New Delhi: The main reason given by the government for demonetising high denomination notes was to curb black money. Various estimates have been made of the quantum of such money -- which is not expected to be deposited in banks -- ranging from Rs 3 lakh crore to Rs 5 lakh crore.
But if one goes by the deposit trends so far and the projections, the black money expected to be purged may be much less. The Narendra Modi government may thus be in for a shock.
On Tuesday, in a reply in Rajya Sabha, the Minister of State for Finance, Arjun Ram Meghwal, said that there were 17,165 million pieces of Rs 500 notes and 6,858 million pieces of Rs 1,000 notes in circulation on November 8, 2016, the day Modi made the announcement of demonetising the two high denomination notes.
The total amount of high denomination currency circulating in the system on that day was, thus, Rs 15.44 lakh crore (Rs 8.58 lakh crore in Rs 500 notes and Rs 6.86 lakh crore in Rs 1,000).
On November 28th, the Reserve Bank of India (RBI) announced that Rs 8.45 lakh crore (Rs 8,44,962 crore) in the banned high denomination notes had been deposited in the banks between November 10 and November 27. Banks were closed on November 9.
This was the value of banned notes deposited in the banks in 18 days, out of the 50 days that the government has permitted bank customers to do so. That too, when huge queues outside banks detered many people from putting money into their accounts.
Further, all commercial banks in India have to maintain a portion of their deposits with the RBI known as cash reserve ratio (CRR). The RBI uses this to manage liquidity in the system.
On November 8, the total amount of actual cash with the RBI as CRR was Rs 4.06 lakh crore (Rs 4,06,900 crore), according to the weekly bulletin of the central bank. This is cash, sent mostly in large currency notes according to bankers, by the banks on any incremental deposit that they have, thus adding to their CRR deposit held with the RBI.
Additionally, banks retain money with themselves to manage day-to-day affair and to provide money on demand by customers. According to the RBI, the average cash-to-deposit ratio of banks in India is 4.69. If four percentage points from this goes as CRR to RBI, amounting to Rs 4.06 lakh crore (on Nov 8, say), the cash with banks would average around Rs 70,000 crore. This would include all denominations, of course.
So, if we take the money deposited in 20 days and add the November 8 CRR to it, that amounts to Rs 12.50 lakh crore. If we further add a portion of the cash-in-hand on November 8, say Rs 50,000 crore, the total amount of money which is not with public in old notes is Rs 13 lakh crore.
There are still 30 days left to deposit banned currency notes. At the rate at which money is being deposited, it stands to reason that Rs 2 lakh crore or more would come into the system till December 30, thus throwing to the winds all calculation of the government to tackle black money.
Either the black money is not in high denomination notes or those who have such money may already have put it back into the banking system.
Closer look: Modi's demonetisation
Modi's currency purge
The Indian government announced the withdrawal of 500 and 1,000 rupee notes from circulation in a bid to bring billions of dollars worth of unaccounted wealth into the mainstream economy and curb corruption. The move has sparked chaos for hundreds of millions of Indians, who operate in a cash economy and have struggled to replace the banned currency.
New high-security 500 rupee notes have been introduced and distributed by designated banks.
The 1,000 rupee notes have been removed from circulation. New 2,000 denomination notes have been introduced instead.
Growth in number of banknotes
The rising number of banknotes has outpaced the expansion of India's economy. In the past five years, circulation of currency notes grew 40 percent, compared with 30 percent economic growth. The increase in 500 and 1,000 rupee notes has been the steepest.
Banknotes in circulation
While the number of 500 and 1,000 rupee notes combined account for less than a quarter of all notes, they are worth over 86 percent of the value in circulation.
By eliminating counterfeit currency, the government also hopes to hit the finances of militants who target India and are suspected of using fake 500 rupee notes to fund operations.