ON DAY 21, surging deposits of over Rs 9 lakh crore in banks — more than 60 per cent of the total value of 500 and 1,000 rupee notes in circulation — have stirred a debate in the government about the stated objective of the demonetisation scheme, which is to break the grip of corruption and black money. Bankers and analysts estimate almost 90-95 per cent of the money will return to the system, with more than a month to go for the deadline to deposit the scrapped notes.
The Income-Tax department, meanwhile, is grappling with a possible situation of people depositing significant amounts of undisclosed money and taking it out soon after the restrictions on withdrawal are lifted on December 30.
“Yes, it is almost akin to an amnesty scheme. People will disclose their hidden income. While we have already set up teams to probe accounts where disclosures of over Rs 2.5 lakh are being made, it will still take us a while to look at all accounts, ascertain how much is undisclosed, and then tax it at 49.9 per cent and further seek deposit of 25 per cent of the undisclosed amount in the Pradhan Mantri Garib Kalyan Yojana (PMGKY) scheme,” said an official, who did not want to be named.
Asked if there may be restrictions on withdrawals based on fine distinctions, a top government functionary told The Indian Express, “I don’t know the answer to this question. Someone is thinking about it. The Finance Minister is a lawyer.”
The official said an assessee generally has time till July 2017 to file Income Tax returns for the year gone by. “It will be a gigantic exercise. And there will certainly be problems when distinctions are made in withdrawals. It is about trust and faith in the monetary system,” said the official.
However, a minister in the government said there are many metrics to ascertain the success of the demonetisation scheme. “The money raised as taxes and penalty on undisclosed money is one metric. The other is the quantum of deposits under the PMGKY scheme. And yet another is the huge shift to a digital or cashless economy,” said the minister.
Indeed, the government and the BJP’s narrative over the last one week has taken a subtle turn from the original buoyant estimates of reaping a Rs 3 lakh crore windfall — the quantum of black money that will not return to the system — which can be used to invest in public infrastructure.
On November 26, the government set up a committee under Niti Aayog CEO Amitabh Kant to identify and operationalise, in the earliest possible time frame, user-friendly digital payment options in all sectors of the economy as an integral part of its strategy to transform India into a cashless economy.
The other members of the committee include the secretary of the department of financial services, DIPP secretary, DIPAM secretary, secretaries of the IT and rural development ministries, managing director of the National Payments Corporation of India and chairman of the National Highways Authority of India.
“Almost 10 days ago, given the pace of deposits, there was tacit acknowledgement in the government that a bulk of the 500 and 1,000 rupee notes will return to the banking system. The I-T amendment is just another income disclosure scheme that will encourage people to come clean. And those with huge undisclosed funds are breaking it down and finding ways to game the system,” said an analyst with a foreign institutional investor.
According to latest data made available by the Reserve Bank of India, banks received Rs 844,982 crore as exchange/ deposits from November 10 to November 27. Of this, exchange of notes amounted to Rs 33,948 crore and deposits Rs 811,033 crore. The RBI’s annual report of 2015-16 states that the total value of Rs 500 and Rs 1,000 notes in circulation as on March 31, 2016, was Rs 14,17,950 crore. If an average daily deposit of Rs 49,000 crore is added for November 28-29, the total deposits would swell to almost Rs 9.4 lakh crore, or over 65 per cent of the value of the total scrapped notes in circulation.
“The pace of deposits (Rs 8.5 trillion till now, 56 per cent) of cancelled notes hasn’t slowed much. If this momentum persists, a meaningful cancellation of RBI’s liabilities looks unlikely,” said Credit Suisse research analyst Neelkant Mishra. He also pointed out that there could be sustained surplus liquidity in the banking system if Rs 10 trillion of currency is assumed post-normalisation.
To this, a government functionary said the RBI may want to do open market operations. “Sell securities worth Rs 2 trillion, and withdraw part of the liquidity,” he noted.
As per the RBI data, people have withdrawn 26.7 per cent of the money deposited during the period — banks have reported that the people have withdrawn Rs 216,617 crore from their accounts either over the counter or through ATMs.
Bankers expect at least 90 per cent of the Rs 500 and Rs 1,000 notes to be deposited in the banks. “I expect that only up to 10 per cent of the cash won’t be deposited in the banks. Most of the money will come to the banks. People have time till December 30 to deposit old notes. We are trying our best to meet the requirements of the public,” said a top official of State Bank of India.
Asked whether the government and RBI would be able to finish the replacement of old notes with new Rs 500 and Rs 2,000 notes by December 30, K C Chakrabarty, who was the Deputy Governor from 2009 to 2014, said, “It depends on the efficiency of the government and the RBI. How quickly they will be able to replace these notes and supply the new notes. It depends on the capacity of the press. When I was in the Reserve Bank, and if that is the (current) position, it will take six months to print the currency notes. Whether they have made any advance preparation or they started printing early… I don’t know.”