Me, My Child & Black Money Myths & Facts of Demonetization & Black Money


There are many myths and facts, claims and allegations, in the air about – recently announced – demonetization scheme, under which the government of the day at the centre has banned all series of old notes of 500 and 1000 Rupees.  My teenaged child & his friend’s arguments and inquisitiveness led me to probe documents on RBI’s websites and some other sources and find out about: One,  the Security and Currency Printing Press’s bank note supply capacity in a year; two, new notes needed to be infused in the system, every year; third, about cause of generation of black money.

My son/Myth: The inconvenience of depositing old notes, and changing it with new notes, will last for few days; anyway, enough time has been given by Modi government to deposit old notes, i.e. until 30 December 2016.

Me/Facts: No, going by RBI’s own old logic, the time given for exchange of old notes with new ones is not sufficient at all and that is causing chaos. In the year 2013, the government withdrew pre 2005 series of 500 Rupees note; keeping inconvenience to general public in mind, the note could have been exchanged from May 2013 to June 2016; and, thereafter, it can be still deposited at the offices of the RBI.

My son/Myth: The shortage of new notes will be over soon; there is enough stock of bank notes.

Me/Facts:  The shortage of new bank notes will last for, at least, more than a year; may, also, have some spillover effect for longer time.  According to RBI, there are 1,570.7 crore pieces of Rupees 500 notes in circulation –  amounting to 7.85 lakh Crore , which would, ideally, be required to be exchanged by RBI. And, 63.2 crore pieces of 1000 Rupees notes amounting to 6.32 lakh crore . Now, let us look at the supply side of these notes:  in the year 2015-16, against the indent of 560 crore new pieces of Rupees 500 note placed by the RBI, only 429.1 crore pieces amounting to 2.14 lakh crore Rupees  could be supplied by currency and security presses to the RBI. And, against the indent of 190 crore pieces of 1000 Rupees note, only 97.7 crore pieces amounting to .977 lakh crore rupees could be supplied. Now, in place of 1000 Rupees, 2000 Rupees note is  being printed; so the amount of 2000 Rupees note, which could be printed would be  doubled, i. e., 2 lakh crore Rupees. So, by October 2017 – one year from the printing of new notes started –  the total amount of  500 and 2000 Rupees, which could be supplied would be 4.14 lakh crore Rupees. Whereas, the total value of demonetize money needed to b replaced is 14.17 lakh crore Rupees. Out of this, we may assume that some amount of black money which won’t return – say 3 lakh crore Rupees.  And some amount of money may not be required to be printed, as it would be replaced by the increased use of digital money – say 2 lakh crore. Now, this makes total amount of money which need not be replaced is 5 lakh crore Rupees; and money that would  printed in a year is 5 lakh crore Rupees (max) – yet,   there will still be huge shortage of  5 lakh crore rupees notes. To add to the misery, by the next year, at least one third of these newly supplied notes will get mutilated – as per the ‘clean currency’ policy of the RBI; the average life of the bank note is one year.

My son/Myth: The demonetization was necessary for blocking the supply of counterfeit notes; it was threatening our economy.

Me/Facts: Though, for time being it will block the use of counterfeit currency; but, the circulation of counterfeit currency was not in such a large amount that required grinding of all the economy; it is like chopping your hand for killing a Dengue infected mosquito.   Moreover, onetime demonetization will not help in the long run. As per Indian Statistical Institute report, every year note amounting to 70 crores is put into circulation; the total value of counterfeit notes is Rupees 400 crore rupees – not enough to threaten the economy. The report never suggested demonetization as a measure to counter counterfeit notes. The study also revealed that, one third of counterfeit notes – which get detected in the banking system,   80% of it was  done by three private sector banks:  HDFC Bank, ICICI Bank and Axis Bank. So, the immediate steps need to be taken to improve the reporting by other financial institutions. Non-banking financial institutions were identified as another big loophole where large volumes of cash are handled but which fall outside the purview of the detection system.

My son/Myth:  Demonetization was necessary for eradicating black money.

Me/Facts:   Demonetization will surely unearthed some part of the black money – may be to the tune of few lakhs crore of Rupees; but it will neither address the real cause of generation of black money, nor does it will eradicate black money. As per the Global Financial Integrity (GFI) report, titled: ‘The Drive and Dynamics of Illicit Financial Flows from India: 1948-2008’:  “the post-reform period of 1991-2008, deregulation and trade liberalization have accelerated the outflow of illicit money from the Indian economy”. It also talks of island tax havens. The report further says:  “illicit outflows drain hard currency reserves and reduce tax collection, harming India’s poor and widening”. The total value of black money in India, estimated by GFI,  is more than 43 Lakh crore Rupees  – 50% of India’s GDP – out of this 31.31 lakh crore; 72% of India’s black money is parked outside India [all figures as per 2008 value]. Moreover, according to income department’s recent figures of raids conducted,  only 5% of black money in India is in cash.

When, earlier, in 2013, just to withdraw 500 Rupees note of pre 2005 series, RBI gave three year time, how come entire series of 500 & 1000 Rupees could be withdrawn in 55 days’ time.  Government must always weigh the workability of its decision; and, in no way should have taken a  decision,  that brought entire country  to a halt –  entire nation is made to wait in the queues for days and waste their productive energy. And, in no way for a decision which may, if at all, just eradicate minimal 2% of the black money – and leaving 98% untouched.   Everyone wants to get rid of black money, but for that we need to strike at the policies and system which generates black money; it’s like treating the cause and not the symptom. The GFI report explains, goods imported in the country are over invoiced and the money charged in excesses is deposited in the foreign bank accounts of the buyer company. It’s like, goods actual costs is 10 Rupees, but it is billed 15 Rupees, and thereby 5 Rupees is deposited in the foreign bank account of the buyer. Also, corporate twists and turn laws to save the Income Tax; even in USA, present president elect, Donald Trump, has been accused of not paying tax since 1998. Back in India biggest Income Tax payers are not from top corporate houses.

I would like to end it with one caution; the move may boost the parallel economy. In tribal belt of the country bartering their goods  with merchant is still common.

Anurag Modi, Activist and National Secretary of Samajwadi Jan Parisahd.

[email protected]

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