Demonetisation of high value currency- 2016: India
The Times of India
This is a collection of articles archived for the excellence of their content. |
1946
See graphic for the broad outline. The Mehta Parikh case study is only for historians and Income Tax lawyers. Lay readers may skip it.
What happened in 1946
In West Bengal, a pundit had to postpone the marriage of his daughter. The Rs 1,000 notes he had scraped together for the marriage were no longer legal tender.
In Nainital a big businessman fell over and died from heart failure when he went to hand in his Rs 1,000 notes. And in Calcutta, an enterprising gentleman who handed in notes to the value of Rs 6.03 lakh, the largest amount deposited that day, claimed he had got them for “an official secret which could not be disclosed to the public.”
These stories are from on January 12, 1946, when the pre-Independence government of India passed the High Denomination Bank Notes (Demonetisation) Ordinance. The background was World War II, which had just got over, but during which businessmen in India were supposed to have made huge fortunes supplying the Allied war effort and were concealing their profits from the tax department.
Letter writers to the Times of India (ToI) exulted at this first formal demonetisation in India. “The money that is concentrated in the hands of these people is not simply wealth. It is the life blood of thousands of Indians who starved and died during the last five years while black marketeers went on piling up money in their safes,” fumed SR Rangnekar from Bombay (now Mumbai). He advised the government to follow this up by cracking down on their stocks of gold “if they exceed 100 tolas.”
G Pingle from Kalyan noted snidely that many black marketing businessmen “tried to play the role of true nationalists. It passes my comprehension why so-called nationalists did not make any attempt to improve the condition of their war-weary fellow men.” Eric Miranda from Bandra suggested that people handing in high-value notes “might even be allowed to smoke a cigarette made out of one of these notes, as some are now doing, as some consolation.”
A writer using the name Non-Idealist suggested, more practically, that the government not waste time moralising about the black market, but just focus on getting the money. Noting that a large amount of notes might just never get handed in because they could not be accounted for, and hence go to waste (or be used to make cigarettes), the writer suggested the Reserve Bank of India (RBI) simply offer 30-40% of the value of the notes, with no questions asked.
The Indian nationalist leaders, who hadn’t been party to the decision, sounded dubious about its effects. Rajendra Prasad, who would become the first president of India, declared that “while we, Congressmen, have no sympathy with profiteers and dealers in the black market, it is not right to penalise honest people who in good faith have their savings in notes of demonetised value… A large number of people belonging to the middle and lower middle classes will be hit hard.”
And in a display of scepticism about government regulations that, sadly, would not carry over to the later Indian government, Prasad wondered how the problem had been created in the first place: “Many of the wartime ordinances succeeded in complicating the problems which they were intended to solve and in creating opportunities for corruption. The new ordinances are not going to fare any better.”
The similarity of all these reactions, from the fulminations of letter writers (Net commentators today), to the need for a mysterious, corrupt group to blame, to concerns for the impact on regular people, all suggest that there is something cyclical about demonetisation. Even the secrecy with which the current government pulled it off has parallels in 1946. “Never was a secret so well kept in Delhi,” wrote ToI on January 26. Even government officials were left with high-value notes to hand in.
ToI wrote that only eight officials knew about the plan, including the RBI governor and the finance member of the Viceroy’s Council (the equivalent of today’s finance minister). “In order to be issued on Saturday, January 12, the ordinance had to be flown in a special plane to Poona for the Viceroy’s signature. It was then flown back.”
During the discussions with governor Chintaman Deshmukh (later to be Nehru’s finance minister), the officers took notes and typed drafts themselves, without the help of secretaries. “Handwritten notes exchanged between these officials were carefully burnt. No carbon copy of the documents was made or kept.” Even extra staff wasn’t allocated to the RBI’s currency department just in case that raised suspicions.
The collections made justified the precautions. ToI reported that currency notes to the value of Rs 47 crore had been deposited across India, with Bombay in the lead with Rs 27 crore, followed by Calcutta (now Kolkata) with Rs 7 crore, Karachi with Rs 3 crore, Lahore with Rs 2.5 crore and Madras (now Chennai) with Rs 60 lakhs. New Delhi, as a newly constructed government town, didn’t seem to count at all. The Indian princes weren’t exempt, but were allowed to use a special form approved by the crown representative in their state.
For a while after 1946, black money ceased to be a major issue. The demonetisations that took place were technical, dealing with the currencies of the native states. In 1949, for example, Kutch’s koris were converted; they were pure silver and were causing problems in the bullion market. After the takeover of Hyderabad, the Osmania sicca, a 148-year-old currency, was converted to Indian rupees in 1957, with a grace period of two years for the change. In 1963-64 the old annas and pice coins were converted to paise, also a technical demonetisation.
But around that time, the rumours about black money started rising again. In 1965, finance minister TT Krishnamachari had to face questioning from increasingly assertive opposition members about the quantum of black money, and using demonetisation to stop it (high-value notes came back in 1954).
1965- 1972
On April 20, 1965, Krishnamachari replied in Parliament that “demonetisation was neither feasible nor would produce results.” He felt that estimates of black money were hugely over inflated and what did exist had been converted to “bonds, property and shares,” all beyond the reach of demonetisation.
Yet the demand never went away. In 1970, it got a boost of sorts when neighbouring Ceylon (now Sri Lanka) conducted a truly radical demonetisation that extended to Rs 100 and Rs 50 notes. A commission on direct taxation was set up under Justice Kailas Nath Wanchoo that looked at the issue and, perhaps inspired by Ceylon, it suggested even demonetising down to Rs 10 notes!
This seems to have been more on the lines of what will happen with our current Rs 500s, where the denomination still exists, but the physical notes will change. As Prem Shankar Jha noted in a column in ToI on August 28, 1972, this in itself would have required a major feat: “The government will have to print no less than 3,500 million currency notes – at least ten times as many as in a normal year – and transport them to every treasury office, bank and post office in the country.” It would, he pointed out, be impossible to do this secretly.
In a sign of the rising demand for action though, Jha concluded his piece by suggesting that, despite the logistical problems, it was needed as a scare: “The real value of demonetisation lies in its therapeutic effect on the economy. Large numbers of habitual tax evaders conceal their incomes only because years of laxity and permissiveness in the present tax laws have lulled them into a sense of security.”
There is an echo here of [the 2016] Prime Minister [Mr Modi]’s speech, urging India to accept the short-term pain for the long-term, cleansing effect. And it shouldn’t be a surprise that later that same year the Jan Sangh, the precursor to the Bharatiya Janata Party, adopted demonetisation in a resolution at a party conference in Jaipur. “The resolution said between high prices and high taxes the citizen was being ‘crushed’,” wrote ToI, and one can see an argument that the flow of black money was causing the first and was caused by the latter.
1978
So when Janata came to power, with the Jan Sangh as part of the coalition, demonetisation was always likely to be on the agenda. Again, it was put into effect with speed and secrecy. According to the RBI’s official history, on January 14, 1978, R Janakiraman, a senior RBI official was asked to go to Delhi on “some urgent work.” Despite being told to go alone, he took an assistant and when they reached they were told they had 24 hours in which to draft a demonetisation ordinance.
They were forbidden from communicating with RBI headquarters in Bombay. They managed to get a copy of the 1946 ordinance and used it to draft a new one. On January 16 it was announced that Rs 1,000, Rs 5,000 and Rs 10,000 notes were being withdrawn from circulation. As with Modi’s announcement on November 8, the next day was declared a public holiday to allow banks to prepare for the onslaught. The public was given just three days to exchange their notes.
Long queues formed in front of RBI and State Bank of India offices from very early in the morning. Additional counters were set up but, according to the RBI history, January 18 “started with utter confusion over the issue of declaration forms at the Reserve Bank headquarters at Bombay and working hours were stretched to 6.30 pm.” Tempers rose and there was a particular outcry from foreign tourists who faced the prospect of running out of legal money far from home.
Despite the problems, finance minister HM Patel declared he was pleased. ToI quoted him saying, a bit cryptically, “You will see me smiling whatever the result.” He deflected suggestions that it would harm trade and industry by saying the measure “would affect smugglers who were in any case on the fringes of trade and industry.” Rather oddly, he played down the impact on black money since, for that, he said it would have been necessary to demonetise Rs 100 notes. This measure, he said, was just to reduce the money used in illegal transactions.
If the finance minister was vague, RBI governor IG Patel was not. In his memoirs, Glimpses of Indian Economic Policy, he made clear he went along with demonetisation reluctantly. He had pointed out to the finance minister that “such an exercise seldom produces striking results.” People who have black money on a substantial scale rarely keep it in cash. “The idea that black money or wealth is held in the form of notes tucked away in suit cases or pillow cases is naïve.” Patel pointed out that even those who are caught with black money can usually find agents who will convert the notes through a number of small transactions “for which explanations cannot be reasonably sought.” Yet the government was insistent, and so “the gesture had to be made, and produced much work and little gain.” Patel didn’t mention it, but another former finance minister C Subramaniam suggested that, then as now, the real aim was political and aimed against other parties.
The same point was made by two economists--CN Vakil and PR Brahmananda. They pointed out that the measure might have had some merit if it had reduced money supply, perhaps by exchanging the notes for a little less. As it stood it was just “a publicity boost” to the government and they recalled how the 1946 demonetisation had just resulted in Rs 10 crore going out of the circulation and the recent Sri Lankan experiment had much the same impact: “One guess is that the present measure has primarily a political and not economic objective. In such a case it becomes a business in and among politicians.”
The rapidity with which black money became an issue again in following decades suggests that the doubters had a point. Perhaps demonetisation is always more of a political gimmick. Perhaps, as Jha had suggested, it is a needed warning to discourage black marketers – though as the doubters might argue, the question remains if the really big players are affected, while regular people suffer the pain.
Excerpt from The Reserve Bank of India’s history
The entire relevant chapter has been excerpted below
CURRENCY AND COINAGE MATTERS
In regard to currency, two developments have to be recorded. The first, the demonetisation of high denomination notes, was a fiscal measure, taken against the Bank’s advice. The second was the replacement of silver coinage by nickel, the Bank lending strong and active support to the change-over.
Demonetisation of High Denomination Notes
Soon after the war, while Government were giving attention to ways and means of averting the expected slump, thought was also given to check black market operations and tax evasion, which were known to have occurred on a considerable scale. Following the action in several foreign countries, including France, Belgium and the U.K., the Government of India decided on demonetisation of high denomination notes, in January 1946. It is interesting that as early as April 7, 1945, in an editorial on the tasks before the new Finance Member, Sir Archibald Rowlands, the Indian Finance referred to the action of the Bank of England in calling in notes of ₤ 10 and higher denominations and suggested similar action in India as ‘one more concrete example for the Indian Government to follow in its fight against black market money and tax evasions which have now assumed enormous proportions ‘.
It is not known when the Government authorities started thinking on the demonetisation measure, but the final consultation with the Governor and Deputy Governor Trevor took place towards the end of 1945, when Mr. N. Sundaresan, Joint Secretary, Ministry of Finance, called for a discussion, for which he had earlier prepared a note and the drafts of the Ordinances to implement the scheme. According to a note recorded by Mr. Sundaresan, it would appear that the Reserve Bank authorities were not enthusiastic about the scheme.
The Governor stated that the Finance Member had given him the impression that the scheme would be launched only when there were signs of the onset of an inflationary spiral. The Governor saw no special signs of such a situation. ‘It appeared to him that the main object of the scheme was to get hold of the tax evader. The Governor wondered if this could be called an emergency to justify the promulgation of an Ordinance, just before the newly elected Legislative Assembly met. The Governor wanted Government to be satisfied that there was no harassment to honest persons. As a currency authority, the Bank could not endorse any measure likely to undermine the confidence in the country’s currency.
The Governor agreed that about 60 per cent of the notes would be in the Indian States and so co-operation of the State Governments was very necessary. Apparently he had some doubts about this. According to Mr. Sundaresan, the ideal thing was to block high denomination notes, but this course was not favoured by either the Finance Member or the Governor.
Subject to these observations, the scheme as drafted by Mr. Sundaresan was considered by the Governor to be theoretically all right, but he and the Deputy Governor pointed out the considerable administrative difficulties involved in covering nearly 5,700 offices of scheduled and non-scheduled banks. The Governor’s concluding remarks, as recorded by Mr. Sundaresan, were as under:
Sir Chintaman Deshmukh felt that we may not get even as much as Rs. 10 crores as additional tax revenue from tax evasion and that the contemplated measure, if designed to-achieve such a purpose, has no precedent or parallel anywhere. If value is going to be paid for value (no matter whether such value is in lower denomination notes), it is not going to obliterate black markets. His advice is that we should think very seriously if for the object in view (as he deduces from the declaration form) whether this is an opportune time to proceed with the scheme. Provided Government are satisfied on the points of (i) sparing harassment to the unoffending holders and (ii) a worthwhile minimum of results in the shape of extra tax revenue, he does not wish to object to the scheme as drafted, if Government wish to proceed with it notwithstanding the administrative difficulties involved.
The Government went ahead with the scheme. On January 12, 1946, two Ordinances were issued, demonetizing notes of the denominational value of Rs. 500 and above. The first Ordinance, viz., the Bank Notes (Declaration of Holdings) 0rdinance, 1946, required all banks and Government Treasuries in British India to furnish to the Reserve Bank of India by 3 p.m. on the same day, a statement of their holdings of bank notes of Rs.100, Rs. 500, Rs. 1,000 and Rs.10,000 as at the close of business on the previous day. January 12, 1946 was declared a bank holiday. The second, the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, demonetised bank notes of the denominations of Rs. 500 and above with effect from the expiry of January 12, 1946.
This Ordinance provided that a non-scheduled bank could exchange high denomination notes declared by it under the Bank Notes (Declaration of Holdings) Ordinance at the Reserve Bank or a scheduled bank, for value in one hundred rupee notes or for credits with the Reserve Bank or a scheduled bank. Scheduled banks and Government Treasuries could obtain from the Reserve Bank value in one hundred rupee notes or in deposits with the Reserve Bank in exchange for high denomination notes declared by them under the above mentioned Ordinance. Other holders of high denomination notes could get them exchanged at the Reserve Bank, a scheduled bank or a Government Treasury on presentation of the high denomination notes and a declaration in the form prescribed in the schedule to the Ordinance, within 10 days of the commencement of the Ordinance.
Under a press note issued subsequently by the Government of India on January 26, 1946, Managers and Officers in charge of offices and branches of the Reserve Bank of India were authorised to allow exchange of high denomination notes, up to and inclusive of February 9, 1946, on production of sufficient and valid reasons for delay in the presentation of notes. Thereafter the Governor and the Deputy Governor of the Bank were authorised to allow exchanges up to and inclusive of April 26, 1946. The power for the extension of the time limit beyond April 26, 1946 was reserved for the Government of India
The provisions of the second Ordinance, which was applicable to British India, were also extended, with suitable modifications, to the Administered Areas on January 22, 1946. Many Indian States also issued parallel Ordinances. States which did not enact such legislation were required to exchange their holdings of demonetised notes before March 7, 1946.
The measure did not succeed, as by the end of 1947, out of a total issue of Rs. 143.97 crores of the high denomination notes, notes of the value of Rs. 134.9 crores were exchanged. Thus, notes worth only Rs. 9.07 crores were probably ‘demonetised ‘, not having been presented. The results of the demonetisation measure were summed up by Sir Chintaman, in his Dadabhai Naoroji Memorial Prize Fund Lectures, delivered at Bombay in February 1957, as under :
It was really not a revolutionary measure and even its purpose as a minatory and punitive gesture towards black-marketing was not effectively served. There was no fool-proof administrative method by which a particular note brought by an individual could be proved as the life-savings of the hard-working man who presented it or established as the sordid gains of a black-marketer. Another loophole of which considerable advantage was taken was the exemption of the princely States from scrutiny or questioning when such notes were presented by them. In the end, out of a total issue of Rs.143.97 crores, notes of the value of Rs.134.9 crores were exchanged up to the end of 1947 as mentioned in the Report of the Board of Directors of the Reserve Bank. Thus, notes worth only Rs.9.07 crores were probably “‘demonetised “, not having been presented. It was more of “conversion “, at varying rates of profits and losses than “demonetisation “.
There was an echo of this measure in 1948. In September, while Government were considering anti-inflationary measures, rumours spread that the 100 rupee notes would be demonetised and that bank deposits would be frozen. The Prime Minister had to make a statement in the Legislature, categorically denying any such intentions on the part of Government.
In 1946, too, IT officers smelt black money in high notes
The Mehta Parikh case study is mainly for historians and Income Tax lawyers. Lay readers may skip it.
In 1946, too, many rich Indians had black money as in 1978 and 2016. Even then they claimed that Income Tax officers were harassing them. Take this case that was heard in the courts from 1946 to 1956.
Messrs Mehta Parikh & Co vs The Commissioner Of [Income Tax?] on 10 May, 1956 Indian Kanoon
The appellants were a partnership firm doing business in Mill Stores at Ahmedabad. Their head office was in Ahmedabad and their branch office in Bombay.
The Governor-General on 12th January 1946 promulgated the High Denomination Bank Notes (Demonetisation) Ordinance, 1946 and high denomination bank notes ceased to be legal tender on the expiry of 12th day of January 1946.
Pursuant to clause 6 of the Ordinance the appellants on 18th January 1946 encashed high denomination notes of Rs. 1,000 each of the face value of Rs. 61,000 [at least Rs.61 lakh at 2016 prices].
During the assessment proceedings for the year 1947-48 the Income-tax Officer called upon the appellant to prove from whom and when the said high denomination notes of Rs. 61,000 were received by the appellants and also the bona fides of the previous owners thereof. After examining the entries in the books of account of the appellants and the position of the Cash Balances on various dates from 20th December 1945 to 18th January 1946 and the nature and extent of the receipts and payments during the relevant period, the Income-tax Officer came to the conclusion that in order to sustain the contention of the appellants he would have to presume that there were 18 high denomination notes of Rs. 1,000 each in the Cash Balance on 1st January 1946 and that all cash receipts after 1st January 1946 and before 13th January 1946 were received in currency notes of Rs. 1,000 each, a presumption which he found impossible to make in the absence of any evidence. He, therefore, added the sum of Rs. 61,000 to the assessable income of the appellants from undisclosed sources.
The cash book entries from 20th December 1945 up to 18th January 1946 were put in before the Income-tax Officer and they showed that on 28th December 1945 Rs. 20,000 were received from the Anand Textiles, and there was an opening balance of Rs. 18,395 on 2nd January 1946. Rs. 15,000 were received by the appellants on 7th January 1946 from the Sushico Textiles and Rs. 8,500 were received by them on 8th January 1946 from Manihen, widow of Shah Maneklal Nihalchand. Various other sums were also received by the appellants from 2nd January 1946 up to and inclusive of 1 1 th January 1946, which were either multiples of Rs. 1,000 or were over Rs. 1,000 and were thus capable of having been paid to the appellants in high denomination notes of Rs. 1,000. There was a cash balance of Rs. 69,891-2-6 with the appellants on 12th January 1946, when the High Denomination Bank Notes (Demonetisation) Ordinance 1946 was promulgated and it was the case of the appellants that they had then in their custody and possession 61 high denomination notes of Rs. 13000, which they encashed through the Eastern Bank, on 18th January 1946. The appellants further sought to support their contention by procuring before the Appellate Assistant Commissioner the affidavits of Kuthpady Shyama Shetty, General Manager of Messrs Shree Anand Textiles, in regard to payment to the appellant is of a sum of Rs. 20,000 in Rs. 1,000 currency notes on 28th December 1945, Govindprasad Ramjivan Nivetia, proprietor of Messrs Shusiko Textiles, in regard to payment to the appellants of a sum of Rs. 15,000 in Rs. 1,000 currency notes on 6th January 1946 and Bai Maniben, widow of Shah Maneklal Nihalchand, in regard to payment to the appellants of a sum of Rs. 8,500 (Rs. 8,000 thereout being in Rs. 1,000 currency notes) on 8th January 1946. The appellants were not in a position to give further particulars of Rs. 1,000 currency notes received by them during the relevant period, as they were not in the habit of noting these particulars in their cash book -and therefore relied upon the position as it could be spelt out of the entries in their cash book coupled with these affidavits in order to show that on 12th January 1946 they had in their cash balance of Rs. 69,891-2-6, the 61 high denomination currency notes of Rs. 1,000 each, which they encashed on 18th January 1946 through the Eastern Bank. Both the Income-tax Officer and the Appellate Assistant Commissioner discounted this suggestion of -the appellants by holding that it was impossible that the appellants had on hand on 12th January 1946, the 61 high denomination currency notes of Rs. 1,000 each, included in their cash balance of Rs. 69,891-2-6. The calculations., which they made involved taking into account all payments received by the appellants from and after 2nd January 1946, which were either multiples of Rs. 1,000 or were over Rs. 1,000. There was a cash balance of Rs. 18,395-6-6 on band on 2nd January 1946, which could have accounted for 18 such notes. The appellants received thereafter as shown in their cash book several sums of monies aggregating to over Rs. 45,000 in multiples of Rs. 1,000 or sums over Rs. 1,000, which could account for 45 other notes of that high denomination, thus making up 63 currency notes of the high denomination of Rs. 1,000 and these 61 currency notes of Rs. 1,000 each, which the appellants encashed on 18th January 1946 could as well have been in their custody on 12th January 1946. This was, however, considered impossible by both the Income-tax Officer and the Appellate Assistant Commissioner as they could not consider it within the bounds of possibility that each and every .payment received by the appellants after 2nd January 1946 in multiples of Rs. 1,000 or over Rs. 1,000 was received by the appellants in high denomination notes of Rs. 1,000 each.' It was by reason of their visualisation of such an impossibility that they negatived the appellants' contention.
1978
Surprise & panic: History repeats itself 38 yrs later, Nov 09 2016 : The Times of India
Summary
2016 was not the first time high value currency notes were demonetised.
In January 1978, the Morarji Desai-led Janata Party government had demonitised Rs 1,000, Rs 5,000 and Rs 10,000 notes to curb black money .This was less than a year after the Emergency was lifted.
Old-timers remember that the decision then too had taken the public by surprise, leading to panic and a rush to banks although people were given time to exchange old notes.
To put things in perspective, a Rs 1,000 note in 1978 could buy 5 sq ft of real estate space in south Mumbai. In 2016, a Rs 500 note would not even be worth 100th of a square foot.
Senior advocate Anil Harish said people with unaccounted money were reluctant to deposit their high denomination currency in banks because of fear of income tax sleuths. “At places like Crawford Market and Zaveri Bazar, people were selling Rs 1,000 notes for as little as Rs 300,“ he said.
At banks, people were asked to fill in a form when they came to exchange old notes.The banks would inform the I-T cell if people walked in with unusually large amounts. “If they were unable to explain the source of income, the I-T wing would levy the prevalent tax, which was as high as 90% in those days,“ he added.
Said advocate Nishith Desai, “I remember 1978, when people had to go with bags full of cash to the bank. It is an excellent step, but the idea is old.“
A senior chartered accountant with Kalyaniwala & Mistry said, “If you want to flush out black money , it is a good step. In 1978 there was no great disruption, however, since the notes were not with common people. Then they had demonetised Rs 1,000 notes which had a huge monetary value. The 500 and 1,000 rupee notes do not have the same value today; even the average man on the street will have these notes.“
RBI’s history (summary)
In 1978, the Janata Party coalition government, which had come to power a year earlier, decided to withdraw Rs1,000, Rs5,000 and Rs10,000 notes by issuing an ordinance on the morning of 16 January that year.
The Reserve Bank of India’s (RBI) history (third volume) describes the process in detail. It goes something like this:
On the morning of 14 January 1978, R. Janaki Raman, a senior official from chief accountant’s office in RBI, was asked by a government official over telephone to go to Delhi to discuss matters relating to exchange control.
On reaching the capital, Raman was told that the government had decided to withdraw high-denomination notes and asked to draft the necessary ordinance within a day.
During that period, no communication was allowed with RBI’s central office in Mumbai, “since such contacts could give rise to speculation.”
The draft ordinance was completed on schedule and sent for signature to President N. Sanjiva Reddy in the early hours of 16 January. The news was announced on the All India Radio news bulletin at 9 am on the same day. The ordinance provided that all banks and treasuries would be closed on 17 January.
The then RBI governor I.G. Patel was not in favour of this exercise. According to him, some people in the Janata coalition government saw demonetization as a measure specifically targeted against the allegedly “corrupt predecessor government or government leaders”.
Patel recalled in his book Glimpses of Indian Economic Policy: an Insider’s View, that when finance minister H.M. Patel informed him about the decision to withdraw high-denomination notes, he had pointed out that such exercises seldom produces striking results.
Most people, Patel said, who accept illegal gratification or are otherwise recipients of black money, rarely keep their ill-gotten earnings in the form of currency for long.
The idea that black money or wealth is held in the form of notes tucked away in suitcases or pillow cases is naive, Patel said. In any case even those who are caught napping or waiting will have a chance to convert notes through paid agents as some provision has to be made to convert at par notes tendered in small amounts for which explanation cannot be reasonably sought, he added.
Excerpts from The Reserve Bank of India’s official history
The following is the entire relevant chapter from RBI's official history
DEMONETIZATION OF HIGH DENOMINATION NOTES
Demonetization of high denomination notes is one of the radical measures normally resorted to by governments to counter forgery and illegal printing of notes by unauthorized sources. The Wanchoo Committee on Black Money had recommended demonetization many years ago. This suggestion was not acted upon, partly because the very publicity given to the recommendation resulted in black money operators getting rid of high currency notes. The Committee had observed that black money should be regarded largely as a flow, not as a hoard, and different members of the Committee held different views on how much black money was in circulation.
The Times of India
The government resorted to demonetization of Rs 1,000, Rs 5,000 and Rs 10,000 notes on 16 January 1978 under the High Denomination Bank Notes (Demonetization) Ordinance, 1978 (No. 1 of 1978). The Finance Minister, in his budget speech of 28 February 1978, announced that demonetization was part of a series of measures that the government had taken for controlling illegal transactions and against anti-social elements. The purpose of the Demonetization Ordinance was stated in the preamble thus:
<<The availability of high denomination bank notes facilitates the illicit transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes and it is therefore necessary in the public interest to demonetize high denomination notes.>>
According to the Ordinance, all high denomination bank notes ceased to be legal tender in payment or on account at any place after 16 January 1978. The Ordinance further prohibited the transfer and receipt of these notes between persons after 16 January 1978 so as to make itself operationally meaningful.
The demonetization of 1978 was the second such exercise in India, the first one having been conducted in 1946. Governor I.G. Patel was not in favor of this exercise. According to him, some people in the Janata coalition in the government saw demonetization as a measure specifically targeted against the allegedly ‘corrupt’ predecessor governments or government leaders. Patel recalled in his book, Glimpses of Indian Economic Policy: An Insider’s View, that when Finance Minister H.M. Patel informed him about the decision to demonetize high denomination notes, he had pointed out that:
such an exercise seldom produces striking results. Most people who accept illegal gratification or are otherwise the recipients of black money do not keep their ill-gotten earnings in the form of currency for long. The idea that black money or wealth is held in the form of notes tucked away in suit cases or pillow cases is naïve. And in any case, even those who are caught napping—or waiting—will have the chance to convert the notes through paid agents as some provision has to be made to convert at par notes tendered in small amounts for which explanations cannot be reasonably sought. But the gesture had to be made, and produced much work and little gain. (p. 159) Demonetization was a sensitive issue and secrecy was imperative. R. Janakiraman, a senior official in the chief accountant’s office in the Reserve Bank, was asked by some officers of Government of India over the telephone on 14 January 1978, to go over to Delhi immediately on ‘some urgent work’. When he enquired the purpose of the visit so that he could go prepared, the officials stated that matters relating to exchange control would need to be discussed and that he should leave for Delhi on his own.
Janakiraman, however, took along with him M. Subramaniam, a senior official of the Exchange Control Department. On reaching Delhi, it was revealed that the government had decided to demonetize high denomination notes and he was required to draft the necessary Ordinance within twenty-four hours. During this period, no communication was allowed with the Bank’s central office in Bombay, since such contacts could give rise to speculation. Janakiraman and Subramaniam made a request for the 1946 Ordinance on demonetization to get an idea of how it was drafted, and the request was acceded to by the Finance Ministry. The draft Ordinance was completed on schedule; it was then finalized and sent for the signature of the President of India (N. Sanjiva Reddy) in the early hours of 16 January 1978. The news was to be announced on All India Radio’s news bulletin at 9 am the same day; it was given as a flash towards the end of the news bulletin.
The Ordinance provided that all banks and government treasuries would be closed on 17 January 1978 for transaction of ‘all business except the preparation and presentation or the receipt of returns’ that were needed to be completed in the context of demonetization. For purposes of the Negotiable Instruments Act, 1881, 17 January 1978 was deemed to be a public holiday notified under the Act.
Issuing the Ordinance was one matter. Implementing it and working out the modalities to receive and exchange notes across the length and breadth of the country was another. The Ordinance contained comprehensive provisions for the exchange of notes held by banks and government treasuries as well as by the public; for exchange of notes after the time limit; and provisions related to offences and the power of the central government to make rules giving effect to the provisions of the ordinance.
Banks and government treasuries were required to submit information (in the form of data ‘return’) to the Reserve Bank of high denomination notes held with them as at the close of business on 16 January 1978. The notes held would be exchanged for an equivalent value by the Bank. The general public2 was given three days to surrender high denomination notes for conversion. After 16 January, notes could be exchanged on tender of the high denomination notes in person by the individuals themselves or by a person competent to act on his/her behalf. They had to tender the notes at the Reserve Bank or at notified banks in the prescribed format with full particulars giving, among other things, the source or sources from which the notes came into his/her possession and the reasons for keeping the amount in cash.
( The term public included the Hindu undivided family (HUF) where the karta was required to tender the notes, companies where directors where required to tender the notes, firms (managing partner), associations (principal officer), etc.)
The arrangements for exchange of high denomination notes to be surrendered by the public at the Reserve Bank in Bombay required that the Bank open additional counters and mobilize manpower from other departments to meet the high demand. Long winding queues started forming in front of the Reserve Bank office right from the morning as also at the main office of the State Bank of India, to collect declaration forms. According to press reports on 18 January 1978, the day started with utter confusion over the issue of declaration forms at the Reserve Bank headquarters at Bombay and the working hours stretched to 6.30 pm. Enterprising city printers are said to have made quick money selling forms in sets of three for Rs 3. As expected, there were frayed tempers and a considerable hue and cry from the public as well as foreign tourists, especially those who did not have, or did not care to preserve, documentary proof to support the exchange of notes. Many tourists were reluctant to fill the forms, particularly tourists from the Gulf countries. Generally tourists who had a small number of currency notes of high denomination had their notes exchanged across the counter.
On the day following demonetization, two noted economists, Professor C.N. Vakil and Dr P.R. Brahmananda, expressed the view that the measure would not have any enduring effect on money supply, prices of necessities and problems like low savings, acute poverty, unemployment and industrial relations, as the high denomination currency notes formed only a small proportion of the total money supply. They were the authors of the memorandum titled ‘Semibombla’ submitted to the union government for tackling the inflationary situation in 1974.
The impact of the 1946, 1978 demonetisations
Failure
The past experiments with demonetisation had ended in failure, as a 2012 report by a black money committee headed by the chairman of Central Board of Direct Taxes (CBDT) noted.
The report titled, 'Measure to tackle Black Money in India and Abroad', while discussing demonetisation as one of the ways to 'kill' the black economy or curb generation of black money, found it impractical despite its 'noble aims'. It revealed that in both instances of demonetisation, in 1946 and 1978, less than 15% of high currency notes were exchanged, while over 85% of the currency notes never surfaced, as the owners feared penal action by central agencies.
The report quoted former Delhi University professor and economist Suraj B Gupta who criticised the measures taken by the government to unearth black money. In his study, 'Black Income in India' (1992), Gupta discussed the Voluntary disclosure of Income (VDI) Schemes of 1951, 1965, 1975 and 1985, Special Bearer Bond (SBB) Scheme of 1981, and the demonetisation of currency in 1946 and 1978, apart from touching upon the schemes launched by the government in 1991-92.
His critique mostly indicated that tackling the black money menace had to do with implementation of existing laws and prevention measures. Thanks to improper execution of statutory tax provisions; ineffective surveys, search and seizures; enforcement of few penalties; and rare prosecutions due to legal loopholes, the black money economy thrived.
The report also quoted former JNU professor Arun Kumar who in his study, 'The Black Economy in India' (1999) wrote against the 1978 demonetisation. Kumar, in fact, had also termed the voluntary disclosure schemes and lowering of tax rates as failures.
The report mentioned that demonetisation of Rs 1,000 and Rs 500 was one of the crucial demands from the public, but observed that it may not be a viable solution when it comes to tackling black money as unaccounted money is largely held in the form of benami properties, bullion and jewellery, and not as wads of currency notes.
The report also noted that demonetisation would only increase the cost associated with currency note production, as more currency notes would have to be printed for disbursing the same amount of money.
Reactions of the public to possible demonetisation were adverse, according to the report. They said the move was likely to have an adverse impact on the banking system with its logistics becoming difficult, and would leave the general public inconvenienced as payments of wages/salaries to workers would become challenging.
1978: The transition to new notes was less painful
Ohe morning of Tuesday, January 17, news reports screamed “High Currency Demonetised”.
There was absolutely no hint then of what was coming — with the only national news pointer from him that weekend being that he would never encourage or rule through “an Emergency”, according to the lead story in Sunday Standard — the Sunday edition of The Indian Express.
ON SATURDAY, January 14, 1978 — two days before the Janata government announced its decision to demonetise or scrap Rs 1,000, Rs 5,000 and Rs 10,000 notes — Prime Minister Morarji Desai was in Bombay, garlanding the statue of Shiva ji and addressing a massive rally of 1,00,000 people at Shiva ji Park, as he enjoyed a historic reception by the Bombay Municipal Corporation.
Before he called for a “halt to the strident demands of organised sections of the country for larger portions of the economic cake,” Morarji Bhai did pause to speak of the city’s “sprouting skyscrapers which disfigured the skylines,” going on to add that he “did not think this was progress”.
Of course, the man who was chief minister of Bombay State was also amused, knowing “Bombay did not get filtered water,” admiring the tolerant nature of those living in the city and commending their spirit of “bear it till things improve.”
There was absolutely no hint then of what was coming — with the only national news pointer from him that weekend being that he would never encourage or rule through “an Emergency”, according to the lead story in Sunday Standard — the Sunday edition of The Indian Express.
These were the early days of the Shah Commission, which was probing the excesses committed during the Emergency under former Prime Minister Indira Gandhi — with the front page always filled with submissions made by witnesses. On Sunday, in the run up to the demonetisation of 1978, Moraji Desai was seen at Bhavnagar spending 45 minutes of his public address offering to resign if anyone could prove allegations that his son Kantibhai Desai embezzled party funds.
All this was quickly drowned out on the morning of Tuesday, January 17, with news reports screaming “High Currency Demonetised”. The Government soon made two announcements — indicating that it had detected a “high level of smuggling transactions” and also openly calling out “political money from previous governments” as the trigger for the announcement.
Powai resident Rekha Vijaykar, now 75, recalls those days, saying “oil was still Rs 6 per litre.” She speaks of a different era — one marked by the “common man’s sensitivity.” According to her, the middle class and lower middle class were not affected at all considering the notes were all high value. “There was a general apprehension but it settled down with time,” she says.
The government justified the demonetisation move, saying that the high-value notes were believed to facilitate illicit transactions that were “harmful to the national economy.” President Sanjiva Reddy, a report in The Indian Express reads, promulgated an ordinance after an emergency Cabinet meeting held in utmost secrecy, withdrawing high-value currency notes from circulation.
A bank holiday was declared for the next day, to enable “them to prepare and present to the Reserve Bank of India tomorrow by 3 pm returns showing the total value of high denominational notes held by them at the close of business on January 16.
Only RBI, SBI and 71 offices of public sector banks existed then, which accepted currency notes for exchange. People were asked to declare the source, time and manner of acquisition of the high denomination notes. Persons making false declarations were liable for a term extending to three years with a fine or both.
The move saw a similar rush as on Tuesday last week with many impacted, a few even calling in sick and sporadic reports of people fainting in lines, and even two cases of heart attacks.
The decision took many by surprise as city newspapers had earlier reported that the Finance Minister in a public meeting had confirmed no such proposal was in consideration, after reports emerged that the newly formed Janata government would heed the Direct Taxes Enquiry Committee (Wanchoo Committee)’s confidential report in 1970-71. The confusion that followed was expected, with stories of smugglers scrambling.
In Mumbai, with just six branches of public sector banks open, the crowd lined outside the RBI for three days. The forms required for exchanging the notes were also in short supply, worsening the chaos as the deadline loomed close.
There are anecdotes of a few Arab nationals who reached the RBI office at Ballard Estate with “bundles of Rs 1,000” notes, demanding immediate change as they had to leave the country. They kept yelling about the counter of a posh hotel in south Bombay where they stayed as the source of the money. Except that when the RBI officials called to check, the hotel denied any knowledge.
In temple dhanpatis across the city donations surged and at least in two temples the money which poured in broke all past records. By evening of the first day of scrapping these notes the RBI governor (I G Patel) called to all priests, asking them to adhere to the Thursday deadline, quipping that the order applied as much to “gods as to men”.
According to reports, the unofficial rate at which people in Bombay were selling excess Rs 1,000 notes was as low as Rs 250. Trading in bullion — as was seen this week— didn’t take place then, with the rate for gold frozen at Rs 693.
It came to be known that Rs 1,000 notes were being held by commercial and co-operative banks. The RBI in its bulletin soon indicated that the three denominations together made up about Rs 150 crore, with Rs 1,000 notes numbering the highest.
Dr Avinash Supe, now the dean at KEM hospital, was a medical student in the 1970s, living on pocket money of Rs 30 per week. “The government hospitals faced no issue back then. Larger denomination notes were not there. Since treatment cost was also low people had no trouble in getting treatment done.”
The current demonetisation move has left patients scrambling to pay hospital dues, with several getting turned away for having notes of Rs 500 and Rs 1,000. “Back then, the transition was smooth,” Supe recalls.
In the city, the RBI exchanged the Rs 1,000 bill of a lone patient who had no one in the city and was admitted for a serious ailment. By the Thursday deadline, the RBI’s Bombay branch had received an account tally of 6,628 pieces of high denomination notes to the value of Rs 66.61 lakh.
In Bombay, late on Thursday evening, the RBI Governor made a public appearance saying “whoever was found inside the bank hall would be serviced fully but whoever happened in the queue outside would be given a token.”
This was to be shown till January 24, the last day for exchange. By then a total of 200 bank employees worked in Bombay at 53 counters daily.
Why 1978 demonetisation didn’t hurt India
Quite simply, it involved only 1.8% of the currency notes in circulation then
This graphic published in The Times of India on November 16, 2016 conveys the panic that must have gripped India after currency notes of Rs 1,000, Rs 5,000 and Rs 10,000 were demonetised on Monday, January 16, 1978. Comparisons with the prevailing cash crisis are natural. But did India really panic 38 years ago? No, and here’s why:
Surgical Strike
Prime Minister Narendra Modi has likened his November 8 decision to demonetise Rs 500 and Rs 1,000 notes to a military ‘surgical strike’, but others say it resembles ‘carpet bombing’ because every citizen is affected by it. In contrast, the 1978 demonetisation was genuinely a surgical manoeuvre as only the truly high-denomination notes were taken out.
Indpaedia adds: In 1978 the starting salary of an Army or IAS officer was Rs1100 and in top private firms like the Tata Adminsitrative Service or Hindustan Lever around Rs.1400. in those days the currency note used most even by well to do people was not Rs.100 but Rs.10 (equal to around Rs.450 in 2016).
A Rs 1,000 note from 1978 would be worth Rs 13,689 today. Conversely, the just-demonetised Rs 1,000 note would have been worth only Rs 73 back then.
There were demands in and before 1978 to demonetise even the Rs 100 note — worth Rs 1,369 now— but neither the Janata government of 1978, nor the Congress governments before it, heeded them. Most salaried people earned less than Rs 1,000 a month and the pain would have been felt all across.
Unlike now, when 86% of India’s currency has been frozen, the 1978 demonetization affected a minuscule proportion of currency notes. Although they were the highest denomination notes, together they amounted to only about 1.8% of the currency in circulation, by value.
So, why are hundreds of people in the queue outside Reserve Bank of India’s Mumbai building in the January 18, 1978 photograph used above?
Only 3 Days To Deposit
Although the general public was not affected by the demonetisation, a rush ensued at Reserve Bank and State Bank offices because the government gave only three days to deposit the high-denomination notes.
The owners of large notes had to visit “the office or sub-office or branch of the Reserve Bank of India or the main office or branch of the State Bank at the headquarters of a district or any other office of a public sector bank notified in this behalf by the Reserve Bank” in person, and submit their notes along with a declaration by Thursday, January 19, 1978.
If they failed to exchange the notes within those three days, they had to submit the notes and the declaration at an RBI office by January 24, along with an explanation for the delay. General banking operations were not affected by the decision and the chaos, if any, was over within a week.
Why Demonetise?
Why were high-denomination notes demonestised in 1978? Surprisingly, then minister of finance, revenue and banking H M Patel told Parliament on March 23, 1978, the government had NOT targeted black money:
“The total number of these notes in circulation was worth Rs 145 crore (1.45 billion). The total number of notes in circulation in this country today is over Rs 8,000 crore (80 billion). Therefore, quite obviously this could not have ever been designed to achieve anything of the nature of trying to attack even the black money problem, etc. It had no such objective…The objective was one of preventing illegal transactions and that will certainly be achieved…”
During the debate before the passage of the High Denomination Bank Notes (Demonetisation) Bill, 1978, Patel said:
“It was brought to Government’s notice that high-denomination banknotes were being used extensively for illicit transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes. Immediate action to demonetise banknotes of the denominational value of Rs 1,000, Rs 5,000 and Rs 10,000 issued by the Reserve Bank of India was, therefore, considered necessary by Government in public interest.”
Politically Motivated?
The government had ordered demonetisation through an ordinance shortly before Assembly elections in some states. The Opposition then, as now, cried foul and alleged the decision was politically motivated.
Noorjehan Razack, an AIADMK member of Parliament from Tamil Nadu, said: “The timing of this demonetisation ordinance was such that it appeared more as a political act on the eve of the Assembly elections to take the teeth out of certain political parties than a purposeful, well-directed and well-coordinated economic offensive against the well-entrenched forces of black money.”
Sanat Kumar Raha, a CPI member of Parliament from West Bengal, said: “This ordinance was promulgated just before the elections and it has already strengthened the doubts and suspicions in the minds of the people… When the government brought out the ordinance it was nothing but a case of publicity, and not a matter of performance. The publicity was meant only as a political stunt because the government wanted to give some radical ideas.”
Little To Show In The End
What did the 1978 demonetisation achieve? It certainly did not root out corruption or black money, or the whole country wouldn’t be going through the trauma of another, bigger sweep-up 38 years later. By the end of the action, high net worth individuals had submitted notes worth Rs 595.5 million while Rs 649.5 million in large notes was found to be in the possession of banks. About Rs 160 million remained unaccounted.
On April 25, 1978, minister of state for finance Zulfiquarullah told Parliament: “Notes of an approximate value of Rs 16 crore (160 million) have not been tendered. They have ceased to be legal tender and are therefore valueless. No follow-up action is necessary.”
Six months after demonetisation, Patel summed up the results thus on July 18, 1978:
“The demonetisation of high-denomination notes had the limited objective of stopping the illicit transfer of money for financing transactions, which, apart from resulting in tax evasion, were harmful for a healthy growth of the economy. The measure resulted in the high-denomination banknotes of an approximate value of Rs 16 crore (160 million) not having been tendered for exchange becoming valueless and therefore, would not form part of money supply. Apart from the psychological impact which such a measure has had on tax evaders, black-marketeers etc, it has yielded valuable information to tax authorities in respect of persons who tendered high-denomination notes for exchange, which, it would appear, indicates tax evasion in a number of cases.”
It merely told government where to sniff next time. But that information couldn’t have been a secret anyway.
1946 and 1978: Stories from the past
The media in terms of numbers was limited in 1946 and 1978 when compared to 2016. But given the importance of the decisions, it did trigger coverage.
Newspaper and magazine archives of the 1946 decision do not seem to be available online. Therefore, I relied on Reserve Bank of India commissioned history of India’s central bank to get an idea of how a stakeholder perceived the decision.
The following extract of RBI’s history volume is sourced from “Mostly Economics,” a blog on economic developments in India.
According to RBI’s relevant volume:
“Sir Chintaman Deshmukh (governor) felt that we may not get even as much as Rs. 10 crores as additional tax revenue from tax evasion and that the contemplated measure, if designed to achieve such a purpose, has no precedent or parallel anywhere. If value is going to be paid
for value (no matter whether such value is in lower denomination notes), it is not going to obliterate black markets. His advice is that we should think very seriously if for the object in view (as he deduces from the declaration form) whether this is an opportune time to proceed
with the scheme. Provided Government are satisfied on the points of (i) sparing harassment to the unoffending holders and (ii) a worthwhile minimum of results in the shape of extra tax revenue, he does not wish to object to the scheme as drafted, if Government wish to proceed with it notwithstanding the administrative difficulties involved.”
It was not the first time an RBI governor was skeptical of government’s move to strip currency of legal tender characteristic at short notice.
In 1978, when Janata government proclaimed an ordinance, some of the media coverage of the development was available online.
A Times of India report (sourced in-house) published on 17th January 1978 said:
“A press note issued tonight said that the ordinance had been promulgated because there was reason to think that high-denomination notes were facilitating the illegal transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes. There has been concern in recent months over the behaviour of agricultural prices particularly of edible oils. In spite of a bumper harvest agricultural prices are ruling much higher than after the poor harvest of 1976- 77. Massive imports of edible oil have failed to bring down prices and the mustard oil price control order has failed miserably to give the consumer his requirements at the specified rate. There has been a feeling that a considerable amount of black money has gone to finance hoarding and speculation. The demonetisation of high denomination currency notes will hit black money hard.”
An analysis of the move was written by Jay Dubashi in one of India Today’s February editions. Dubashi reported that the ordinance had a ripple effect on other markets such as gold and diamond where prices slumped by 5 to 10% within a week. In addition, the old notes were going at 70% discount in Bombay’s Zaveri Bazar.
In his report, Dubashi wrote:
“Politics apart, the demonetization is unlikely to curb black money in circulation, for the simple reason that no one really knows how much black money there is in circulation and, even more important, whether black money can really be defined in precise terms in all its shades.”
I.G Patel was governor of RBI when the ordinance was promulgated in 1978. He was not happy about the government move.
“Mostly Economics” quotes the relevant part from Patel’s memoirs which are as follows.
“such an exercise seldom produces striking results. Most people who accept illegal gratification or are otherwise the recipients of black money do not keep their ill-gotten earnings in the form of currency for long. The idea that black money or wealth is held in the form of notes tucked away in suit cases or pillow cases is naïve. And in any case, even those who are caught napping—or waiting—will have the chance to convert the notes through paid agents as some provision has to be made to convert at par notes tendered in small amounts for which explanations cannot be reasonably sought. But the gesture had to be made, and produced much work and little gain.”
1978 demonetisation law not unreasonable, SC
Mumbai: The last time the Centre demonetized high denomination notes, nearly four decades ago, it also resulted in a challenge to its validity. A challenge the Supreme Court dismissed two decades ago as being "wholly misconceived".
The High Denomination Bank Notes (Demonetisation) Act, which replaced an ordinance, was brought into effect early 1978. Its validity was assailed in 1979, on grounds that it impinged on the fundamental right to trade and as it stood then, to property. In 1996, a five-judge Constitution bench of the SC upheld it as a valid legislation. "It can't be said it was not enacted for public purpose," a bench of Justices Kuldip Singh, M M Punchhi, N P Singh, M K Mukherjee and S S Ahmad had said. There was no dissenting judgement.
"From the preamble it was manifest that the Act was passed to avoid the grave menace of unaccounted money, which had resulted not only in affecting seriously the economy of the country but had also deprived the state exchequer of vast amounts of its revenue," said the ruling authored by Justice Mukherjee.
The objective in the gazetted notification to scrap Rs 500 and Rs 1,000 notes from November 9 is similar.
The SC had rejected a challenge of unreasonableness to the limited seven-day deadline then, for exchange of old high denomination notes—defined as those with a value of Rs 1,000, 5,000 and 10,000, that had been rendered illegal tender from January 16, 1978.
The SC referred to the Reserve Bank of India (RBI) Act of 1934 which empowers the RBI to issue bank notes and imposes an obligation on it to exchange those notes, as legal tender. Section 26 of the Act allows the Centre to notify any series of bank notes to cease to be legal tender. The arguments centred around provisions for exchange of notes, as refusal by banks violated their fundamental and legal rights, the petitioners J R Shah and others claimed. People had to submit their cash by January 19 or latest by January 24. But the SC held, "after compulsory acquisition under the Act, their "rights thereto stood extinguished. "Equally untenable is the contention that they were deprived of right to compensation for such acquisition since the Act laid down "elaborate procedure to apply and obtain equal value of the notes held.
Any extension of time to tender money to banks for exchange would "defeat the very purpose of the Act of banning circulation and transfer of the notes.
Senior advocate Rajiv Kumar in Mumbai said, "Demonetisation is a valid law but it needs to be brought in as a financial policy every five yearly basis. That would deter a parallel economy and more significantly reduce hardships to the common man, caught up in a move targeted at hoarders.
Unlike in 1978, the scrapped notes are available even with the masses. The RBI pegs Rs 500 notes in circulation at 16.5 billion and Rs 1000 notes at 6 billion. While the Centre has assured a review after 15 days on the exchange of currency, solicitor Ashok Paranjpe said, "in view of the huge quantum, it would be helpful if time is extended to avoid the huge inconvenience being caused to general public.
1946 and 2016: Stories from the past
Manimugdha Sharma, 2016 vs 1946: Tale of two notebandis, Dec 11 2016 : The Times of India
From long queues to heart attacks, the two demonetisations have a lot in common
On November 7, a young man in Kanpur received Rs 70 lakh in Rs 500 and Rs 1,000 notes as advance for a plot of land he was selling. On November 8, as Prime Minister Narendra Modi announced demonetisation, the man had a cardiac arrest and died.
Seventy years ago, on January 12, 1946, a 40-year-old woman died of heart failure in Karachi, then a commercial hub of British India. She had saved up Rs 10 lakh in 1,000-rupee notes, rendered invalid by the Government of India's High Denomination Bank Notes (Demonetisation) Ordinance, according to a Times of India report on January 14, 1946.
For a few weeks after that move, there were several reports in the Indian press on never-ending queues outside banks, on how the Raj move against `black capitalists' was bound to fail as they would invest in gold bullion and real estate, and how Britain and Australia had done it without causing much hardship to their citizens.
The similarities between the two demonetisation exercises and the impact they had on people's lives are striking. Indeed, if you were to read TOI's coverage during the period, you might wonder if it's talking about 1946 or 2016.
MAKING NEWS
In the edition dated January 19, 1946, TOI said “there was a Gilbertian wit and wisdom“ behind the move, while arguing the costs and benefits of it. Our editorial dated January 25, 1946, took a balanced view: “The main grounds of criticism are that the step was taken after much black market money had already found refuge in gold, securities, jewellery, and land...It is felt that by splitting up their holdings, some of the largest note hoarders may escape without a trace. There is an element of truth in that criticism.“
In Bombay alone, it was estimated that 80,000 people had their savings in Rs 1,000 notes. The number was far greater for those having Rs 500 notes.But unlike now, the move wasn't projected as a great masterstroke to end “black capitalism“. “It has never been claimed that demonetisation was a specific cure for the black markets...big notes and black markets go together,“ the TOI editorial had said then. Several letters to the editor showed that people were quite happy that the illgotten wealth of the rich would be rendered useless. The Congress had criticised the move even then. Dr Rajendra Prasad spoke to the press on behalf of the Congress Working Committee. “I do not know how far and to what extent the new ordinance will be able to affect the persons for whom it is intended. One thing is clear. A large number of people belonging to the middle and lower middle classes will be hit hard on account of the demonetisation of currency notes of the value of Rs 500 and Rs 1,000,“ Prasad said (TOI, January 16, 1946).
He added, “While we, Congressmen, have no sympathy for profiteers and dealers in the black market, it is not right to penalise honest people who in good faith have their savings in notes of demonetised value.“
As it turned out, this big-bang move to curb the shadow economy didn't quite succeed. Black-marketeering thrived in the run-up to Partition and Independence.
TWIN DEMONS
Incidentally, demonetisation in 1946 came close on the heels of large-scale demobilisation of the armed forces. Post World War II, growth slumped, jobs became scarce and there was a food crisis. Between 1939 and 1945, the colonial state had recruited over 2.5 million people for war service. These men had to be released from military service after the war, adding to the swelling ranks of the unemployed. Military historian and Delhi University professor Anirudh Deshpande has narrated how the Raj bungled up the demobilisation exercise in his book, Hope and Despair: Mutiny , Rebellion and Death in India, 1946.
According to Deshpande, demobilisation in the Royal Indian Navy, in particular, was shoddily done. In February 1946, a little over a month after the demonetisation exercise, the navy rose in revolt. Soon, trade union and peasant revolts broke out in the country.The British used brute force to crush the rebellion.
See Royal Indian Navy (RIN): 1946 uprising
Demonetisation added to the post-war economic distress of the people. The political instability that followed tore their lives apart. In the summer of 1946, the country was gripped by horrifying communal riots. And the road to Independence became a slippery slope that hurtled India towards Partition.
Debate on demonetisation between 1978 and 2015
Economic Times had recommended demonetisation before it actually took place in 2016. See below.
Against: Finance ministry committee, 2012
A high-level finance ministry committee, set up to suggest measures to track black money in the country and abroad, had in its report in 2012 opposed demonetisation of Rs 500 and Rs 1,000 notes and said it was not a solution to trace illicit wealth which was largely held in the form of benami property , bullion and jewellery . The previous two attempts at demonetisation only had partial success with just 15% of high currency notes coming back into the system, the panel had said.
The committee, which was headed by chairman of the Central Board of Direct Taxes and had director general (DG), currencies, as its member, had observed that such measures would only have an adverse impact on the banking system.
“Demonetisation undertaken twice in the past (1946 and 1978) miserably failed, with less than 15% of high currency notes being exchanged, while more than 85% of currency notes never surfaced as the owners suspected penal action by government agencies,“ the report had said. The committee was constituted in view of civil society unrest in 2011 and against the backdrop of a series of CAG reports on “loss to the exchequer“ on account of government policies benefitting corporate houses.
The DG, currencies, pointed to the huge economic cost of demonetising higher denomination notes and observed that “it was not a feasible idea“.
“Further, demonetisation will only increase the cost, as more currency notes may have to be printed for disbursing the same amount. It may also have an adverse impact on the banking system, mainly logistic issues,“ the report had said. The panel had also said that huge amounts of black money was invested in real estate and it was difficult to detect this.
For: ET/ Nathan: ‘Withdraw Rs 500/ 1,000 notes’ / May 2016
This article had asked the government to withdraw Rs 500 and Rs 1,000 currency notes six months before the actual demonetisation.
Increased currency in circulation is a burning issue we are facing now. As on April 29, 2016, total value of currency in circulation has reached Rs 16.50 lakh crore, an increase of 15.32% compared to same period last year. This 15% plus yoy growth is happening continuously for the last 2 months now, something not seen after July 2011.
There are several theories explaining this spike. The first theory states that it is because of the just completed assembly elections in five states. But a close look at currency in circulation data will reveal that the increase is more gradual and therefore, these elections are not the main reason behind this spike. More importantly, there were bigger elections earlier and the currency circulation was smaller then. For example, currency in circulation now is 27.55% more than 2 years back, when national election was going on.
Increased banking restriction may be another reason for this. For example, you need to furnish PAN details now for depositing more than Rs 50,000 in cash. Due to this, black money stays outside the banking system. Co-operative banks used to be a safe haven for tax evasion because they were exempt from deducting TDS on deposit by members. Now they have to deduct TDS for everyone, including its members.
Since black money can’t be used for buying financial assets, the same is used for purchasing mostly real estate and gold. The cash component is still very high in real estate transactions. The government’s efforts to tackle gold import by imposing 10% import duty compounded the problems further. Though official gold import figures have come down, a large part of that shifted to smuggled route. Foreign payment for smuggled gold can’t happen through official banking channel and has to be either smuggled cash or through some other stuffs smuggled outside. Similarly, from smuggling point to the end consumer, transactions have to happen in cash.
Situation has come to such level that this has started hurting bank’s deposit growth. So what should the government do? No need to dilute anti-money laundering measures because they are in right directions. Reducing gold import duty is one solution as it will reduce gold smuggling and resultant need for cash transactions.
Since more than 80% of money in circulation are through Rs 500 and Rs 1,000 notes, the best solution to this problem is the withdrawal of these notes from circulation. How will it benefit? First, withdrawal of Rs 500 and Rs 1000 rupee notes will result in immediate unearthing of black money. This is because people who are hoarding black cash currency will be forced to come to banking system for converting.
Second, withdrawal of high denomination notes w ill help to reduce black money generation in future. This is because it will become difficult to deal in cash, especially for large deals that runs into crores. Smuggling of Indian currency outside also become really difficult. This is very important for our national security also because terror outfits usually use smuggling and black money route for financing. Major economies have already started taking steps in this direction. Only recently, the European Central Bank has decided to stop printing Euro 500 bank notes, popularly known as ‘Bin Laden notes’, because of its association with money laundering and terror financing.
2016: Demonetisation of Rs. 500 and Rs 1000 notes
Black Out? Rs 500, 1000 Notes No Longer Valid, Nov 09 2016 : The Times of India
i) thwart Pakistan’s attempts to subvert the Indian rupee (by printing counterfeit Indian currency of high denominations like Rs. 500 and Rs.1,000), and
ii)render useless the illegal cash that political parties had collected and stowed away.
The Times of India
The Times of India
The anticipation built up after PM Narendra Modi met the service chiefs to review the India-Pakistan security situation and news filtered out that he would address the nation. But it was a surgical strike of a different kind, with Modi delivering a stunning surprise by scrapping Rs 1,000 and Rs 500 notes and calling for a “decisive war“ against corruption, black money and terrorism.
“There is a need for a decisive war against the menace of corruption, black money and terrorism...festering wounds which make the country and society hollow from within,“ the PM said in a TV address, his first, to the nation. The decision comes in the backdrop of a fierce political fight over black money with opposition parties claiming Modi has failed to deliver on his pledge to combat black money .
“From the midnight of November 8, Rs 500 and Rs 1,000 will not be legal tender...these will be just worthless pieces of paper,“ Modi said in his 40-minute speech. He said this was being done to combat graft and terror funding. The two high-value notes account for nearly one-fourth of all the notes in circulation. In value terms, however, their share was over 86% as of the end of March.
The PM also said new notes of Rs 2,000 and Rs 500 will be introduced but those being currently held will have to be exchanged at banks. But this is subject to limits and rules out the possibility of large exchanges of illegal stash as these will need to be explained and accounted for. Pitching the decision as a much needed antidote to stamp out the menace of corruption and terror funding, the PM said “Black money and corruption are the biggest obstacles in eradicating poverty...Have you ever thought how these terrorists get their money? Enemies from across the border have run their operations using fake currency notes.“
Describing illegal finan cial activities as the “biggest blot“, Modi said that despite several steps taken by his government over the last twoand-a-half years, India's global ranking on corruption had moved only to 76th position from 100th earlier.
According to the finance ministry , the total number of bank notes in circulation rose by 40% between 2011 and 2016, while the increase in number of notes of Rs 500 denomination was 76% and for Rs 1,000 denomination was 109%.
The World Bank in July 2010 estimated the size of In dia's shadow economy at 20.7% of GDP in 1999, rising to 23.2% in 2007. “A parallel shadow economy corrodes and eats into the vitals of the country's economy ,“ a finance ministry statement said. BLACK OUT? P 2, 13, 14, 15, 25, 29 & 30 It (a parallel shadow econo my) generates inflation, which adversely affects the poor and the middle classes more than others. It deprives government of its legitimate revenues which could have been otherwise used for welfare and development activities,“ a finance ministry statement said.
The move could have political ramifications in the forthcoming state elections as it impacts the capacity of parties to spend unaccounted cash for campaigning and various political payments. ATM withdrawals will be restricted to Rs 2,000 per day and withdrawals from bank accounts will be limited to Rs 10,000 a day and Rs 20,000 a week. Banks will remain closed on Wednesday and ATMs will also not function for the next two days, Modi said.
Apart from depositing money in bank accounts, Rs 500 and Rs 1,000 notes can also be changed for lower denomination currency notes at designated banks and post offices on production of valid government identity cards like PAN, Aadhaar and election card from November 10 to November 24 with a daily limit of Rs 4,000.
The demonetised currency notes will remain valid for transactions like booking of air tickets, railway and government bus journeys and hospitals till midnight of November 11 and 12. The RBI and the finance ministry have set up helplines to answer questions.
The background
The Hindu, November 9, 2016
RBI board had approved production of Rs. 2,000 denomination notes long ago, say officials
The government’s move to scrap nearly 23.2 billion high-value currency notes of Rs. 500 and Rs. 1,000, was in the pipeline for several months but was kept tightly under wraps, with just a handful of officials in the know.
The Reserve Bank of India’s central board had approved the production of the Rs. 2,000 notes several months ago and even began production of the new Rs. 500 and Rs. 2,000 notes, which are to be issued from November 10 a few months ago.
System ready
“The timing [of the announcement by the Prime Minister] was appropriately chosen as we should be ready with adequate number of notes to replace the existing ones. We had ramped up production in the past few months of the new notes, and hence, it was decided to do it now as we can provide more of them in the weeks and days to come,” said RBI governor Urjit Patel at a briefing.
Security concerns
The case for introducing new notes followed prolonged deliberations within the top echelons of government, based on inputs from security agencies and the central bank.
“There’s been no breach of security features of our notes. But for ordinary citizens, it is often difficult to tell a genuine note from a fake. There’s now a confluence of thought between the government and the Reserve Bank of India. Multiple objectives can be met so this led us to withdraw the legal tender character of Rs. 500 and Rs. 1,000 notes,” Mr Patel pointed out.
Mr. Das said the bold and decisive step to fight black money and the use of fake currency notes to finance terrorism was backed by analysis of India’s currency trends.
‘Disproportionate rise’
“Statistics show that high denomination currency in circulation has risen sharply between 2011 and 2015. When all currency notes grew 40 per cent, Rs. 500 notes in circulation rose by 76 per cent and Rs. 1000 notes went up by 109 per cent. But during this period, the economy expanded by 30 per cent so the circulation of such notes had gone up disproportionately,” he said.
“The long shadow of the ghost economy has to go for the real economy to grow. This will add to our economy’s strength,” Mr. Das stressed.
2016: Preparations began in Jan, decision on May 27
RBI, govt were in touch over note ban since Jan 2016, Jan 19, 2017: The Times of India
Demonetisation Decision Taken Around May 27
The Reserve Bank of India and the government were in regular touch over the demonetisation of Rs 500 and Rs 1,000 notes and printing of a new series of no tes since January 2016, the central bank and senior officials told a parliamentary committee.
In his comments before the standing committee on finance, RBI governor Urjit Patel said consultations were held but no minutes were maintained to ensure that secrecy was not compromised. The actual decision was taken around May 27, 2016.
Finance ministry officials and Patel said discussions on demonetisation were held, countering suggestions that the RBI recommended demonetisation after being prodded by the government just ahead of the November 8 announcement by the PM. RBI governor Urjit Patel also informed the parlia mentary committee that of the Rs 15.44 lakh crore that was demonetised, Rs 9.2 lakh crore had been replaced by way of new currency notes.
BJP member Nishikant Dubey is understood to have suggested that the RBI could produce travel details of its officials and other records to confirm that the discussions with the government did indeed take place. Patel said he was not in a position to respond to questions whether deposits below a threshold would not be investigated. He was asked about the central bank's autonomy as well in the context of the demonetisation decision.
Patel's comments on interactions with the government elaborated on the background note that the central bank had provided the committee. “It occurred to the government and the RBI that the introduction of new series of notes could provide a very rare and profound opportunity to tackle all three problems of counterfeiting, terrorist financing and black money by demonetising bank notes of Rs 500 and Rs 1,000 or by withdrawing legal tender status of such notes,“ the bank said. The large number of questions posed by members, said sources, made it difficult for officials and the governor to respond in length. Some members felt unhappy that Patel could not provide clear-cut answers on how much scrapped currency was deposited with banks by the December 30 deadline. Patel said he could not offer clarity as “physical counting“ of the currency was still in progress. Similarly, on the issue of when normal banking would be re stored, Patel said he hoped this would be soon and that ATMs were nearly back to their previous status.
Congress's Jyotiraditya Scindia, BSP's Satish Misra and TMC's Saugata Roy asked several questions.
Six months’ preparation
RBI got 6 months to prepare for this, Nov 09 2016 : The Times of India
Around six months ago [around May 2016], the government asked the RBI to prepare for its latest assault on black money , and told the currency manager to print more Rs 50 and Rs 100 notes, with PM Modi having decided to phase out the current lot of Rs 500 and Rs 1,000 notes earlier this year.
After all the task was hu mongous: replacing 23 billion notes.Besides, the information had to be kept confidential at all costs.
In any case, apart from the PM, only finance minister Arun Jaitley knew, and two senior officers each in the finance ministry and the RBI were in the loop.
The six months were used not just to print enough Rs 50 and Rs 100 currency notes, but also to plan the operations meticulously . This meant that, on Tuesday 8 Nov 2016, the Reserve Bank of India initiated the first “public“ move when its board met around 6pm and recommended the withdrawal of Rs 500 and Rs 1,000 notes. Soon, the government, which was ready with the notification, moved the Cabinet, which met at 6.30pm on Tuesday . The decision was taken and the PM went on air to announce the first demonetisation in 38 years.
The government's calculation was simple. It sees major gains accruing to the economy , beginning with an immediate halt to black money transac tions -at least in the near run. This is ex pected to force peo ple to use only legal channels, which will result in higher tax es in the govern ment's kitty .
While those showing “agricultu ral income“ can still use a possible loop transact in cash, the hole to transact in cash, the window is seen to be limited and the government expects bulk of the funds to flow into the banking system. This itself is going to provide more boost for lending, which has remained subdued, a senior government official said. “We have hastened the printing of these notes,“ RBI governor Urjit Patel said.
Designs approved on May 19, 2016
New note designs got RBI nod in May, 2016: Jan 25, 2017: The Times of India
The design of new banknotes of Rs 500 and Rs 2,000 denominations was approved at the May 19, 2016 meeting of the Central Board of RBI, an RTI query has revealed.
In his application, city-based activist Jeetendra Ghadge had sought the exact date of the approval of the design of new bills. “The new design of the bank notes was approved by the central board of RBI in its meeting held on May 19, 2016,“ the central public information officer of RBI stated in the response.
As per the Reserve Bank of India Act, 1934, general superintendence and direction of the Bank's affairs are taken care of by the central board of directors, a body headed by the governor of the RBI. Raghuram Rajan was governor of the apex bank during September 2013-September 2016.
RBI cited section 8(1)(a) of RTI Act to refuse information to Ghadge, who had sought to know exact date of the first meeting held at the apex bank with the agenda to print new currency notes of Rs 500 and Rs 2,000 denominations, and the exact date for the order allowing their printing. Ghadge, on Tuesday , said the RBI and its Governor need to come clean on the entire process of demonetisation “so that responsibility could be fixed and the common people's trust is maintained.“ Demonetisation of old Rs 500 and Rs 1,000 bills was announced by PM Narendra Modi on November 8 last year.
Rs 2000 notes' value with the RBI on November 8, 2016: Rs 4.98 lakh
The Times of India, Dec 20 2016
RBI had just Rs 5L cr in new notes on Nov 8
An RTI query has revealed that the Reserve Bank of India (RBI) only had around Rs 4.95 lakh crore in the new Rs 2,000 notes when the demonetisation decision was announced. An estimated Rs 15.44 lakh crore was in circulation in the old Rs 500 and Rs 1,000 notes on November 8. According to RTI activist Anil Galgali, the RBI's Rs 2,000 notes accounted for less than one-fourth of the value of its own stock of the old notes. On that day , the RBI had Rs 20.51lakh crore in the old Rs 500 and Rs 1,000 notes.
“As per the RTI reply by RBI PIO Suman Rai, it is clear that the government was well aware of the gamble it was taking on a decision that had the potential to wreak havoc on the lives of 125 crore Indians,“ Galgali said.
How currency ban was kept a secret
Ban on currency: How it was kept a secret TNN | Nov 10, 2016 The Times of India
- The ministers who attended the Cabinet meeting on Tuesday had to stay back till PM's address to the nation was over
- This was to ensure that there was no premature leak of the plan to scrap Rs 500 and Rs 1,000 notes
- Members of the Reserve Bank of India board too left only after Modi's speech
NEW DELHI: The ministers who attended the Cabinet meeting on Tuesday evening had to stay back till PM Narendra Modi's televised address to the nation was over, in order to ensure that there was no premature leak, even by a few minutes, of the plan to scrap Rs 500 and Rs 1,000 notes.
The demonetisation plan+ , the best kept secret in the power corridors of the national capital, was a tightly policed affair with only a handful of top officials privy to the move. Apart from ministers at the Cabinet meeting who had to remain in quarantine for a while, members of the Reserve Bank of India (RBI) board too left only after Modi's speech.
Sources said the official agenda for the Cabinet meeting on Tuesday was a deceptive string of MoUs between India and Japan, and even ministers were not aware about the proposal to ban high value currency notes.
"We just got some indication 10 minutes before the meeting started. It was a bold step by government. All ministers remained in the meeting hall from 6.45pm to 9pm until the PM's address to the nation ended," a minister said.
The Cabinet meeting ended around 7.30pm and the PM went to meet the President to inform him about the decision. "All ministers remained in the meeting hall.The PM held another meeting with three senior ministers later, which went on till late night," a source said.
It's worth mentioning that only a few weeks ago, the cabinet secretariat had issued a circular, to personal staff of all ministers, advising ministers not to carry mobile phones to the Cabinet meeting+ . "So, there was no scope of the information going out," said a source.
The government had also planned the timing of the Cabinet meeting. It was moved to the late evening slot and the RBI board also met around the same time. Sources said this was done to ensure that the news did not leak out.
Bankers Got Just A Few Hours To Mount Operation
10 Days On, They Reveal How Secret It All Was
Prime Minister Narendra Modi maintained such a deep level of secrecy in executing the decision to demonetise two high-value denominiations, that even the top bankers of the country had no idea about the move till he went on air at 8pm on November 8 to announce the decision to the world.
In the first week of November, RBI officials informed the chairpersons and MDs of all the top banks in India about a meeting at the central bank's headquarters in south Mumbai scheduled for 7pm on November 8. Uncharacteristically , the RBI didn't specify any particular agenda for the meeting, two bankers said. Usually , the central bank gives some notice to bankers when they are called for a meeting since it wants them to come prepared. On the day of the meeting, convened on the 15th floor of the RBI's Mint Street headquarters, all the top bankers of India, each with more than three decades of experience in the sector, were in attendance. The meeting started with RBI officials mainly discussing the situation pertaining to non-performing assets in the banking sector, a hot topic for the sector until that day.They discussed some other issues as well. Just before 8pm, RBI officials switched on the TVs in the room. They said that the PM would be on air soon, and they would continue the discussion after his speech, the bankers told TOI.
Until the time the PM had announced that India was scrapping Rs 500 and Rs 1,000 notes in less than four hours, none of the top bankers had any clue that the next few days would be their careers' most challenging.
“Basically it was as much of a surprise to us as to anybody else,“ said SBI chairperson Arundhati Bhattacharya. After the PM ended his speech, the bankers wanted to leave immediately and start work.
“The mood (with everyone present) was just to get out of the place and get things in place. We had to get out quickly to tell our people to switch off the ATMs by midnight; about the evacuation the next day, which was a huge exercise, then to take care of the recalibration; in the branches, what would be the instructions because there was to be exchanges, Rs 10,000 withdrawals etc,“ the SBI chief added.
However, the RBI deputy governors listed out what was expected of them and the bankers scrambled to meet their teams. The SBI chairperson, along with others, left the meeting between 9.30pm and 9.45pm.
By the time she reached her home at Malabar Hills around 10pm, she had called some of the top SBI officials to her bungalow. Soon enough, the meeting started and went on until the early hours. The next three days proved to be a tough challenge for the banking veterans, but they say that things have since started to fall in place.
Cost to RBI
The Hindu, November 9, 2016
New notes to cost RBI more than Rs. 12,000 crore
Sharad Raghavan
By removing the Rs. 1,000 note, the government is doing away with the cheapest note to print in relation to the face value of the note.
Replacing all the Rs. 500 and Rs. 1,000 denomination notes with other denominations, as ordered by the government, could cost the Reserve Bank of India at least Rs. 12,000 crore, based on the number of notes in circulation and the cost incurred in printing them.
Data from a Right to Information answer by the RBI in 2012 shows that it costs Rs. 2.50 to print each Rs. 500 denomination note, and Rs. 3.17 to print a Rs. 1,000 note.
That means that it cost the central bank Rs. 3,917 crore to print the 1,567 crore Rs. 500 notes in circulation, and Rs. 2,000 crore to print the 632 crore Rs. 1,000 notes in circulation currently.
Assuming that the new Rs. 500 notes cost the same to print, then that is an additional Rs. 3,917 crore spent in simply maintaining the same number of notes in circulation.
The new Rs. 2,000 notes are likely to cost about the same or a little more than the Rs. 1,000 notes, which means an additional cost of Rs. 2,000 crore to print them.
In total, removing the old notes and replacing them with the new Rs. 500 and Rs. 2,000 notes will cost the central bank a total of at least Rs. 12,000 crore. This figure is likely to go up since additional security measures, which the new notes are set to have, will only add to the cost of printing.
By removing the Rs. 1,000 note, the government is doing away with the cheapest note to print in relation to the face value of the note.
Highest cost
The Rs. 3.17 it costs to print a Rs. 1,000 note is the highest in absolute terms across denominations, but it is the lowest when compared to the face value of the note.
For example, a Rs. 10 note costs only Rs. 0.48 to print, but that works out to 9.6 per cent of the face value of the note. Printing a Rs. 10 note costs 10 per cent of what that note is worth. This, for a Rs. 1,000 note, is 0.3 per cent.
Nashik mint goes into printing overdrive
The Currency Note Press (CNP), Nashik, has dis patched 74 million pieces of currency notes of Rs 500, Rs 100 and Rs 20 denominations to Reserve Bank of India (RBI) in just two days, on Monday and Tuesday .
Of the 74 million notes, 13 million are of Rs 500 denomi nation, 31million of Rs 100, and the remaining 30 million are of Rs 20 denomination, sources from the CNP told TOI. The CNP had sent five million pie ces of new currency notes of Rs 500 to RBI on Friday too.
The CNP, which is one of the nine units of the Security Printing and Minting Corpo ration of India Ltd (SPMCIL), is printing cur rency notes of all denomina tions, except the new Rs 2,000 note. “We despatched 37 mil lion currency notes on Mon day and the same quantity on Tuesday ,“ an official said “We are taking efforts to print maximum number of notes of Rs 500, Rs 100 and Rs 20. On an average, 16 million notes are being printed daily .“
The government scrapped the currency notes of Rs 500 and Rs 1,000 with effect from Tuesday midnight. Although the Rs 2,000 currency notes have come into circulation, the new Rs 500 notes are expected in the market shortly . The RBI is printing Rs 2,000 and Rs 500 notes at its two printing units in Mysore in Karnataka and Salboni in West Bengal, while SPMCIL is printing Rs 500 notes at its presses in Nashik and Dewas in Madhya Pradesh.
2016: the impact
Summing up the impact, 3 months later
The concerns of its legion of critics have all been proven plain wrong
Whatever else supporters and critics of the Indian government's demonetisation exercise may disagree on, everyone will agree that the decision by Prime Minister Narendra Modi, on 8 November 2016, to remove from legal tender high denomination notes (HDNs) accounting for about 86% of the currency stock in value terms was a bold and unprecedented move. Indeed, it is arguably one of the great economic experiments in modern history and will be studied for years to come.
Given the disputes about the measure's wisdom and success, however, it is time to take stock of what was said in the aftermath of 8 November and what has actually transpired since then.
With no compelling precedent for such a move in a growing and stable economy , not one suffering hyperinflation it was no surprise that most commentators failed to grasp its implications and many got it plain wrong.
Take just three frequently repeated assertions.
First, many well-known economists argued that there would be a precipitous drop in GDP growth, the reasoning evidently being that the temporary liquidity crunch caused by demonetisation followed by slow “remonetisation“ would severely affect cash-dependent sectors of the economy , leading presumably to a drop in aggregate demand and hence in GDP growth.
Second, it was suggested that, if the intention was to detect and destroy “black money“, most of this money would escape the trap as large black money holders would find small, and presumably poorer, depositors as “mules“ to deposit money on their behalf and eventually exchange these deposits for new notes. It was argued that we would largely see small deposits below the announced legal threshold for scrutiny with little black money detected and confiscated through this exercise.
Third, it was argued that demonetisation would prove a political disaster for the Modi government, with the populace angered at having to wait in long queues to redeem their old notes into new notes and with ATMs short of cash in the month or so following 8 November.
But the doomsayers were to be proven wrong.
First, GDP growth in the third quarter, October-December 2016, the period during which demonetisation occurred, has shown only a modest dip (from projections made in advance of 8 November) of roughly one half of a percentage point.This is hardly the economic disaster that the critics had imagined.
Indeed, we were perhaps among a small minority of economists who had argued explicitly that, contrary to this emerging consensus, demonetisation could, paradoxically , be expansionary rather than contractionary , or, in any case, that the contractionary impact could be much less than commonly believed. Additionally , the take-up of digital payments, the emergence of informal credit arrangements between sellers and consumers, and the fast pace of remonetisation all together assured that the economy did not contract as much as was widely feared.
Second, data presented to Parliament on 1 February during the Union Budget speech by finance minister Arun Jaitley suggests that very many large deposits were made in the aftermath of 8 November.In particular, deposits exceeding Rs 80 lakh were made into 1.48 lakh accounts, with an average deposit of Rs 3.31 crore (thus accounting for around 5 trillion rupees or about a third of the currency in circulation). Smaller, but still quite significant and potentially taxable, deposits in the Rs 2 lakh 80 lakh range accounted for another 5 trillion rupees.
Taken together these deposits accounted for about two thirds of the currency in circulation. Notwithstanding the multiple instances of malpractice and corruption at retail banks that have been exposed, these figures belie the narrative of clever money launderers circumventing potential taxation altogether through “benami“ deposits.
Third, BJP's success in recent state elections, most notably its thundering rout of all of the other parties in Uttar Pradesh, demolished the notion that there was a political price to be paid for the pain allegedly caused by the “despotic“ demonetisation. Nothing succeeds like success; and the prime minister was clearly vindicated politically in the eyes of many voters, and, belatedly, the witless commenting class some of whom had even resorted to ad hominem attacks against us in the absence of serious counter-arguments.
Finally , it was argued by Harvard economist, Kenneth Rogoff (an MIT student of Bhagwati), that demonetisation could have been pursued gradually with the slow elimination of HDNs, planned over a seven-year period.
If the elimination of HDNs was a goal in itself, this may perhaps have been the ideal approach, but surely this was not the case in India where corruption, tax evasion and the accumulation of black wealth were instead the primary targets.Rogoff 's concern that the Indian system lacked the logistical capability to implement demonetisation has also proven unfounded: RBI succeeded in remonetising the entire system in less than a couple of months, for which Governor Urjit Patel and his team deserve enormous credit.
Macbeth's great soliloquy (Act V , Scene 5) ends with these immortal lines: “It is a tale Told by an idiot, full of sound and fury Signifying nothing.“
The same may be said of much of the commentary on demonetisation.
Jagdish Bhagwati, Vivek Dehejia and Pravin Krishna are, respectively, University Professor at Columbia University; Resident Senior Fellow at IDFC Institute; and Deputy Director of the Raj Center on Indian Economic Policies at Columbia University
The first few days’ impact
The demonetisation of Re.500 and Re.1,000 notes was announced on Tuesday 8 Nov. 2016. It impact began to be felt the next day itself. The following items from
The Times of India of 12, 14, 15 Nov 2016 chronicle the immediate, three-day impact of the action taken by the government.
ADVANCE PAYMENTS First, many employers have begun to pay their staff in advance -in some instances, salaries for the next one year -in cash. The tendency to pay employees in advance has been noticed in many private educational institutions, which mostly pay their staff in cash, said a source.These staffers will deposit this advance salary in their bank accounts.
Second, some traders are depositing their cash as business revenue to be shown as sales done before November 8 (the day of the ban) but payment received thereafter. Others, particularly wholesale traders, are reporting cash-in-hand in their ledgers to legitimise unaccounted for cash, and having it deposited at a later date. (Day 3)
BANKS SBI gets one month's deposits in one day
Demonetisation: Banks Get Rs 60K Cr In 2 Days
Banks have received nearly Rs 60,000 crore in deposits following the withdrawal of Rs 500 and Rs 1,000 currency notes. SBI alone has raised about Rs 39,677 crore in deposits following the withdrawal of high denomination notes. Bankers expect the surge in deposits to bring down interest rates.
“We have received deposits of Rs 11,000 crore in savings accounts in one day .Normally , it takes a month to mobilise Rs 8,000 crore of savings deposits,“ said SBI chairman Arundhati Bhattacharya, while announcing the results on Friday afternoon.
At the end of the day , the bank said that the collections on Friday amounted to Rs 17,527 crore on the back of Rs 22,150 crore on Thursday . For exchange, the country's largest bank received Rs 723 crore worth of notes on Thursday and another Rs 943 crore on Friday .
According to Bhattacharya, demonetisation tends to have a deflationary impact.Also, the surge in low-cost deposits will bring down the bank's cost of funds.
Taken together, both measures would help bring down interest rates. Before demonetisation, the public held around Rs 14 lakh crore in Rs 500 and Rs 1,000 currency notes. These notes have to be exchanged or deposited in banks and post offices. (Day 3)
5th day: The total cash deposited in banks since the announcement of the withdrawal of the old Rs 500 and Rs 1,000 notes has crossed Rs 1.5 lakh crore, according to estimates received from different banks. SBI received total cash deposits of Rs 75,945 crore and exchanged currency worth Rs 3,753 crore.Against this, there had been withdrawals of Rs 7,705 crore in currency notes of Rs 100 and Rs 2,000 till the 5th day .
CARS Delhi has seen about 70% dip in registration of new vehicles in the past three days. On average, 1,500 vehicles are registered every day in the city. This number has come down drastically since November 8.
Sources said dealers, who also register vehicles in Delhi, had reported a similar drop in the number of registrations. “Some registrations are taking place but the number is minuscule. Registrations have almost stopped in the 13 RTOs in the city ,“ added the official. (Day 3)
JAN DHAN Dead since birth, Jan Dhan a|cs now flush with cash
A large amount of cash has suddenly started flowing into previously inactive Jan Dhan accounts.
The Jan Dhan Yojana was launched in August 2014 with an aim to bring the poor into the fold of banking facilities, and empower them financially by encouraging savings, and easing loan delivery and direct cash transfer.
Accounts opened at the time but not used so far have overnight turned flush with funds. Many such accounts, which held only Re 1or Rs 2 till November 8, now have up to Rs 49,000, the upper limit for deposits that can be done without PAN cards.
A few bank officials told TOI on the condition of anonymity that many accountholders were possibly being exploited by middlemen or the rich to lend their accounts to park cash.
Ajay Agnihotri, manager of State Bank of India's Fatehabad Road branch in Agra, said, “There are around 15,000 Jan Dhan accounts at our branch, and 30% of the account-holders have deposited amounts of up to Rs 49,000 since Thursday (when banks reopened in the wake of the demonetisation announcement). We are quite sure that this percentage will go up in the coming days.“
Another bank official added, “In certain cases, we are quite sure that it is not their money . Gullible persons and those working on a contractual basis in factories are being used by their employers as well as middlemen. However, people should know that the government is tracking all the records and transactions.“
TOI was able to track a few account-holders used for this purpose. One of the victims, who had deposited Rs 49,000, said he was promised Rs 500 in return. He would have to return the rest of the money in some days.
“I was told that if I deposit this amount, my reputation in the bank will go up. The middleman also said he would help me financially in the future,“ he added. (Day 3)
Day 18 Govt: Jan Dhan deposits now Rs 64,252 crore, Nov 26 2016 : The Times of India
Deposits in Jan Dhan accounts [by Day 18] totalled Rs 64,252.15 crore with Uttar Pradesh leading the list with Rs 10,671 crore in these accounts, the government said on Friday . Since the government scrapped high value notes on November 8, nearly 7 lakh new Jan Dhan accounts were opened and the total addition to deposits has been Rs 18,615.55 crore.
Minister of state for finance Santosh Gangwar told the Lok Sabha in a written reply that the number of Jan Dhan accounts totalled 25.58 crore. According to data available on the PMJDY website, there were 25.51 crore accounts as on November 9 with an amount of Rs 45,636.61crore. “Out of 25.58 crore accounts, 5.89 crore accounts (23.02%) are zero balance accounts. PMJDY (Pradhan Mantri Jan Dhan Yojana) scheme allows all account holders the benefits of zero balance accounts,“ Gangwar said citing data up to November 16.
In terms of number of accounts, Bihar followed Uttar Pradesh with 2.62 crore accounts totalling Rs 4,913 crore. West Bengal has 2.44 crore accounts with Rs 7,826 crore and Rajasthan had 1.89 crore accounts with 5,346 crore. Gangwar said all state-run banks have denied giving any instructions to deposit Rs 1 to 2 in the zero balance accounts. Reports had indicated some banks were depositing the token amount to cut their number of zero banalance Jan Dhan accounts.
There has been a surge in deposits in Jan Dhan accounts and the government has said that it is keeping a close watch on any spurt. The limit for deposits have been set at [Rs?] 50,000 in these accounts.
JEWELLERY MEERUT/DELHI/DEHRADUN: With the rumour mill going on overdrive after demonetisation of Rs 500 and Rs 1,000 currency notes on the 1st night, hoarders rushed to jewellery showrooms to convert cash into precious metals. Across Delhi, Mumbai, UP and Uttarakhand, some jewellery shops were seen doing business till late in the night. There was a small queue outside one such shop in Delhi's Green Park Extension at 11.50pm, with no sign of it shutting anytime soon. (Sandeep Rai & Shivani Azad | Did jewellers sell gold to hoarders at Rs 50k/10gm?, TNN | The Times of India Nov 10, 2016)
While jewellers TOI spoke to denied they accepted money that had just been declared illegal, there were reports from various cities — Meerut, Agra, Dehradun, Delhi and Mumbai — that many bullion traders sold gold at a high premium, exceeding the existing market rate of around Rs 30,000 per 10gm.
In Mumbai, the going rate was Rs 37,000-38,000. Reportedly, business in Malad's Natraj Market lasted well into the night with gold rates shooting up to Rs 48,000 per 10gm for a brief period.
Mukesh Mehta, president of India Bullion and Jewellers Association said, "It is true that gold is a safe haven investment at all times. Paper money may let you down, gold will never betray you. Its value can only appreciate. The government's announcement evoked considerable panic among people, and they immediately sought refuge in gold. "
On a daily basis, around 4-5kg in gold ornaments are sold in Uttarakhand, worth Rs 1.5-2 crore, but Gold Association officials, too, were not sure about the amount of precious metals which changed hands on the first night after the demonetisation.
KASHMIR’S STONE-PELTING: Defence minister Manohar Parrikar said [on Day 6 ] that there had been no incidents of stone pelting in the Valley ever since Prime Minister Narendra Modi announced the demonetisation decision. Parrikar also said, "Earlier, there were rates: Rs 500 for stone pelting (on security forces in Kashmir) and Rs 1,000 for doing something else. PM has brought terror funding to zero".
Earlier in the day, news agency ANI had also quoted MHA (Union home ministry) sources as saying that there has been a decline in separatist-instigated violence in the Valley after the surprise demonetisation move.
It is believed that the violence instigated by separatist forces in Kashmir is widely-funded by fake currency notes coming from across the border+ . The intelligence sources had earlier informed the government and the Reserve Bank of India about a mint in Pakistan's Peshawar where fake Indian currency notes were being printed, especially of Rs 500 and Rs 1,000 denominations.
Pakistan's intelligence agency ISI, which oversees the mint, uses organised networks including those run by its clients like Dawood Ibrahim, LeT, besides international criminal networks to push fake currency into India.
In a report to government and RBI, intelligence agencies had claimed a few years ago that Pakistan machinery had achieved "zero-error counterfeit capability" in printing fake Indian notes.
On November 10 2016, The Times of India had reported that intelligence sources have said that the security features on the new notes will be nearly impossible to duplicate for Pakistan and organised criminal networks.
LIQUOR vends from different parts of Delhi reported about 40% dip in sales. (Day 3)
MANDIS Cash low, mandis may close
Biz Slumps, Traders Want To Withdraw 50% Of Daily Sales
A crisis may soon erupt in the city with traders threatening to shut down the wholesale vegetable and fruit markets for a few days unless they are allowed to withdraw at least 50% of their daily sales from banks.
“We haven't been able to pay farmers and labourers for the past three days. Also, sales have suffered because retailers do not have cash to pay us. We have asked the government to allow us to withdraw 50% of our daily sales from banks or we will be forced to close down till the market stabilises,“ Kriplani said.
Business in the mandi slumped by almost 50% on Friday .
Sources said that on Friday several transporters refused to accept cash or cheques. “They said that as petrol pumps were not accepting cash, they would not be able to refuel,“ said a source. This problem was resolved by the evening after the government announced that petrol pumps would continue accepting notes of Rs 500 and Rs 1,000 denomination for another 72 hours.
The problem in the mandi percolated down to the retail market where several vendors had trouble getting stock.While many said that they had taken goods on credit, they were unable to make sufficient sales as customers had run out of cash. (Day 3)
NEWSPAPERS IN MANIPUR to go off stands
Newspapers in Manipur won't hit the stands on Friday [Day 11] as hawkers and distributors are unable to lift their stock after the invalidation of Rs 500 and Rs 1,000 currency notes, forcing publishers to stop publication.
With smaller denomination notes non-existent among hawkers, publishers have been left with no other choice other than stopping printing.
ONLINE VEGETABLE SALES RISE: (Day 7) Gurgaon: Vegetable markets wore a deserted look on Monday. With the cash crunch, people were now buying vegetables and groceries from online and offline departmental stores, using plastic money or ewallets, which has led to a significant rise in the F&B (food and beverages) sales of these players.
Sale of vegetables, in particular, has risen by 30-60% across retailers. A good chunk of it is being attributed to new customers. “We've seen a 35% increase in F&B sales since the demonetisation drive. In the same period, our GMV (gross merchandise volume) of fruits and vegetables has risen by 52%,“ said Prashant Verma, director (marketing) of Grofers, one of the largest online groceries. “This means, not only are more people ordering fruits and vegetables from Grofers, but are also ordering in higher quantities,“ he continued. Gurgaon-based Satvakart has also seen a 60% rise in sale of vegetables and fruits, according to the company's co-founder Rahul Hari. “This step will help convert cash transactions into cashless digital economy and help the economy , as it will bring down cost of handling cash and tax evasion in the long run,“ said Hari.
He added the company has seen a 35% rise in new customers.
POWER BILLS: Gurgaon: It's windfall gain for the Dakshin Haryana Bijli Vitran Nigam (DHBVN) Limited. The government's decision to allow consumers to pay their power bills in defunct currency has filled the discom's coffers with Rs 12 crore. (Day 5)
PROPERTY TAX: Delhi: The three municipal corporations collected over Rs 3 crore as property tax in two days after a public notice was issued that people can utilise Rs 500 and Rs 1,000 notes for payment of property tax till November 14. North Corporation has collected Rs 1.17 crore as property tax while East Corporation has managed to collect Rs 51 lakh. South Corporation has mopped up Rs 2.52 crore, which is the highest among the three civic bodies. As the north and east corporations were going through a severe financial crisis, senior officials claim that the sudden collection will help them carry out development work. Usually, till June 30, people pay property tax the most. (Day 5)
REAL ESTATE: There was a significant decline in the revenue department's collections from registration of property sale deeds in Delhi. Data show that across 11 districts, a total of 674 documents were registered on November 8, resulting in a collection of Rs 6.73 crore. This was the day when the demonetisation was announced. A day later, the collections dipped to nearly half at Rs 3.89 crore.
In stark contrast, the daily revenue collection from registration of documents around Diwali ranged from Rs 5.10 crore to Rs 8.41 crore. On November 4, as many as 970 documents were received and 918 registered. On November 7, too, 842 documents were registered. Since then, it had been all downhill, said officials.(Day 3)
SHOPS Shops down shutters as purchasing power hit
DELHI: Markets across the city continued to wear a deserted look with some even observing a total shutdown on Friday . While traders' associations attribute this to loss of business due to the liquidity crunch, some shop owners admit that the news about income tax raids has created panic among people.
Nearly 80% of shops in the Walled City , which mostly deal in cash, downed their shutters. Naresh Khanna, president of jewellery association of Dariba Kalan market, said there was panic among people and no one was willing to visit the markets. “The government has ruined the wedding season. We decided to shut our shops as there is no business,“ added Khanna. (Day 3)
THEFTS DECLINE: Pune: In the five days following demonetisation, the Pune police did not recorded a single house break-in in the city and Pimpri Chinchwad. All the 39 police stations had registered about five to six complaints of house break-in thefts every day for several months.
According to the officer, even those involved in the house break-in-thefts or the persons planning house break-ins may be in a quandary. "Generally, the stolen cash is available for immediate disposal for the suspects. In the current scenario+ , cash is not available for immediate disposal of the suspects and it may have been one of the reasons for zero registration of house break-ins," he said.
The officer added that valuables like electronic goods, gold and silver ornaments, and cash are stolen from the locked residences. "Suspects can keep the ornaments and electronic goods for disposal at a later date, but cash is always required for immediate disposal. In the current scenario, they may have given up their plans to execute the crimes as people are taking all their household cash to the banks for depositing+ ," he said. (Day 5)
THIEVES take coins, ignore Rs 1,000 notes [Day 11]
I n two separate incidents in Nashik and Dhule districts of Maharashtra, thieves and robbers did not touch bundles of Rs 500 and Rs 1,000 from the crime scenes. In one house, they took away notes of Rs 10, Rs 20 and Rs 100 and all the coins. In the second incident, robbers barged into a house and fled with only small currency notes.
Debit card use increases
Mayur Shetty, Customers Of Small PSU Banks Driving Change, March 27, 2017: The Times of India
After DeMon, debit card spend more than doubles, tops credit
Debit cards have conclusively displaced credit cards as the primary mode of payment in the country following demonetisation. Until October last year, despite outnumbering credit cards by a factor of more than 25, debit cards accounted for only 42% of the total card spend. This has jumped to 60% after demonetisation, which was announced on November 8, 2016.
The change is largely driven by small public sector lenders like Oriental Bank of Commerce and Punjab & Sind Bank, where usage of cards has gone up nearly five times. Debit card transactions tripled--from October 2016 levels--in December. Transactions in January slipped to double those in October last year. However, according to payments companies, they are seeing sticki ness in use of debit cards for utility and petrol bill payments and travel bookings. Last October, public sector banks saw transactions worth Rs 10,893 crore from the 61.7 crore debit cards they had issued till then. As against this, private and foreign banks had reported transactions worth Rs 11,048 crore although their debit card base was much smaller at 12.25 crore. This has changed after demonetisation. In January this year, public sector banks reported debit card transactions valued at Rs 29,339 crore against Rs 19,664 crore worth transactions recorded by debit cardholders of private banks.
Pre-demonetisation, in October, for every 100 debit cards in circulation there were only 19 transactions in a month. This jumped to 54 transactions a month in December, but dropped to 40 a month in January 2017. Bankers point out that if debit cardholders use their cards even once a month on an average, the share of debit cards in transactions will cross 80%.
Public sector bank customers in smaller cities are expected to drive the debit card usage. “In metro centres, the credit card penetration is high and increasing. Given a choice, customers will use their credit cards to make payments because of rewards. But in smaller towns debit card is the only instrument that the customer has,“ said an official with the National Payments Corporation of India (NPCI).
Impact on crime
See Delhi: Crime for the first month’s impact on crime in Delhi
Counterfeit currency deposited with banks
In the first 20 days: 3.4% of all notes returned, 3.2% of the counterfeit bills estimated to be in circulation
Chethan Kumar, 3.4% Of All Notes Back In System Are Fake, Dec 05 2016 : The Times of India
Demonetisation aimed at removing counterfeit bills
One of the main objectives of the government's decision to demonetise the old Rs 500 and Rs 1,000 notes was to root out fake notes, which are used for terror funding among other crimes.
According to documents available with TOI, 1.39 lakh (3.4% of all notes returned) fake notes with a face value of Rs 9.63 crore had been returned to the banking system by November 27, nearly 20 days after the demonetisation decision kicked in.
In the first half of 2016, the Indian Statistical Institute (ISI) had pegged the face value of fake notes in circulation at Rs 400 crore -Rs 1,000 notes accounted for 50% of the sum, while the old Rs 500 accounted for at least 25%.According to the ISI's estimates, together, the fake notes of the Rs 500 and Rs 1,000 denominations had a face value of Rs 300 crore.
This means that the fake notes deposited in the wake of the demonetisation announcement account for 3.2% of the face value of the counterfeit bills estimated to be in circulation. Experts say this is an indication that the majority of the fake notes are either with terror groups or black money hoarders, who cannot return these notes.
Figures: Demonetised currency, returned to banks
The Hindu’’, December 14, 2016
Till 10 Dec 2016
Nearly 80% of old notes turned in
RBI’s note issuance short of demand
About Rs. 12.44 lakh crore of Rs. 500 and Rs. 1,000 notes, representing nearly 80 per cent of the demonetised currency, had been returned to the central bank and the currency chests until December 10, the RBI said on Tuesday.
Bank notes worth Rs. 4.61 lakh crore were issued to the public by banks over their branch counters and through ATMs from November 10 to December 10, 2016, the RBI added.
The RBI’s data indicates that new notes issuance has not kept pace with the amount of scrapped notes that have been tendered by the public to banks.
That being the case, the RBI needs to ensure that its currency note presses fire on all cylinders. The public has been facing a serious shortage of currency notes following the demonetisation of high-value notes, which took effect on November 9.
In response to media reports of irregular transactions in various bank branches and the alleged involvement of bank staff, Deputy Governor SS Mundra said, “In an operation of this size, there are always elements who would have behaved otherwise than what is expected of them; we are keeping a constant vigil on the same.”
To a question on whether a show-cause notice had been issued to Axis Bank, Mundra said “There is no such thing at this point...Wherever such actions are reported, enquiries are made. But as of now no show-cause notice has been issued by us.”
On December 12, 2016, the RBI clarified that it has not initiated any action to cancel the banking licence of Axis Bank in the wake of certain allegations about irregularities.
Rs 4 lakh crore undisclosed funds enter bank accounts
Based on initial estimates that as much as Rs 4 lakh crore of undisclosed funds may have flown into bank accounts post-demonetisation, the tax department is gearing up to serve notices on those who cannot explain the source of the money .
Data with the income tax department shows that till December 17, cash deposits of Rs 80 lakh or more added up to nearly Rs 4 lakh crore, which flowed into 1.14 lakh bank accounts (see graphic). Tax de partment officials suspect that a large chunk of this amount could have come from those who dodged taxes.An exercise is on to verify the genuineness of the deposits and tally them with tax returns, with officials saying there was no way genuine taxpayers would keep hoards of cash at home. The income tax department has already served around 5,000 notices to those who have deposited unusually large amounts of cash in banks.
“People thought the government will not do anything and kept depositing money . We have been analysing data on a weekly basis and we are going to act against those who have unaccounted money . Obviously , we want everyone to come forward and themselves pay taxes,“ said a senior official, adding that the government was hoping to earn “good revenue this year“.
The government's message that it was keeping a close watch came at a time when it an nounced a fresh scheme which would allow those with undisclosed cash to come clean by paying 50% tax. Those who don't opt for the scheme, open till March 31, will have to shell out around 90%. Sources said nearly 60 lakh individuals and firms had made deposits of around Rs 7 lakh crore in old notes but were quick to add that some of that could be from “institutional sources“ which could be explained.
While data for deposits of as low as Rs 30,000-40,000 is being analysed for Jan Dhan and dormant bank accounts (where there was no activity for a year or two), there are certain other aspects that have really caught the taxman's attention.
For instance, between No vember10 and the end of November, 1.77 lakh borrowers had repaid loans of over Rs 25 lakh using old notes -with the repayments adding up to nearly Rs 50,000 crore. The list included companies and firms apart from individuals. Officials said the tax department intends to go after those who made large repayments in cash. Similarly , the tax department, sources said, has come across instances where bank accounts that were not compliant with KYC norms saw deposits of over Rs 1crore.
The data is interesting considering that the scramble to deposit old currency with banks has led many to wonder whether a large number of suspected tax evaders had devised ways to launder their unaccounted money . The fear that tax dodgers may have aced the system was the goad for the government to switch gears and launch a new version of the Income Disclosure Scheme. The nature and quantum of deposits could possibly be both because of the willingness to turn undeclared income into legit money after forfeiting more than half of it by way of tax or because of the confidence that authorities would find it difficult to trawl through the mine of data to spot those who thought they had gamed the system. Importantly , the data does not bear out the widespread misuse of Jan Dhan accounts.
While deposits in Jan Dhan accounts have come under the scanner, officials said the amount involved was not very large. Contrary to the notion of widespread misuse of the nofrills bank accounts, a mere 34 saw deposits of Rs 10 lakh or more with the highest deposit being Rs 58 lakh.
Sources said the maximum number of deposits into Jan Dhan accounts were made in West Bengal and Karnataka, with Delhi topping the list among `urban centres'.
Sources said the estimate of undisclosed money was preliminary and based on multiple sets of data that the income tax department was analysing. The government had earlier suggested that it was in for a “windfall gain“ post-demonetisation.
Rs 35,000 cr deposited in MP banks
More than Rs 35,000 crore of stashed cash was pulled out of hidden lockers of corporates and individuals and deposited in 25 major banks within 60 days of demonetisation in Madhya Pradesh, reveal documents accessed by TOI.
More than 40% of these accounts are under I-T surveillance, say sources. Money in Pradhan Mantri Jan Dhan Yojana accounts rose by Rs 461 crore after the note ban -from Rs 863 crore on November 8, 2016, to Rs 1,324 crore on January 19, 2017. This debunks the belief that PMJDY accounts were the main source of depositing undisclosed cash.
The document states that 25 major banks in the state had an aggregate deposit of Rs 2,57,372 crore on November 8, 2016, which shot up to Rs 2, 92,901 crore by January 10, 2017 -a whopping rise of Rs 35,529 crore. The 10 banks that saw the maximum cash deposit were Union Bank of India, Indian Bank, Axis Bank, IDBI, Punjab National Bank, Canara Bank, ICICI, HDFC, Syndicate Bank and Bank of India, say sources.
It was this surge in deposits that led the MP government to constitute a special task force under state finance minister Jayant Malaiya to chart out a roadmap for adoption of digital transactions.
Asked about the large amounts of cash deposited during demonetisation, Ma laiya said it was the job of income tax department to verify the sources. “Training is being imparted at the block levels to promote cashless transaction. College students and volunteers have been roped in for this,“ he added.
The I-T department has conducted 87 search operations and questioned 2,400 individuals across Madhya Pradesh and Chhattisgarh after demonetisation despite being short of personnel.
‘Black’Rs 3 lakh crore: a ‘profit’ for the government
From Note Ban, Govt Eyes Rs 3L Cr Windfall, Nov 17 2016 : The Times of India
ii) Extinguished black cash will be the government’s dividend,
iii) Understanding the magnitude of this windfall.
Extinguished black cash will come as dividend
Of the Rs 14 lakh crore worth of Rs 500 and Rs 1,000 notes that have been scrapped, roughly Rs 3 lakh crore are not likely to be exchanged for new notes ever.This entire extinguished or disappeared black money will be profit to the RBI, and will be transferred to the central government as dividend.
On the balance sheet of the RBI (just like any central bank in the world) currency in circulation is a liability item. Currency that goes out of circulation is equivalent to reduction in liability . In this case, the reduction will be sudden and large, without the need to create new currency of the same amount.
What the government should and could do with the expected Rs 3 lakh crore bonanza is subject to different interpretations and suggestions -ranging from bolstering public finances to boosting infrastructure to building hospitals, affordable housing and schools.
“There will definitely be higher dividend to the government and this can be done under the prevailing law,“ said a former RBI governor who did not wish to be identified. But another former governor, D Subbarao, is not so sure. “Will the RBI treat `the promise to pay' as a continuing liability and transfer an amount equivalent to the wealth destroyed to a special reserve? Or will it treat this as an extinguished liability and account for it as `profit'?“ he was quoted as saying in a report in the Business Standard newspaper.However, he also said that “as required by law the profits have to be transferred to the government.“
Rs 5,000 cr black money detected in 5 months
Apr 12 2017, The Times of India
Rs 5k cr black money detected after Nov 8
Shortly after the note ban, tax authorities carried out more than 1,100 searches and surveys which led to undisclosed income of over Rs 5,400 crore, finance minister Arun Jaitley told Rajya Sabha on Tuesday.The FM said the action taken by the I-T department had identified 18 lakh people whose tax profiles did not match with the cash deposits made during the demonetisation drive. The tax department sought online responses from them. Jaitley said there was no official estimation of black money parked abroad. He said information was received from various channels. TNN
The 30-day impact: economy slows down
Black Money Antidote Stifles Economy, Dec 8, 2016: The Times of India
Demand Shrinks, Jobs Hit, Sentiment Down
The diagnosis was correct: Black money has been Indian society and business's bane. The prescription wasn't wrong: Replacement of high-value currencies to shut out hoarding black money in cash. It's the administering of the pill that seems to have gone wrong, maybe very wrong.
Designed to cleanse the system of tainted cash, the November 8 demonetisation is beginning to hurt income, demand and jobs, raising fears that the gains of uncovering corruption will be far outweighed by losses to business and economy .
A month into the scheme, 77% of the cash withdrawn (Rs11.5 lakh crore out of Rs 14.9 lakh crore pumped out in old Rs 500 and Rs 1,000 notes) has found its way back into the banking network in the form of deposits. Sure, this is a welcome conversion of some black money into white, on which some depositors will have to pay tax. But this is too minuscule a gain to justify the virtual standstill that the scheme has brought the economy to.
“If a significant portion of the money comes back into the system, say more than 90%, then the assumption that demonetisation would reduce black money would be questionable. That would show that the black economy can be in different forms other than cash,“ says N R Bhanumurthy, professor at the National Institute of Public Finance and Policy.
As TOI reported in the past three weeks, businesses small (such as Agra's lock manufacturers and leather industry) to big (automobile, mobile and grocery) are grappling with falling sales, temporary layoffs and shaken business confi denceThe Centre for Monitoring Indian Economy has estimated the total 50-day cost of demonetisation at Rs 1.28 lakh crore, nearly 40% of annual I-T revenues.Most rating agencies and RBI have scaled back growth estimates for 2016-17.
The change in the government's stated key objectives -demonetisation as a means of stamping out black money and fake currency, increasing non-cash transactions and introduction of an unplanned tax amnesty scheme -shows that outcomes haven't matched expectations.
With the consequences now clear, what can the government do to limit the negative impact in the medium and long terms? “The jury is still out on the net benefits of demonetisation.While the pain is frontloaded, the gains will materialise over time and for that the cash shortage needs to be resolved quickly,“ says D K Joshi, chief economist at Crisil. He recommends a reduction in direct taxes and quick implementation of GST. Bhanumurthy doesn't rule out the chances of a jump in the number of I-T payers and tax revenues.
Luckily, the government can still count on popular support for the scheme, as several surveys show. But this support rides on expectations of future gains -a future not too distant.
60 days later: the impact
Note ban has halved hawala ops: Intel, Jan 7, 2017: The Times of India
J&K Sees 60% Dip In Violence Tied To Terror
The call traffic between hawala agents in India dropped almost by half post demonetisation, says a recent assessment by the central intelligence agencies.
Payments to the end bene ficiary of hawala deals are traditionally in cash, with Rs 500 and Rs 1,000 being the favoured denominations. The demonetisation of these high-value notes on November 9 severely affected hawala operators, and going solely by call traffic, their business may be down by 50%, said an intelligence source.
Terror funds are mostly sourced in counterfeit currency , comprising high-quality fake notes that Indian agencies suspect are printed at the Pakistan government printing press in Quetta and its security press at Karachi.Given this fact and the drop in hawala transactions, demonetisation has dried up funds used for organised stone-pelting in Kashmir and paying overground terror supporters in the state.
Intelligence officials claim that terrorism-related violence in J&K dipped by 60% post the cash ban, with only one major blast reported from the valley in December. An intelligence official claimed that apart from organised stone-pelting, a direct casualty of demonetisation in J&K was the overground network of terror facilitators.“The overground supportbase of terrorists depends on instant cash payments. A weakened OGW (overground worker) network due to demonetisation has resulted in several successful counterterrorist operations in the Valley over the past several weeks,“ said the officer.
A sharp decline in corrupt deals and price correction in the artificially skewed real estate market (by the land mafia) in J&K are among the other positives witnessed in the state in the aftermath of demonetisation.
Impact on inflation
The Hindu, November 12, 2016
Demonetisation could cut inflation, says Panagariya
The Centre’s demonetisation drive will help lower inflation, NITI Aayog vice chairman Arvind Panagariya said.
“All these makes me believe that their could be some moderation in inflation in the short-term,” Mr. Panagariya said at the Economic Editors’ Conference. “Yields on sovereign bonds softened after the government announced that the present Rs. 500 and Rs. 1,000 currency notes will not be a legal tender from November 9." He also said that eradication of black money from circulation will have some impact on money supply.
“As the black money goes out of the system, the money supply will shrink to some degree. This will reduce the inflation rate in the absence of any open market operations by the RBI,” Mr. Panagariya said.
Savings growth
Banks will see healthy growth in savings account deposits due to this exercise, he said.
“Savings that were kept in different forms particularly in the form of currency notes, they will now move into bank deposits. So we will see some surge in bank deposits,” Mr. Panagariya added.
Separately, Bibek Debroy, member of NITI Aayog dismissed that the demonetisation will have any impact on economic growth.
“Real estate prices were already impacted due to several measures that government had taken in the past,” Mr. Debroy said.
He said black money was never in the calculation of GDP figures, hence the present demonetisation drive will not impact growth.
Agriculture: no impact in 70 days
Note ban has had no immediate impact on agriculture, finds survey, Jan 24, 2017: The Times of India
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A perception survey of village panchayat heads across nine states appears to corroborate nationwide sowing data suggesting that demonetisation may not have had an immediate impact on agriculture.
The survey conducted by Shubhashis Gangopadhyay , Nishant Chadha and Arijit Das of the research organisation India Development Foundation (IDF) covered 48 districts across nine states. It was carried out between January 10 and January 20 and aimed to find out, based on early indicators, whether the impact of demonetisation was uniform across states. The states covered were Madhya Pradesh, Uttar Pradesh, Tamil Nadu, Gujarat, Rajasthan, Andhra Prade sh, Telangana, Jharkhand and Maharashtra.
At the end of the second week of January , government data showed that area sown for rabi crops was 616.2 lakh hectares, 6% higher than in the same period last year. Sowing in the previous year, however, was influenced by deficient rainfall during the southwest monsoon.
IDF's survey data showed that area under rabi had either increased or remained the same in a little over half the villages surveyed. Other key agricultural indicators such as fertiliser use also suggested that demonetisation did not have a negative impact.
According to Gangopadhyay , the survey results showed that demonetisation did not have a uniform impact and there could other factors influencing the results on agriculture. Another indicator that has been widely used as a proxy to measure the impact of demonetisation is food prices. In December, the consumer price index, which measures retail prices, showed a 1.3% inflation in food products, the lowest level in two years.
Food prices have been low regardless of demonetisation, said Gangopadhyay . Prices started trending lower before PM Narendra Modi's announcement of the demonetisation og high value currency notes on November 8 and the main reason for low food prices was weak aggregate demand in the economy , he added. The survey also covered the impact of demonetisation on the use of agricultural labour. The results showed that more than half the sample reported that the use of labour remained unchanged or had increased.
Impact on industrial output, inflation
IIP rises to 5.7% despite notebandi Jan 13 2017 : The Times of India
Nov Growth Surprises Economists
Industrial output growth surprisingly rose to a 13-month high of 5.7% in November 2016 while retail inflation slowed to a 25month low in December led by a sharp decline in vegetable prices.
According to the data released by the Central Statis tics Office (CSO), industrial output grew an annual 5.7% in November 2016 compared to a decline of 3.4% in the year earlier period [2015]. The sector had declined 1.8% in October 2016. Growth in November 2016 was helped by the favourable base effect and the performance of manufacturing, capital goods and consumer durables sectors. Between April and November 2016, industrial output growth rose 0.4% compared to 3.8% expansion in the year ago period, reflecting the sluggishness still persisting in the sector.
Economists said it was too early to predict whether the November data had shrugged off the impact of demonetisation. “The positive IIP numbers have come as a surprise.Prima facie, it looks like the effect of demonetisation has been nullified by the huge negative base effect. However, this growth needs to be seen with caution, whether it is sustained in the coming months needs to be seen,“ Madan Sabnavis, chief economist at Care Ratings said.
The manufacturing sector rose 5.5% in November 2016 compared to a decline of 4.6% in November 2015 while mining rose an annual 3.9% compared to 1.7% in the year earlier period. The capital goods sector, which is seen as a key gauge of industrial activity, rose 15% in November compared to a decline of 24.4% in November 2015. The consumer durables sector rose 9.8% compared to a growth of 12.2%. The electricity sector grew 8.9% in November compared to 0.7% expansion in November 2015.
Separate data released by the CSO showed retail inflation slowed to a 25-month low of 3.4% in December. Inflation as measured by the consumer price index was 3.6% in November 2016. Food inflation slowed to 1.4% in December compared to 2% in the previous month, largely on the back of a 14.6% decline in vegetable prices and 1.6% contraction in prices of pulses. Sugar and confectionary remained a pressure point rising an annual 21% in December.
Impact on weddings
Please see graphic
Impact on automobile sale
Feb 10, 2017: The Times of India
Two-wheeler sales continue to remain depressed due to cash crunch as demand for scooters and motorcycles fell even in the first month of the new year. Analysts say the two-wheeler industry will take some more time to recover from the demonetisation measure that has also impacted commercial vehicles and three-wheelers. Car and SUV sales, however, seem to have turned a corner, led by new models and attractive discounts and offers
Weighing with coins: Punjab
The Times of India, Jan 27, 2017
WEIGHING CANDIDATE WITH COINS: Demonetisation has taken a toll on an old election tradition in Amritsar that involves weighing a candidate with coins and donating the same amount as fund by supporters. Amritsar-based currency exchanger Vijay Kumar said the practice led to an “immense demand“ for coins in previous polls. “But, this year, we don't have coins and currency notes, and even demand from supporters is less,“ Vijay said. BJP worker Naresh Gupta, said a candidate would collect Rs 1 lakh a day from funds received through the tradition.
“It used to be fun watching a thin candidate lose out to a heavier one in terms of money collected. Besides demonetisation, fear of action by the Election Commission has also made candidates play it safe this time,“ said Gupta.
Nevertheless, this time the tradition is still on at some localities where they use sweets to weigh candidates instead.
Congress supporter Shiv Bansal said a candidate of average build weighed around 17,000 coins of Re 1. “It was more of a tradition, which has now lost the charm of polltime euphoria,“ he said. (The Times of India)
97% of scrapped notes deposited by Dec 30, 2016
97% of scrapped notes deposited with banks as on Dec 30: Report, Jan 5, 2017: The Times of India
Nearly 97% of the outlawed Rs 500 and Rs 1,000 notes has been deposited with banks as on December 30, according to Bloomberg news service.
Quoting two people with knowledge of the matter, Bloomberg said banks had received Rs 14.97 lakh crore by the last date for depositing old cash, adding that the figures were provisional and could be revised. Rs 15.44 lakh crore, representing about 86% of all currency , was declared void on November 8.
TOI had reported on December 28 that about Rs 14 lakh crore, or 90%, of the demonetised currency had been deposited with banks. At the time the decision to demonetise was announced, the view within the government was that roughly Rs 3 lakh crore of the scrapped currency would not come back into the system. There was also a view within a section of the government that this money , once legally extinguished, would constitute windfall gain for the RBI and could be transferred to the Centre as special dividend.
15% dip in healthcare spends
Rupali Mukherjee, Note ban leads to 15% dip in healthcare spends, Jan 20, 2017: The Times of India
Demonetisation led to a drop of 10-15% in healthcare spend, with patients deferring elective surgical and medical procedure, while overall, the impact was more pronounced in small towns.
While retail sales of drugs witnessed a slight dip, the diagnostic services suffered a drop of around 15%. Private hospitals in major cities like Delhi and Mumbai were not impacted, as cashless payment channels including credit/debit cards/ e-banking and electronic payment platforms emerged, with no significant reduction being reported from their out-patient department.
Initially retail sales of prescription drugs had experienced a boost as older notes were still legal tender at pharmacies till November 24, but weeks later, the adverse effect of demonetisation led to a dip in the retail market.
In a sudden move, the government announced that existing currency notes of denominations Rs 500 and Rs 1,000 will cease to be legal tender from November 8, 2016. Over 70% of the country's healthcare spend is out of pocket, so the liquidity crisis certainly had an impact, industry experts say, adding the impact was more pronounced in November, while the situation was creeping back to normalcy over the following weeks.
Dr Ram Narain executive director, Kokilaben Dhirubhai Ambani Hospital said, "Our hospital has not seen any impact of demonetisation on our out-patient department. There has been no drop in surgeries, and all surgeries over the last month have been undertaken as planned. While this had certainly caused some inconvenience to patients initially, we helped them cope with the situation to ensure convenience of patients and their families during the transition".
Another major private hospital in Mumbai said that its credit card transactions jumped three times, post-demonetisation.
Overall for the home healthcare industry the demonetisation impact will be transitory depending on the service offerings of individual enterprises, Vishal Bali co-founder & chairman, Medwell Ventures said. "At Nightingales, in the chronic diseases care, part of our business continues to see growth. However, in elective procedures like physiotherapy, we do see consumers delaying their treatment. For the annual care plan subscribers in November and December, we have offered a quarterly pay option which eases their immediate outflow of expenses". Dr Narendra Trivedi, CEO Apollo Hospitals Navi Mumbai, says the hospital has not seen any significant drop in surgeries and in some cases, patients have rescheduled their dates of the surgery. "In cases of emergency procedures, in patients interests, we had started accepting payments by cheque, net banking, debit, credit cards and also enabled payments from Android and iOS phones".
Life Insurance Premiums
Rachel Chitra, Life cos' premium grows up to 7-fold, Dec 21, 2016: The Times of India
Life insurers saw an increase of up to seven times in premium collection to Rs 6,700 crore for the month of November as more people took to buying policies, according to Irdai data. Post demonetisation, there was 50% growth year-over-year at private insurers, even as LIC saw total premiums rise 141%.
While a majority of this could be due to people wanting to move to safer havens of investment given the market turmoil, an executive from fraud management firm LexisNexis said that a percentage like this could be explained by people using the insurance route to convert black money to white. “The government, however, is keeping a tab on those purchasing high value insurance policies,“ said Shivakumar Shankar, MD, LexisNexis, which currently provides fraud management solutions to more than 13 life insurers in India.
Mohit Rochlani, director (operations and IT), IndiaFirst Life Insurance, said, “Most insurance companies will ask for PAN card number for high-value cash payments of single-premium policies. Also, we highlight any suspicious transaction to the financial intelligence bureau.“
And it's these single-premium policies that have seen an upsurge. At LIC, a whopping Rs 6,438 crore was booked in individuals buying single-premium policies in November 2016, compared to Rs 899 crore for the same month in the previous year -a sevenfold increase. The regulator, in a bid to track highcash transactions, has mandated that insurers cannot accept more than Rs 50,000 in cash.
For accepting premiums above Rs 50,000 in cash, the prospective customer will be asked to furnish their PAN card.
Tax collection
Govt gets Rs 6000 cr as tax
Govt gets Rs 6k cr as tax from stashed cash, March 18, 2017: The Times of India
The Centre has netted around Rs 6,000 crore as tax on unexplained cash deposits after demonetisation so far and the amount could go up, vice-chairman of the SIT on black money Justice Arijit Pasayat said. He said in the first phase of the postdemonetisation drive against black money , the focus was on cash deposits of Rs 50 lakh or more, reports Dhananjay Mahapatra.
91 lakh people added to tax net
91 lakh added to tax net after note ban, May 17, 2017: The Times of India
The income tax department has identified at least one lakh “high-risk individuals“ with more than Rs 1.72 lakh crore deposits in their bank accounts and the tax authorities will soon take action under the second phase of “Operation Clean Money“ launched by finance minister Arun Jaitley.
The FM said more than 91 lakh people have been added to the tax net as a result of the action taken by the I-T department on tax evaders after demonetisation. Jaitley also unveiled a website for “Operation Clean Money“, which will contain data and information gathered during the demonetisation drive.
“It is the time of recko ning for those who evade tax.We want to change the habit from non-tax compliant to tax compliant,“ Jaitley said. The FM assured that honest taxpayers have nothing to fear. During the first phase of the I-T operation, search and survey operations had yielded more than Rs 16,000 crore in unaccounted money and assets worth about Rs 900 crore were seized.
Jaitley said demonetisation has helped faster digitisation and “people have realized the risk of dealing in excessive cash“. The daily demand for PAN has gone up from one lakh a day to over 2-3 lakh. The department has so far issued over 30 crore PAN cards and is looking at making a significant addition to the tax base in the next two years.
CBDT chairman Sushil Chandra said between January and April, the department had identified over 18 lakh people whose the bank deposits were not in line with their tax returns or identified sources of income. Subsequent investigation has helped in a 22% growth in e-filed returns.
He said the department has given enough opportunity to people in the high-risk category to come clean. However, now the department will launch operations against those who have failed to avail of the repeated chances given through text messages and emails.
The department has identified 7.5 lakh medium-risk individuals who would be given more time to declare their income and file returns, he said. “High-risk individuals“ are those who had made unexplained deposits of over Rs 25 lakh in accounts post demonetisation. Such deposits have been estimated at over Rs 1.72 lakh crore, Chandra said.
Tax evaders
1,200 tax evaders seek mercy
Post-DeMon, 1,200 tax evaders seek mercy from I-T dept, March 15, 2017: The Times of India
Taxmen Noose Tightens Against 570
The income tax department has stepped up its drive to launch criminal prosecution against alleged offenders by initiating 570 cases, which is three times higher than last year's. This has also put pressure on other evaders, resulting in at least 1,200 applications from accused seeking mercy under compounding of offences rules with several of them approaching authorities post-demonetisation.
A senior income tax (I-T) official said the department has filed as many as 570 prosecution cases in the last one year (till January 2017) against alleged offenders caught laundering money and evading taxes, compared to 196 cases fi led in different courts across the country in the previous financial year (2015-16).
Under I-T laws, a court conviction for tax offences can lead to imprisonment of up to seven years in addition to fine and interest and penalty on the tax evaded. The department has been taking up cases of money laundering seriously and has asked officials to file prosecution complaints against entities who refuse to own up their money despite enough evidences based on banking data obtained on deposits made after demonetisation.
The department is hopeful of filing more cases as the post-demonetisation data obtained from banks are still be ing analysed. In the Karnataka and Goa region, the tax department had recently issued over 850 prosecution notices to firms in the private and government domain on charges of delay in remitting TDS funds to the exchequer. In some high profile cases, the department has also launched prosecution against politicians. One such case is that of an MLA from Telengana where unaccounted income is to the tune of Rs 500 crore.
In a number of cases, the accused in black money cases have opted to surrender their unaccounted income under the Pradhan Mantri Garib Kalyan Yojna (PMGKY) available till March 31.
Civic bodies, state-wise
Municipal tax collection zooms all over India; in Surat by 1,400%
Dipak Dash, Rush To Dump Cash Spells Jackpot For Civic Bodies, Nov 23 2016 : The Times of India
47 Agencies Mop Up Rs 13.2k Crore
The Centre's demonetisation decision has led to a windfall for 47 municipalities, pushing up their total tax revenue for this month to over two and a half times the sum collected in November last year.
According to the Union urban development ministry's estimates, by the 14th day of demonetisation , the municipal tax collection for the 47 civic bodies had reached Rs 13,192 crore. In the previous November [2015], the municipalities had collected just Rs 3,607 crore. Mumbai has the maximum share of the increased tax collection at Rs 11,913 crore, which is 90% of the total revenue. This is over three times Mumbai's collection for 2015. However, Hyde rabad accounts for the maximum increase -26 times the tax collection in November 2015. Surat's tax revenue of Rs 100 crore marked a nearly 14-fold increase (see graphic).
Sharing the details, Union urban development minister M Venkaiah Naidu said this was one kind of change that had happened as a result of the decision to demonetise the old Rs 500 and Rs 1,000 notes. He said the government's move had forced defaulters to deposit their dues.There have been reports of people queuing up with old notes to pay their dues.
Haryana, Telangana, Maharashtra, Gujarat, Chhattisgarh: increase in property tax
The Times of India, Dec 19 2016
Note ban nets a windfall for civic bodies
Dipak Dash
Municipalities in Haryana recorded maximum increase (over five times) in collection of property tax and other user charges in November, following demonetisation of Rs 500 and Rs 1,000 notes, as compared to the amount they collected during the same month in 2015.
Municipal bodies in Telangana, Maharashtra, Gujarat and Chhattisgarh recorded a spurt in such income, according an analysis of revenue rise across 450 municipalities in India. Chandigarh, Goa and Himachal Pradesh saw a slight dip in collection.
These municipalities are covered under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT).
According to data, Narkatiaganj municipal body in Bihar recorded the highest increase by 101 times, though the amount collected was negligible. Gudur municipalty in Andhra registered the second highest increase by 40 times.
The data showed that while overall tax collection and other user charges across these municipal bodies was Rs 1,034.5 crore during November 2015, it rose to Rs 3,555.7 crore last month, registering nearly 2.5 times increase. The spurt in such revenue was primarily because of the government's decision to allow Rs 500 and Rs 1,000 notes for making payments to municipal bodies.
Last month, the urban development ministry had said the total revenue of 47 select civic bodies had reached Rs 13,192 crore against a collection of just Rs 3,607 crore a year back.
“That figure included all types of revenue collected by the selected municipal bodies including non-tax revenue.But in the case of these 450 cities, we have taken collection of only property tax and other user charges such as water bill and sewage charges,“ an official of the urban development ministry said.
He added that the analysis of data from these 450 municipalities shows how almost every municipal body saw increase in collection of property tax.
Micro-finance institutions: Loan repayments improve
The Hindu Business Line, November 20, 2016
ABHISHEK LAW
The micro-finance industry seems to be on a path towards recovery with loan repayments (from customers) improving and disbursals resuming.
Repayments/loan recoveries for MFIs had come to a near standstill since old Rs. 500 and Rs. 1,000 ceased to be legal tender.
Some major names like Ujjivan and Arohan claim that re-payment have improved on a comparative basis (since the days demonetisation was announced). Disbursals too have begun from their end.
However, on the other side, there’s Village Financial Services (VFS) which still claim repayments to be an issue.
Bandhan, on its part, may not face issues of repayment but it has still not resumed disbursals. The company will review the decision to resume disbursements after November 19.
“Collections have started picking up a little and is varying the range of 10-35 per cent depending on the size of the micro finance institution,” Ratna Viswanathan, CEO, Micro Finance Institutions Network (MFIN) — the self regulatory body of MFIs — told BusinessLine . This means that on an industry level, for every Rs. 100 that MFIs were supposed to get back, they are recovering between Rs. 10 and Rs. 35.
If sources are to be believed, then original expectations in terms of recovery for the sector were far bleaker.
Collections resume
As Manoj Nambiar, Managing Director, Arohan Financial Services, points out, there’s been an improvement in collections over the last two/three days. Against every Rs. 100 due, Arohan is able to collect around Rs. 40-60. This number had previously fallen to Rs. 30.
“There is slow recovery now. This comes after the first week of demonetisation, when repayments had fallen or stopped,” he maintained.
Nambiar adds that if all MFIs were allowed to accept old Rs. 500 and Rs. 1,000 notes from customers, then repayments wouldn’t have be impacted. Arohan — which has an outstanding loan book of Rs. 1,000 crore — has also begun cash disbursals.
Ujjivan Financial Services’ Managing Director Samit Ghosh talks of a similar recovery. He too claims that repayments have started coming-in and at improved levels over the time demonetisation announced. Disbursements too have begun. The company’s outstanding loan book is around Rs. 6,000 crore.
Kartick Biswas, Managing Director of Uttrayan Financial Services, also talks of there being a regularisation in repayment cycles over the last few days.
“Collections were stopped for two to three days since November 9. Collections improved last week (November 14 onwards),” he said.
Rural scenario
However, MFIs which work predominantly in rural belts are not that happy. Repayment cycles there are still slow compared to elsewhere banks and ATMs have comparatively more cash. Ratna Vishwanathan, the CEO of MFIN too agrees that repayment cycles in urban areas seem to be better; when compared to predominantly rural ones. In fact, Kuldip Maity, MD, VFS, said the issues with repayment persist at his end.
“Since cash flow in the hinterlands are still an issue we see problems with repayments. They have slowed down substantially for us,” he maintained.
“May be recoveries are better in areas where cash (at banks and ATMs) is being replenished fast,” Maity added.
Delhi: negative growth in revenue collection
Ambika Pandit, DeMon effect: Tax collection dips, Feb 21, 2017: The Times of India
The final word is out on the impact of demonetisation on Delhi's revenue generation from VAT. While the total tax collections till January stand at Rs 17,708 crore in the current fiscal as against Rs 16,668 crore for the same period in 2015-16, the assessment for the period between December and January this year has revealed a dismal scenario.
In December, the revenue collection for the first time witnessed a negative growth of almost minus 4% over the same period in 2015 while in January, there was only a marginal recovery with a dismal growth rate of 1.72% over January 2015. The average growth rate before demonetisation was announced in November was between 8% and 10%.
The VAT department's hopes now rest on the February collections which appear to be picking up.
The revenue target for 201617 from VAT has been pitched at Rs 22,000 crore. The government has just eight days of February and the month of March left to make up for the decline in growth rate. Also, the global decline in the construction sector, iron and steel continues to hold sway and has adversely impacted VAT collections since last year.
After a robust VAT collection of Rs 2,023 core in November 2016, which was 15.59% hig her than the same period the previous year and more than the monthly average of 8% to 10% witnessed in 2016 over 2015, December recorded a ne gative growth in VAT for the first time in the current fiscal.In December, VAT collections were Rs 1,687 crore, 4% less than Rs 1,757 crore earned in 2016. This was clearly a setback for the state government.
The increase in November had been attributed to more tax being paid between October 21 and November 21. Since Diwali was on October 30, preDiwali sales had also got reflected in the November tax cycle. Also, since most traders deposit VAT in the last days of the monthly cycle, tax was paid after demonetisation kicked in. The spike is also being attributed to the fact that traders paid tax after demonetisation by showing pre-dated sales.
It was after this that the impact of demonetisation started showing as a reduced cash flow meant a massive decline in cash-based transactions on which tax is levied. Also the reduced cash flow impacted the manufacturing and trade sectors too as a lot of transactions there too were largely cash-based and declined. December reflected the adverse impact at its peak when a negative growth was recorded.
Rabi sowing
Did demonetisation affect the sowing of the Rabi crop in Nov 2016. Figures given in a graphic on this page suggest that there was no effect. There was, instead, an increase in the area sown
The above figures suggest that there was no effect. There was, instead, an increase in the area sown
The Times of India
The Naxalite strategy: Jan Dhan to launder notes
See also Naxalism/ Maoism: India
Jaideep Deogharia, Jan Dhan a|cs to help Maoists convert levy, Nov 11 2016 : The Times of India
The CPI (Maoist) zonal and special area committee (SAC), which collects levies in cash for the organisation's daily functioning, is not worried about the sudden demonetisation of Rs 500 and Rs 1,000 currency notes.The Jan Dhan accounts of villagers in rural Jharkhand will bail out the rebels by converting the “redundant“ currencies into usable instruments, they believe. Maoists who possess Rs 500 and Rs 1,000 currency notes in large numbers -collected from contractors, mining companies and industrialists as “levy“ -have issued instructions to their cadres to hold talks with the villagers and expedite a workable plan.They count on the villagers as supporters and hope the latter will deposit money in their Jan Dhan accounts for a commission and help them. Bihar-Jharkhand Special Area Committee (BJSAC) spokesperson Gopalji said the levy collected is handed over to the central committee which, in turn, allocates money to different zonal and special area committees for their functioning. “Zonal and special area committees, in particular, do not have much in cash but the ban will create trouble unless the notes are exchanged,“ he said.
Weighing candidate with coins
Demonetisation has taken a toll on an old election tradition in Amritsar that involves weighing a candidate with coins and donating the same amount as fund by supporters. Amritsar-based currency exchanger Vijay Kumar said the practice led to an “immense demand“ for coins in previous polls. “But, this year, we don't have coins and currency notes, and even demand from supporters is less,“ Vijay said. BJP worker Naresh Gupta, said a candidate would collect Rs 1 lakh a day from funds received through the tradition.
“It used to be fun watching a thin candidate lose out to a heavier one in terms of money collected. Besides demonetisation, fear of action by the Election Commission has also made candidates play it safe this time,“ said Gupta.
Nevertheless, this time the tradition is still on at some localities where they use sweets to weigh candidates instead.
Congress supporter Shiv Bansal said a candidate of average build weighed around 17,000 coins of Re 1. “It was more of a tradition, which has now lost the charm of polltime euphoria,“ he said. (The Times of India)
IMF: India 2nd fastest growing economy after demonetisation
Note ban impact: India loses fastest-growing economy tag
China regains top spot as IMF trims India’s FY17 growth forecast to 6.6%
The International Monetary Fund (IMF) has trimmed its GDP growth forecast for India by one percentage point in its report, citing the impact of demonetisation, and said the country would cede its position as the world’s fastest growing large economy in 2016, with China set to regain the top spot.
In its World Economic Outlook Update, the IMF has pegged India’s growth rate at 6.6 per cent for the ongoing financial year, and 7.2 per cent in 2017-18. It expects GDP growth to rise to 7.7 per cent in 2018-19.
“(This was) primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative,” said the report released on Monday.
In October 2016, the IMF had projected a GDP growth of 7.6 per cent for India this fiscal year and the next.
The IMF’s downward revision comes soon after Finance Minister Arun Jaitley cited tax collection data for November and December to underline that the decision to demonetise notes of ₹500 and ₹1,000 notes would not hurt economic activity.
Demonetisation drag
The adverse impact of the note ban on the economy was also highlighted by rating agency Moody’s Investors Service and its affiliate ICRA. The two agencies said on Monday that though India would remain one of the fastest-growing major economies in 2017, GDP growth would moderate in the first half of the year.
ICRA expects growth of gross value added (GVA) at basic prices to ease to about 6.6 per cent from around 7 per cent in 2016, with a likely pick-up in the second half of 2017.
Offerings at temples, shrines
Tirupati: 20-40% dip in income
According to officials, before demonetisation, TTD's daily income was about Rs 5 crore, including interest on bank deposits.
Apart from the `hundi' collections, TTD's coffers are filled by the sale of tickets, `prasad', etc. “After demoneti sation, we observed a dent of Rs 1-2 crore on many days,“ TTD chairman Chadalavada Krishnamurthy told TOI. Tirumala Tirupati Devasthanam (TTD) chairman C Krishnamurthy said they were looking at a small hike in ticket prices at the Tirupati temple to offset the fall in revenue post-demonetisation.
2016: The pain: a compendium
DEMONETISATION: WHERE IT'S HURTING Nov 18 2016 : The Times of India
The Times of India
AUTOS, TAXIS LOSE OUT TO CASHLESS OPTIONS
Demonetisation has affected the auto and taxi businesses in the two big metros. Auto drivers in Delhi say there's been a fall in riders and where earlier an autorickshaw driver may have earned Rs 500, he is now earning Rs 150-200 less.Many Delhiites are opting for cashless options like taxi aggregators. Mumbai's black and yellow cabs have been worst hit, but they hope to pick up business. These days they are getting fares even as low as Rs 50 as no one wants to use up Rs 100 bills. Mumbaikars are, however, avoiding autos for long journeys, affecting their business.
CINEMAS CANCEL SHOWS, BUT THE PLAY GOES ON
Usually, a film decides occupancy in cinema halls, but now it is the liquidity crisis. Shows in Rajasthan are being cancelled at smaller centres or running with negligible occupancy.
Ahmedabad theatres have seen a drop of around 60% in footfall with only 8-10 tickets sold for some shows. In Surat, window sales have dropped by 40% and several night shows have been cancelled.Some multiplexes in Mumbai were not able to accept debit or credit cards, disappointing many. However, play producers in Pune are now accepting cheques and extending credit so as to not to have to cancel shows.
EMBASSIES IN INDIA
Aditya Dev, Embassies protest against cash curbs, Dec 07 2016 : The Times of India
Russia Leads The Charge, Writes To MEA
[A month later a] small pile of letters and protests from [third world ] foreign missions in New Delhi [was] piling up with Union ministry of external affairs (MEA) as diplomats confronted the currency crunch post the government's demonetisation drive.
Russian ambassador Alexander Kadakin's letter threatening reciprocal action against Indian diplomats in Moscow found its way to the media. But similar letters have been sent to MEA by Hans Dannenberg Castellanos from the Dominican Republic, who is the current dean of the diplomatic corps posted in New Delhi, ambassadors of Ethiopia, Sri Lanka and Pakistan.
With the Russians leading the charge, Kadakin's complaint has reportedly been forwarded to the PMO for an immediate decision. The government, already overwhelmed by the complexities of the rollout of the plan, has not yet focused on the foreign missions.The latter are asking for an increased ceiling for withdrawals, a dedicated window in bank branches to deal with their cash demands, and removal of cash curbs for for eign visitors on short visits.
In his letter, Kadakin said the limit set by the government is “not even enough to pay for a decent dinner“ and inadequate for everyday running of the mission. “How can such a big embassy in Delhi function without cash?“ he said in his letter. The Russian embassy has around 200 people living and working here.
The Times of India
FISHY BUSINESS
Fish, the Bengali staple, is falling off menus in the state. The entire chain from fishermen to wholesalers to retailers has been disrupted, with fish rotting in trawlers.In Gujarat, there are fears that trawlers won't be able to go out to sea after November 24, raising prices.
Mumbaikars, it seems, are giving up fish as the markets are empty while in Guwahati sales have fallen by 50%.Meat is the same story.While trade in MP has been reduced by 35-40%, in Ahmedabad prices have skyrocketed on short supply, and in Pune meat sellers are not able to pay for stock nor are they getting customers.
FOOD: vegetables and grain
THE ROT IN THE FOOD CHAIN
Vegetable prices are dropping steeply, in some cases by half, because people don't have cash to buy groceries, retailers can't provide change and farmers can't hold back their produce because it would rot. Wholesale markets for vegetables and grains have received a body blow that has paralysed the supply chain. Some retailers have offered groceries on credit while some farmers have actually given away their produce free. Grain mandis in some states were shut the first few days after demonetization was announced. Many farmers refuse cheques because their accounts are linked to loans for fertilisers and seeds and they fear an automatic adjustment against their earnings.
FMCG industry
Demonetisation hit the FMCG industry hard. Data from market researcher Nielsen shows sales of the industry have gone down by 1-1.5% or Rs 3,840 crore in November, compared to October. “While 11.5% net impact of demonetisation does not look huge, considering the size of the FMCG industry at Rs 2.56 lakh crore, this is a large drop in terms of absolute value,“ said Nielsen. (Dec 24 2016 : The Times of India)
MEDICAL CRISIS
Demonetisation is spawning a medical crisis with surgeries postponed and patients turned away. One major hospital estimates that only eight to 10 surgeries are being performed per day against an earlier average of 35 to 40. At smaller hospitals, patients have been refused treatment. Though the really big hospitals accept payment through other modes, cash is preferred at smaller clinics.Pharmacists, meanwhile, are reporting dips in business of over 70%. They accept discontinued banknotes but are unable to return the change because of the severe cash crunch.
Meanwhile, reports from MP say many government hospitals don't even have pharmacies on the premises.
TOURISTS
AGRA
`Tourists down to half at Taj in peak season'
Following come demonetisation, the number of domestic tourists coming to Agra has down to half. According to ASI, which manages sale of tickets at marble monument, the average sale of tickets in the first week of November was 25,000 per day, which has come down to just about 12,000. Besides, budget hotels in the city, most of which do not have swipe machines, have been the worst hit, with only 20% occupancy during the peak tourist season. TNN
VENDORS IN MUMBAI GIVE UP BARGAINING
The business of street vendors has taken a hit across the country. In Bihar, cobblers, plumbers and construction workers are not getting work. Vendors in MP had to close their shops on several occasions, and sales have gone down by 40%. A parantha-seller in Rajasthan, where business is down by 60%, says he hasn't managed to scrape together even in five days what he could earlier earn in just one day. Train and street vendors in Mumbai say they don't even bargain anymore, they just take whatever the customers give so that they don't go hungry.
FEWER TOURISTS, NO BUYERS FOR HANDICRAFTS
Nearly 40% of individual tours in Maharashtra have been cancelled. Tour groups visiting different parts of India are finding their high-value notes of no use or are being charged extra.Tourists are shopping less.Rajasthan's handicrafts have seen sales drop by 70-80%.With Xmas near, what is generally a busy time for handicraft sellers is proving immensely lacklustre.
BUT FREE COFFINS
The Guwahati Baptist Church is accepting demonetised Rs 500 and Rs 1,000 bank notes from those who come to buy coffins from its coffin supply centre. The church has also made it a point to provide free coffins to those who cannot afford it
These are rough estimates of the transitory pains of demonetisation reported by TOI bureaus. Exact impact could vary substantially from place to place
WORKERS, MIGRANT
Dharavi
90% Leather And Garment Factories Shut
Tailors. Of the 15 who used to toil in this garment factory , only four remain. The rest are back in their village in Uttar Pradesh's Amethi.
The migrant tailors here were hit by twin convulsions -note-bandi and the collapse of the wedding season.
There are at least 5,000 leather units and 4,000 garment factories, according to local manufacturers. In the month [following demonetisation], 80-90% of these cottage industries have shut down, they estimate.
Migrants from UP, Bihar, Bengal and Karnataka live and work here for several months of the year. Clothes from the garment factories are supplied to wholesale markets in Mumbai and other states.The leather units make jackets, bags, wallets and belts.
Many take bulk orders for corporate gifts and even do back-room work for designer brands.
Manufacturers say consumer demand has plummeted.And with the continuing cash crunch, there is no money for transactions or wages. Most of the migrants have no bank accounts and rely entirely on cash payments.
“My factory would make 3,000 garments a day and had a turnover of Rs 1-2 lakh per day. Today it is locked, like 90% of the units,“ says Haji Babbu Khan from Tan-Man Dresses, one of the biggest garment manufacturers in Dharavi. Only two of Haji Khan's 40 workers remain in the city now. Most workers in the garment trade earn between Rs 8,000 to Rs 15,000 a month, depending on skill and speed.
Abdulais Shaikh from Sana Leather Works, is one of the largest leather manufacturers and exporters in Dharavi, with an annual turnover of Rs 1.5 crore. “Business is down 95%. We have received no orders for corporate gifts in the last month,“ he says. During the winter season, his factories would make 1,000 leather jackets. This season, they are making just 100.
Manufacturers like him are allowed to withdraw Rs 50,000 a week.In reality, his bank only doles out Rs 4,000. Outside his door is a new sign to entice customers: they can pay by Paytm. “I put this up 15 days ago, but no one is in the mood to spend,“ he says.
Workers from Bihar's Sheohar district make leather jackets. Since the note-ban, their earnings have fallen from Rs 500 to Rs 300 per day. None of them has been able to send money home.
GOLD: SOME GOOD NEWS IN MP
It's not all bad news for everyone. There's a gold rush in Madhya Pradesh where jewellers are believed to have done a year's business in the first three days of demonetization.Gold worth Rs 100 crore was traded in the state on November 9 and 10. The income-tax department has launched a series of raids on jewellers in Bhopal, Indore, Jabalpur and Satna, among other cities.
USURY/ private moneylending
Demonetisation seems to have helped private moneylenders in Maharashtra. Of the Rs 13,558 crore of loans required for the rabi season, banks could disburse only about Rs 2,400 crore (18%), due to shortage of cash. Besides, there are restrictions on district cooperative banks (DCCBs).
Officials said the crisis gave moneylenders an opportunity to get rid of defunct notes as loans were disbursed in old notes and they will be paid back in new notes. The rate of interest levied by moneylen ders ranges from 24% to 120% per annum as against the 915% charged by banks.
Of the amount disbursed, Rs 857 crore was from DCCBs and the rest from commercial and private banks. Sowing has been 120% of last year, and on 92% of the av erage area available for the rabi crop, which prompted in creased borrowings.
The state government had allowed farmers to buy seeds and fertilisers using Rs 500 and Rs 1,000 notes, which helped moneylenders even more. “The area under rabi cultivation has gone up despite the small amount of bank loans being disbursed.This has meant that funds have been provided from sources outside the formal banking sector,“ said an official from the cooperatives department.
Demonetisation was announced around the time sowing had just picked up in Maharashtra. The receding monsoon was very good in the state--a favourable condition for the rabi crop.
“With weather and soil water content just right for a good produce, farmers couldn't give up on the season due to a lack of bank loans, and so they resorted to borrowing from moneylenders,“ said farmers' leader and activist Vijay Jawandhia. (Bhavika Jain, Usurers cash in as bank loans to farmers dry up, Jan 02 2017 The Times of India)
Developments after the demonetisation of 2016
50th day of demonetisation: Top developments, The Times of India, agencies, 28 Dec, 2016
Here's a round-up of the major developments that have occurred in the first fifty days.
1. New notes
After Prime Minister Narendra Modi announced demonetisation, the Reserve Bank began to release new Rs 2,000 and Rs 500 notes to banks for distribution to the public. Citizens were told they had till December 30 to deposit their defunct bills in banks, or exchange them for new notes. However, it was later announced that there wouldn't be any over-the-counter exchange of demonetised notes after midnight of November 24, but that deposits could still be made. An RBI circular relased on December 19 (which was later withdrawn for KYC-compliant citizens) said that deposits of old notes worth more than Rs 5,000 could be made just once till December 30, if the depositor could satisfactorily explain them.
Old notes could still be used for some purposes, such as buying LPG cylinders and railway tickets, till December 15.
Currently, the daily withdrawal limit at ATMs is Rs 2,500 and the weekly withdrawal limit is Rs 24,000.
2. Political parties: Many, but not all, oppose ban
While the government has strongly defended its decision, several Opposition parties - including the Aam Aadmi Party and the Trinamool Congress - have opposed the note ban. Former Prime Minister Dr. Manmohan Singh intervened in the Rajya Sabha, describing the goverment's move as "monumental mismanagement." The Parliament's Winter Session was marked by repeated adjournments, and the logjam in the legislature prompted President Pranab Mukherjee to remark at an event: "For God's sake, do your job (in a remark directed at MPs)."
However, some political parties, such as Bihar Chief Minister Nitish Kumar's Janta Dal (United) have supported the move.
3. Encouraging cashless transactions
Since demonetisation, the government has stressed on the importance of moving towards a cashless economy. For example, on November 22, the RBI doubled the balance limit of of semi-closed Prepaid Payment Instruments (PPIs) to Rs 20,000. On December 8, the Finance Ministry announced eleven measures to promote cashless transactions, including a 0.75 per cent discount on purchases of petrol and diesel (at Central Government Petroleum PSUs) using credit or debit cards, e-wallets and mobile wallets.
4. Lucky draws to encourage digital payments
Earlier this week, the government also launched two lucky draws - Digi Dhan Yojana (for businessmen) and Lucky Grahak Yojana (for consumers) - to incentivise cashless transactions. Winners will be selected on a daily and weekly basis under the Lucky Grahak Yojana and weekly basis under the Digi-Dhan Vyapar Yojana respectively, leading up to a mega draw of Rs 1 crore on April 14, 2017, after which the scheme will be reviewed for further implementation.
5. I-T raids
The Income Tax department has conducted several raids across the country after demonetisation, the most high-profile of which was perhaps the one conducted at the premises of former Tamil Nadu Chief Secretary P Rama Mohana Rao and his relatives. Rs 23 lakh in new currency and Rs 6 lakh in demonetised notes were seized from the premises of some of Rao's relatives and associates, officials said. However, they didn't find any unaccounted money at the former chief secretary's office or house.
6. More than 3,500 I-T notices sent
Since November 8, the I-T department issued 3,589 notices to various entities for alleged tax evasion and hawala dealings, a report said on December 25. The department is set to initiate action against an additional 67.54 lakh non-filers who carried out high-value transactions in the 2014-15 financial year, but didn't file tax returns for 2015-16, the report added.
7. Citizens turn watchdogs
Prime Minister Narendra Modi said during his last Mann Ki Baat address of the year that the government was using information provided by citizens to crack down on those who have unaccounted wealth. In fact, the government asked citizens to write to blackmoneyinfo@incometax. gov.in with details about black money hoarders, and received as many as 4,000 messages as of December 20.
8. Pradhan Mantri Garib Kalyan Yojana
A new tax disclosure scheme, the Pradhan Mantri Garib Kalyan Yojana, opened on December 17, and will close on March 31 next year. The scheme provides for 50 per cent tax and surcharge on declarations of unaccounted cash deposited in banks. Declarants also have to park a quarter of the total sum in a non-interest bearing deposit for four years. Information disclosed under the scheme won't be used for prosecution, Revenue Secretary Hasmukh Adhia said.
9. Penalty for possession of demonetised notes
The government will soon issue an ordinance imposing a penalty on possession of defunct notes after December 30. Possession of demonetised notes will only be permitted for the purpose of research and numismatics. However, the ordinance - which the Cabinet is expected to clear in a day or two - will have a clause allowing people to deposit defunct notes at RBI branches (as promised by the government) after giving reasons for doing so. The ordinance is necessary to complete the legal process of demonetisation as banks will stop accepting deposits of old currency after Friday.
Inputs from agencies
Legal view
HC: Ban came with enough relaxations
HC: Ban on notes came with enough relaxations, Nov 29 2016 : The Times of India
The Delhi high court on Monday appeared to have agreed with the Centre that relaxation has been provided to citizens to help them deal with the shift to new currency as per the demonetisation policy .
“Relaxation has been given wherever it is necessary ,“ a bench of Chief Justice G Rohini and Justice Sangita Dhingra Sehgal said. The court was hearing a PIL seeking relaxation of the Rs 2.5 lakh withdrawal limit for marriages. The petition also sought a direction for allowing old notes of Rs 1,000 and Rs 500 for paying fines and court fees till December 31. HC is likely to deliver the verdict on Tuesday .
Appearing for the Centre, additional solicitor general Sanjay Jain and standing counsel Gaurang Kanth said fear of misuse has made government impose conditions. “For weddings, if there are no conditions, then anybody can get a marriage card printed and go to the bank,“ Jain said, urging the court to dismiss the plea.
Petitioner Birender Sangwan alleged that the guidelines that seeks detailed list of people to whom the cash is proposed to be paid for marriage and declaration from them that they do not have a bank account were “arbitrary“ and made it impossible for a family to withdraw cash at the time of need.
“Liberty must be given for marriages so one can pay as per the customs. How can somebody give such an undertaking? As per the guidelines, even the priest who performs marriages has to give an undertaking of not having an account. The parents of the bride and groom should be allowed to withdraw without such arbitrary conditions,“ Sangwan said.
NEPAL and BHUTAN: the pain
I
Nepal Rashtra Bank and the Royal Monetary Authority of Bhutan are in touch with the RBI regarding facilitation of collection and deposit of old Rs500 and Rs1,000 notes Nepal and Bhutan, two major recipients of Indian developmental aid, have taken up with New Delhi the issue of demonetisation of high-value currency bills and the impact it could have on financial assistance to them.
As per the 2016-17 budget, India has earmarked Rs5,490 crore for Bhutan and Rs300 crore for Nepal.
II
Below are excerpts from Jeremy Luedi, Senior Analyst, Global Risk Insights, Under the Radar: Nepal in turmoil after India’s rupee demonetization, November 25, 2016. The full article and graphs can be accessed at this link.
Under the Radar: Nepal in turmoil after India’s rupee demonetization
Hundreds of thousand of Nepalese citizens work in India as migrant workers, with Nepal receiving $640 million in remittances from its citizens in India in 2016. Much of these remittances, which amount to 2.6% of GDP, are sent home using the now defunct banknotes.
Pandey, who attempted to deposit $440 worth of rupees, only to be refused, is now unable to repay a $275 loan used to rebuild the family home after the 2015 earthquake. He is in a situation shared by hundreds of thousands of others now unable to deposit their Indian earnings in Nepalese banks, as said banks no longer recognized the defunct bills. Alongside migrant workers, Nepalese students seeking admission to Indian institutions, those seeking medical treatment, pilgrims, and those visiting family in India are also affected. Moreover, thousands of veteran Gurkhas drawing pensions in Indian rupees have seen their payments undermined.
Unlike Indians, Nepalese citizens are not able to exchange or deposit their notes by the December 30th deadline set by New Delhi’s transition plan. The Federation of Nepalese Chambers of Commerce and Industry estimates that some ten billion rupees ($146 million) in defunct notes is held by the informal sector and private individuals – a major loss of savings in a country with a nominal per capita GDP of only $837.
To make matters worse Nepal has banned the use of the new replacement bills until India issues a FEMA notification, as per the Foreign Exchange Management Act. While this is standard procedure, the move only puts Nepal further at the mercy of New Delhi’s schedule, as well as exacerbates the troubling plight of ordinary Nepalese caught in the middle. This is not the first time consumers and investors have faced difficulties regarding the rupee in Nepal, as prior to 2015 India’s 500 and 1,000 rupee notes were banned, a ban only removed after a visit by PM Modi in the same year.
During Nepal’s previous ban India set up a task force to ease currency exchanges with Katmandu after which the now defunct 500 and 1,000 rupee bills were finally accepted.
Another concern for both Nepal and Bhutan is how banknote demonetization will impact foreign aid from India, as New Delhi allocated 54.9 billion rupees ($798 million) to Bhutan and 300 million rupees ($4.36 million) to Nepal in 2016.
Demonetization threatens unrest, tourism in Nepal
The losses incurred by ordinary Nepalese from India’s demonetization will have serious knock-on effects, especially in a country with severe existing food shortage problems and a lack of other basic services.
Any instability could seriously damage Nepal’s efforts at economic growth. The country’s tourism sector is particularly at risk as the industry is highly exposed and responsive to political risk. Tourism constitutes Nepal’s largest source of foreign exchange, and if this source diminishes, then it (coupled with stymied remittance rates) will contribute to a major reduction in desperately needed foreign reserves.
Laundering money
Methods used
Please see graphic
1. Fall back on friends:
The easiest and most pervasive is the use of personal network. Asking the person who can legitimately exchange.
2. NBFCS can play facilitator:
Here, a person tells a willing non-banking financial company (NBFC) that he is ready to hand over cash in exchange for an interest-free loan of an amount that is say, 20% lower than the cash being paid. The loan is transferred into the person's account, providing legitimate cash. The loan is interest-free for 3 years, within which time a paper trail would be created to show than it has been repaid. The 20% is the cut the NBFC takes for putting through this fraudulent transaction.
3. Forex route:
Governments, after all, can not demonetise other currencies. Hence, people are rushing to the grey market for dollars, euros and pounds. Once again, they are ready to pay a sizeable exchange premium. The dollar has been driven up to around Rs 120 in these deals, sources say.
4. Realty to the rescue:
The real estate sector is assumed to be badly hit by demonetisation. And, sources in the trade say the unsold inventory is being bought by those seeking quick conversion of cash at rates prevailing months ago. As is common in realty, these deals are often settled at 70-30 or 60-40 ratios of white and black payments. It is clear how this helps the buyer, but what does the builder get out of it? Where is his conversion charge? Partly, he gains from getting rid of unsold inventory. And partly from sticking to old rates at a time when prices have fallen.
5. Pumping out the cash:
Through transporters: According to an industry source, permission to use old notes at petrol pumps has been used to hilt for this operation. Figures being thrown run into tens of thousands of crores, but even if these are an exaggeration, this is certainly a major conduit for cash.
6. The gold route:
Those with large stashes of demonetised cash hand in old Rs 500 and Rs 1000 notes and get gold in exchange. Of course, gold in these transactions is priced much higher than the official rate of Rs 30,000 or so. And in some cases, it is close to Rs 50,000 per 10gm, sources say. The premium is the charge for legitimising the cash stash.
Some other indigenous tricks:
1. NGOs: Donations have spiked
2. Sales of medicines, as chemists were accepting old notes
3. AC-I ticket sales, up by 1000% with buyers planning to cancel them later
4. Advance salary with pay hike
5. Temple donations
6. Jan Dhan accounts: People "rented" JDY accounts to deposit black money to be withdrawn later.
Cash sent repeatedly from unscheduled airfield, on chartered aircraft to the NE
Income tax and intelligence officials in the national capital suspect that the Rs 3.5crore in scrapped currency notes seized from a chartered flight in Nagaland could be part of a big money laundering racket, with the masterminds exploiting tax exemptions for tribals in the northeast and non-existent security at smaller airports.
A probe by the I-T department revealed that some businessmen, including the Gurgaon-based owner of a printing and packaging firm, allegedly roped in Anato Zhimomi, who claimed the seized money after produc ing an I-T exemption certificate, and took advantage of the absence of security at a small airfield in Hisar to haul at least Rs 11 crore in outlawed denominations of 500 and 1,000 to Dimapur by a chartered plane.
The money thus ferried was deposited into the account of Anato, the son-in-law of three-time Nagaland CM Neiphiu Rio, the sole representative in the Lok Sabha from the state who backs the BJP-led NDA at the Centre.Anato's father Khekiho Zhimomi served as a member of the Rajya Sabha from the Naga People's Front party.
Anato, who has been arrested, was supposed to transfer the money back into the account of the business men through RTGS [Real-time gross settlement systems].
Sources in the I-T department said Anato had “confessed“ to have ferried cash thrice from Hisar to Dimapur by the same plane on November 12, 14 and 21. Anil Sood is the Gurgaon-based owner of a printing and packaging firm, in whose bank account Anato had been making transfers through RTGS after cash was deposited in his Dimapur account. The proprietor of the airline is also under the scanner, with the I-T department seeking to verify Anato's claim that the last cash shipment belonged to the former.
Besides highlighting the desperation of those with stashes of scrapped notes, the incident has rung alarm bells among authorities over the absence of security at the airfield belonging to Hisar Flying Club -something which the group capitalised on. Inquiries suggest that those involved in shipping cash faced no questions as they loaded their cargo onto the aircraft chartered from Air Car Airlines. “Today, this is a case of money laundering. Tomorrow, any terrorist can similarly fly from an unscheduled airfield to land at a scheduled commercial airport to wreak havoc,“ said an official source.
Large cash enters inactive Jan Dhan accounts
A large amount of cash has suddenly started flowing into previously inactive Jan Dhan accounts in the aftermath of the demonetisation of Rs 500 and Rs 1,000 notes.
The Jan Dhan Yojana was launched in August 2014 with an aim to bring the poor into the fold of banking facilities, and empower them financially by encouraging savings, and easing loan delivery and direct cash transfer.
Accounts opened at the time but not used so far have overnight turned flush with funds. Many such accounts, which held only Re 1or Rs 2 till November 8, now have up to Rs 49,000, the upper limit for deposits that can be done without PAN cards.
A few bank officials told TOI on the condition of anonymity that many accountholders were possibly being exploited by middlemen or the rich to lend their accounts to park cash.
Ajay Agnihotri, manager of State Bank of India's Fatehabad Road branch in Agra, said, “There are around 15,000 Jan Dhan accounts at our branch, and 30% of the account-holders have deposited amounts of up to Rs 49,000 since Thursday (when banks reopened in the wake of the demonetisation announcement). We are quite sure that this percentage will go up in the coming days.“
Another bank official added, “In certain cases, we are quite sure that it is not their money . Gullible persons and those working on a contractual basis in factories are being used by their employers as well as middlemen. However, people should know that the government is tracking all the records and transactions.“
TOI was able to track a few account-holders used for this purpose. One of the victims, who had deposited Rs 49,000, said he was promised Rs 500 in return. He would have to return the rest of the money in some days.
“I was told that if I deposit this amount, my reputation in the bank will go up. The middleman also said he would help me financially in the future,“ he added.
Gold worth Rs 2,700cr bought in Hyderabad
The Times of India, Dec 18 2016
Gold worth Rs 2,700cr bought in Hyd with banned notes from Nov 8-30
SagarKumar Mutha
Investigations by the Enforcement Directorate (ED) have revealed that gold biscuits worth Rs 2,700 crore were bought with demonetised currency in November in Hyderabad alone. People who purchased the biscuits went underground thereafter. ED sources told TOI that going by details of air cargo, more than 8,000kg of gold was imported into Hyderabad between November 8 and 30.“That all this was sold can be ascertained from the fact that there was fresh import of 1,500kg of gold between December 1and 10. There is a sudden spurt in the bullion market and those with high stash of the banned currency are buying gold from bullion traders and jewellers in Hyderabad,“ the sources said.
Rs 9,000cr put in dist co-op banks in 5 days
The Times of India, Dec 18 2016
UNDER LENS - Rs 9k cr deposited in dist co-op banks in 5 days after cash ban
Freny Fernandes & Shrutika Sukhi
Entities Cater Primarily To Poor Farmers
Either the rural economy is extremely robust, or farming possibly the most lucrative of occupations. Deposits totalling over Rs 9,000 crore were made in select district central cooperative banks (DCCBs) across 17 states between November 10 and 14. The five-day window began a day after the government's demonetisation decision kicked in on November 9.
Perennially saddled with accumulated losses and large non-performing assets, DCCBs suddenly mopped up over 147 crore of the demonetised Rs 500 and Rs 1,000 notes in the period.
Old notes selling at a premium in Kolkata market, Rohit Khanna | TNN | Dec 27, 2016
Old notes of Rs 500 and Rs 1000 will fetch you Rs 550 and Rs 1,100 here
Shell companies need to shore up 'cash in hand' in their balance sheets before the third quarter ends on December 31
These old notes can be deposited in banks only till December 30
After PM Modi announced demonetisation on November 8, the business community in Calcutta adopted every possible means to either exchange the notes or get some deposited in banks. With the third quarter coming to an end, they have little cash left to show as 'cash in hand'. Income tax officials have come across a number of companies which have shown a large amount 'cash in hand' in the balance sheet when the physical cash was much less.
If these companies have shown 'cash in hand' over a long period, then a large part of the amount is expected to be in the form of old Rs 500 or Rs 1,000 notes. But, as per RBI guidelines, these notes can be deposited in banks only till December 30 this year. This has led to the sudden surge in demand for the scrapped currency. "There is such a possibility but I can't say if anyone has utilised the scope to fudge the balance sheet," said Anirban Datta, chairman of Institute of Chartered Accountants of India (eastern region).
At a time when people across the country are queuing up outside banks to get rid of old Rs 500 and Rs 1000 notes, the scrapped currencies are selling at a premium in the serpentine bylanes of trading hub Burrabazar. Old notes of Rs 500 and Rs 1000 will fetch you Rs 550 and Rs 1,100 here.
On 26 Dec 2016 The Times of India spotted men sitting with wads of new currency notes in the shops dotting the trading hub. They were there a month ago too, but then they were handing out anything between Rs 800 and Rs 850 in exchange for a note of Rs 1000 in old denomination. The sudden reverse exchange may stump commoners but those in the know say it has been triggered by shell companies who need to shore up 'cash in hand' in their balance sheets that show huge paper transactions. The city's accountancy fraternity sees this as a bid to justify the paper transactions before the third quarter ends on December 31.
In the balance sheet, 'cash in hand' is the amount held by a company in the form of notes or coins. In layman's term, 'cash in hand' is the money that is kept to pay small amounts but is not deposited in the bank. However, it does not mean the money lies in physical form in a chest or a drawer.
The six most common methods used
See graphic.
The Times of India
Karnataka laundered other states’ money
BV Shivashankar, Dec 29 2016: The Times of India
Investigation into the seizures in Karnataka has revealed that the state could be a prominent part of well-oiled operations, with 70% of all cash seized belonging to currency chests from other states.
A source said the serial numbers on the notes indicate that most of the seized money -Karnataka recorded the highest number of seizures -came from currency chests in Chennai, Hyderabad, Vijayawada, Ahmedabad and Surat, among other cities. “Going by the serial numbers of notes seized, only a few were allocated to banks in Karnataka,“ he added.
Of over Rs 3,500 crore seized as of December 25 across the country , Rs 100 crore was in Rs 2,000 notes.The income tax department has referred over 55 cases to the Enforcement Directorate, out which 26 are from Karnataka. The currency notes seized indicated the rackets spread to TN, Andhra, Gujarat and Goa. For instance, of the Rs 29 lakh seized from the Bengaluru home of P Vivek, the son of sacked TN chief secretary Ram Mohan Rao, Rs 23 lakh was in new notes issued to a currency chest in Chennai. Tirumala Tirupati Devasthanams trust member J Shekhar Reddy and D K Badrinath, brother of former Chittoor MP Adikeshavulu Naidu, were allegedly linked to a money laundering racket in Bengaluru. Most of the notes they dealt with were from Andhra and TN.
Even in the case of Bheema Nayak, who allegedly helped mining baron G Janardhana Reddy with currency conversion, Rs 100 crore is said to have been routed to Bengaluru from Andhra.
Not linked to this was a racket operated from Goa.Many casino owners were involved, and the Rs 5.7 crore seized from the residence of JD(S) politician K C Veerendra, also a casino owner, is linked to it.
Corrupt bank employees were acted against
156 PSB officials suspended for note ban irregularities Feb 04 2017 : The Times of India
Many bank employees were found involved in `irregular exchange of transaction' of specified bank note (SBN) during the phase of demonetisation.
As many as 156 senior officials of various state-owned banks were suspended and 41 transferred after they were found involved in irregularities related to demonetisation, Parliament was informed in Feb 2017.
Banks also reported having filed 26 cases with police and the Central Bureau of Investigation (CBI) wherever criminal cases were involved.
In respect of private banks the Reserve Bank of India (RBI) informed that 11 employees have been placed under suspension The RBI has further informed that banks have initiated internal investigation and complaints have been filed with police/ CBI.“
Trash cash sent to temples
Siddhivinayak hundi swells
Siddhivinayak hundi swells with donation in trash cash, Nov 18 2016 : The Times of India
Temple donation boxes across the country are over flowing with cash, a bulk of it in old 500 and 1,000 rupee notes, prompting their managements to speed up counting of currency and ensure timely deposits in bank accounts.
Mumbai's Siddhivinayak has received twice the usual amount in anonymous donations in the week since the demonetisation of the old Rs500 and Rs1,000 currency notes. Its hundi was opened on Wednesday to reveal cash donations of Rs 60 lakh, much of it in highdenomination notes.The average weekly tally is Rs 35-40 lakh.
The Maharashtra government has requested Siddhivinayak and other prominent shrines in the state to deposit cash offerings in banks on a daily rather than weekly basis so that the flow of new currency can be augmented.
Narendra Rane, chairman of Siddhivinayak temple trust, said, “We have received 90 bank notes of Rs2,000 denomination also. It shows devotees who have spent long hours in queues at banks and ATMs want to offer the first note to Lord Ganesha. As for the outgoing currency , there are 1,060 notes of Rs 1,000 which total Rs 10.60 lakh. There is a flood of of Rs500 notes, which comes to approximately Rs 17 lakh. The rest is small currency .“
Tirumala Tirupati Devastanams
Hundi collection at the Tirumala Tirupati Devastanams (TTD), considered the richest temple trust in India, stands at a little over Rs 20 crore since the announcement of demonetisation. “For the last few days we are receiving hundi income in the range of Rs 2 crore to Rs 2. 5 crore daily ,“ said Chandrasekhar Pillai, deputy executive officer, TTD.
Mathura and Vrindavan
Anuja Jaiswal, UP DONATIONS - Govt eyes shrines for change, Nov 18 2016 : The Times of India
Desperate for cash in small denominations, temples in Mathura and Vrindavan, which get close to Rs 6 crore each month in donations, have been asked by the district administration to take each day's earnings to banks and deposit them.
There are over 7,000 temples in the two districts and all of them will be expected to open their donation boxes at the end of the day for various banks to collect them.
All temples in India have been instructed to deposit their donations in their respective bank accounts.
The move is also being viewed as a step by the administration to check people from doing away with money in the form of now-banned Rs 500 and Rs 1,000 notes. Officials TOI spoke to on Thursday said religious places should not turn into “exchange centres“ for people to get their ill-gotten wealth converted into legitimate cash.
Temples get I-T notices
Arshad Afzaal Khan, It's Temple Run Across India In Hard Times, Nov 18 2016 : The Times of India
Ayodhya religious bodies get I-T notice in black cash fight
The income tax department has issued notices to all religious trusts and major temples in Ayodhya asking them to present their balance sheets as on November 8, when the demonetisation order was implemented. The I-T department swung into action after reports that there was a beeline for all religious trusts for turning black money into white after the demonetisation announcement.
The I-T department has also issued notices to religious trusts being run by scions of erstwhile estates, said sources.
I-T commissioner Vijay Kumar said, “We have served notices to all religious trusts. Ac tion would be taken against trusts whose accounts would have anomalies.“
See also
Political parties' funding and finances: India
Demonetisation of high value currency- 1946, 1978, 2016: India
Foreign currency inflows: India
Sensex <> The stock market: India <> Mutual Funds: India <> Gold in the Indian economy
