If RBI retains the two high denomination notes, a time will come where banks receive very few such notes

The Supreme Court’s verdict put an end to the 10 legal questions it raised about the validity and due process by which demonetisation was carried out. However, the critics of demonetisation would continue to question the efficacy which was spelt out by Prime Minister Narendra Modi at the time of announcing the decision to the nation.

When any public policy is devised and implemented, the intended benefits are stated. The outcome may not achieve all the stated benefits, but it may achieve some which were not envisaged at the time of implementation of a public policy.

There are essentially four menaces that were targeted by the government from demonetisation announced on November 8, 2016. They were counterfeit currency, terror financing, tax evasion and black money.

Although counterfeit currencies can be printed by anybody, it is not easy to print them very similar to currencies printed by the RBI and hence, its circulation is exceptionally difficult if the public is a little alert. The alertness and quick action of the local police also plays a large role in quickly nabbing the culprits, who try to circulate counterfeit currencies. Counterfeit currencies are also very difficult to pass through the banking system.

Invariably, attempts have been made to print counterfeit currencies of larger denominations as the huge risk involved in circulating counterfeit currencies can be compensated only by printing larger denomination currencies by the culprits. With INR 2000 denominations constituting only about 13.8 per cent in terms of value of the total currency in circulation in December 2022 and which has been on the decline further in the months to come, it is more futile now to attempt to generate counterfeit currencies.

The number of counterfeit banknotes has come down from 7.62 lakh pieces in 2016-17 to 2.09 lakh pieces in 2020-21 post-decision of the Government of India to cancel the legal tender status of Rs 1,000 and Rs 500 denomination currency notes on November 8, 2016.

The second one is terror financing. It was the use of counterfeit currencies that played a key role in the terror financing before demonetisation and with the demonetisation, the counterfeit currencies reached the lowest level of INR 2.60 lakh between 09.11.2016 and 14.07.2017 (PIB dated 25.07.2017). But terror funding need not always have to come from counterfeit currencies but from legal tender too.

After the repeal of Article 370 for Jammu & Kashmir, the terror unleashed against the public is more local and one can surmise that it has been happening with legal tender. The third one is tax evasion. With GST and the electronic trailing associated with it, businessmen and traders are forced to show their true transactions and thereby true income to some extent. The consistency of higher GST collections in FY 2022-23 shows that GST compliance has been improving significantly. The GST compliance will improve the Direct Tax collections both in terms of corporate tax and personal income tax.

The fourth one is black money or precisely unaccounted currency. Unaccounted wealth includes unaccounted currency to a limited level, but essentially consists of other movable and non-movable assets. There are different policy instruments to combat unaccounted currency and unaccounted wealth and demonetisation was never aimed to combat unaccounted wealth.

Only when the unaccounted wealth goes for sale next time, unaccounted currency may surface again or may come out white-washed. It is a hide and seek game played by people who have accumulated unaccounted currency. Only when the unaccounted currency is captured in one or other way, the linkages between unaccounted currency and unaccounted wealth can be cut, till new unaccounted current is generated from the corrupt system.

The purchase of gold by currency, the difference between the registered value and the market value of a real estate property, unaccounted donations to educational institutions and bribes and commissions, distribution of currencies to vulnerable sections of the voters to seek votes and hiding the unaccounted currencies by creating unaccounted wealth are some of the factors that contribute to the generation of unaccounted wealth.

Real estate is one sector where unaccounted currency hides behind unaccounted wealth, as the registered values are different from market values. The Residential Property Price Index, which was 165 just before demonetisation, is at 165 in June 2022. The stagnation of the Residential Property Price Index (RPPI) for the last six years cannot be fully attributed to demonetisation.

The anecdotal evidence shows that still unaccounted currency may contribute to about 30 per cent of the total value of a real estate asset, but the control of unaccounted currency stopped the unreasonable price increase of real estate properties.

The above analysis indicates that demonetisation gave a jolt to those who had unaccounted currencies at the time of demonetisation. But the unaccounted currencies will grow again with corruption, bribes and untrue revelation of revenue and profit and will be either kept as ‘Store Value’ or hide behind unaccounted wealth. This systemic problem cannot be rectified with one demonetisation or demonetisation at regular intervals.

Although India witnessed an exponential rise in using non-currency transactions, first due to demonetisation, then due to the development of various Fintech platforms, including Universal Payment Interface and Covid and people’s quick adoption of UPI, the currency in circulation increased from INR 17 lakh crore in 2016 to about INR 33 lakh crore in 2022.

Although the RBI has stopped printing of Rs 2000 denominations and its circulation is limited to only 13.8 per cent of the total value of currency in circulation, the circulation of Rs 500 is alarming at a level of 73.3 per cent of the total value. The combination of Rs 2000 and Rs 500 constitutes about 87 per cent of the total value of currency in circulation, which is the same as the pre-demonetisation level of Rs 500 and Rs 1000 denominations.

It may be argued that the total currency value in circulation has increased only in proportion to the increase of GDP in current value, but that does not hold water, given the huge penetration of digital transactions. Hence, the surmise is that a substantial portion of the currency, especially the Rs 2000 and Rs 500 denominations in circulation, have been kept as ‘Stored Value’, although there is no data to support this surmise.

If the RBI retains the two high denomination currencies which come to the banks and releases only smaller denominations such as Rs 100 and Rs 50 through their ATMS and counters by printing it on a larger scale, a time will come where banks receive meagre numbers of Rs 2000 and Rs 500 denominations or may stop receiving Rs 2000 and Rs 500 denominations altogether. That is the inflection point to arrive at the estimation of the ‘Stored value’ of Rs 2000 and Rs 500 denominations in circulation and the right time to devise innovative measures to get hold of ‘Stored Value’ and crackdown against hoarders. This is the way forward to bring justification to the demonetisation exercise.

(Author is a public finance expert)