Note ban@3: Fakes, cash are back; where is black money?

On the evening of November 8, 2016, Prime Minister Narendra Modi announced a unilateral decision of outlawing the high-end notes of Rs 500 and Rs 1,000 notes -- a move that sent the country into a tailspin. Three years now, the data shows that while fake notes are back with a bang, so is cash circulation in the country, and the threat perception of terrorism has increased. However, the elimination of black money still remains more or less a myth.

There were three basic motives that were emphasised upon by the government at that point of time were: reduction in black money, curbing counterfeit notes and reduce dependence on cash.

READ: Rs 2,000 banknotes being hoarded: Ex-finance secy

The RBI data busts the myth of killing fake notes in circulation. By June 2017, six months after note-ban, the central bank had detected 837 fake notes in the new Rs 500 and Rs 2,000 notes valuing up to Rs 4.19 lakh. In the following year, the number surged by 34 times to 27,821 notes valuing Rs 1.4 crore. In 2018-19, the number further jump by 57% to 43,712 notes valuing Rs 2.19 crore. The banking sources estimate that the actual number of fake currency in circulation would be at least 100 times more than the amount detected by RBI. Many sources suggest that these fakes are being domestically produced.

The cash was back with a vengeance in just two years of demonetisation, crossing unprecedented levels on the Rs 20 lakh crore and has been able to remain above the level till now. As of date, there is Rs 21.37 lakh crore of cash in circulation – over Rs 4 lakh crore higher than the pre-note ban levels. Also, despite the Reserve Bank stopping the printing of the Rs 2,000 note, the high-end denominations make up 83% of the currency circulation right now. To give a perspective, the current value of high-end notes (Rs 17.34 lakh crore) make up 96% of total currency in circulation pre-note-ban (Rs 17.97 lakh crore) – making hoarding cash easier than before.

When it comes to curb on the black money -- the impact of it seems to be shoddy, to say the least. The government hasn't been able to arrest even a single black-money holder to date. In fact, as an RTI reply, first published by DH, revealed that the Reserve Bank had told the Centre that note-ban won't help in curbing black money. By the end of August 2017, the Income Tax Department made seizures worth Rs 1,469 crore – less than 1% of the currency in circulation before note-ban. Moreover, 1,16,262 notices under section 142(1) of the Income Tax Act are being issued to non-filers who deposited Rs 25 lakh or more in cash during demonetisation but failed to file their return of income by the due date. However, in all the cases the Income Tax Department had raised demand for tax, the cases are caught up in litigation, according to the sources in the I-T Department.

However, one thing that the note ban did successfully was to send the economy for a toss. According to a report by Azim Premji University, earlier this year, five million people lost their jobs between 2016 and 2018 -- which coincided with Prime Minister Narendra Modi's demonetisation. This is evident from the stress the unorganised sector and MSMEs have been facing off late -- most of whom used deal mostly in cash. The stress in Bengaluru's Peenya Industrial Estate as well.

On the other hand, many who had no other option that stock markets to park their money, started investing in the equities. In one year after demonetisation, the wealth of investors in the Indian equity markets surged by 30% by November 7, 2017. In three years till now, this number has surged to 38% by now, despite the fact that the market sentiments have been mutes and earnings growth of India Inc has been disappointing -- if anything. In the month of demonetisation, domestic institutional investors (DIIs) parked a net of Rs 18,277.03 crore in the Indian equities -- their highest ever till then.

Not only this, but the move did also hit the growth in the private consumption growth -- which dipped by 160 basis points (bps) in 2017-18 -- a year immediately following the demonetisation drive. In 2015-16, the total private consumption grew by 12.2%, in the 2016-17 (the year of note ban) it grew by 12.2%, in 2017-18 by 10.6%.