite demonitistion, regular loan write off , it had increased to Rs 10,36,187 crore as of 31 March 2018. The government is publicising that non-performing assets (NPAs) or bad loans of banks have slightly declined to Rs 8.34 lakh crore at the end of March 31, 2021.
But this is due to loans write-off amounting to Rs 1,31,894 crore in 2020-21. ‘Gross NPAs of banks is expected to cross Rs 10 lakh crore in March 2022’, according to the Financial Stability Report (FSR) released by the Reserve Bank of India. The total bad loans written off between April 2014 and March 2021, a period of seven years, stands at a mind-boggling Rs 10.63 lakh crore. It may be noted that banks are able to recover only 10 to 15% of loans written off.
An increase in corruption is also reflected in the global Corruption Perceptions Index reported by Transparency International. India’s rank has slipped six places to 86th among 180 countries in the corruption perception index (CPI) in 2020. This index ranks 180 countries and territories by their perceived levels of public sector corruption. India’s ranking had slipped from 78 to 80 in the previous index. India has been ranked 79th among 176 countries in the Corruption Perception Index 2016. It means since 2016, India has declined by 7 slots.
Further rise in corruption and black money is reflected in rise of election expenditure by political parties. According to a study by the Centre for Media Studies (CMS), a not-for-profit multi-disciplinary development research think-tank, a staggering Rs 60,000 crore was spent in the Lok Sabha elections, 2019. BJP has alone spent 45 percent of it. The figure is almost twice the amount (i.e., Rs 30,000 crore) spent in the last general polls in 2014.
Money and muscle power still plays a dominant role in our electoral process. There are at least 75 to 85 seats where individual candidates spent more than Rs 40 crore, which is over 50 times the expenditure limit (Rs 70 lakh) mandated by the EC per candidate in a constituency. The average MP’s assets rose from Rs 14.7 crore in the previous Lok Sabha (2014) to Rs 20.93 crore in the latest one (2019).
In March 2018, the average of assets per Rajya Sabha MP was Rs 55.62 crore. Out of the 229 sitting Rajya Sabha MPs analysed, 201 (88 percent) are crorepatis. In June 2020, the average assets declared by the new Rajya Sabha MPs was Rs 74.04 crore. According to India Today’s Data Intelligence Unit (DIU), our MPs are 1400 times richer than average Indians and according to ADR, 345.8 times that of an annual income of a tax-filing individual. This shows how the corrupt and black money holders are ruling the roost.
The author is an Odisha-based eminent columnist/economist and social thinker. He can be reached through e-mail at [email protected]
DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.