No Black Money in India?

Here is a shocking possibility that there may be no black money hoarded in India. At least, that is what two reports seek to show convincingly, quoting government’s own data.

The IANS Story

According to an IANS story published by the Indian Express, the government may have a rude shock to find that there is no or negligible amount of black money hoarded in India. At least, that may be the outcome the data as on 30 Dec 2016 can reveal. Here goes the story.

According to various estimates, black money was pegged at amounts ranging from Rs 3 lakh to Rs 5 lakh crore. On Nov 8, the value of Rs 500 and Rs 1000 notes in circulation was Rs 15.44 lakh crore. Out of this, as of Nov 28, the RBI said, Rs 8.45 lakh crore was deposited between Nov 10 and Nov 27 (banks were closed on Nov 9).

Commercial banks are required to keep a cash reserve ratio (CRR) @ 4% with the RBI. On Nov 8, CRR was about Rs 4.06 lakh crore, deposited mostly in high value notes. The cash-to-deposit ratio is 4.69%, which leaves 0.69% with the banks as cash in hand, which works out to approx Rs 70,000 crore.

The sum of CRR and cash deposited in 20 days is approx Rs 12.50 lakh crore. If you add Rs 50,000 crore from cash in hand, the total amount of high value notes not with the public works out to Rs 13 lakh crore.

At rate at which old notes are deposited or exchanged since Nov 8, Rs 2 lakh crore or more can come to the banks in till Dec 30, taking the total to above Rs 15 lakh crore, “thus throwing to the winds all calculation of the government to tackle black money”.

This report says, “Either the black money is not in high denomination notes or those who have such money may already have put it back into the banking system”.

The Wire Report, Quoting Economist Arun Kumar

Economist Arun Kumar estimates that over 95% of the old high value notes may come back to the banking system. The government had estimated that up to Rs 3 lakh crore of these notes may not come back into the system.

As of Dec 1 2016, nearly Rs 11 lakh crore of the old Rs 1000 and Rs 500 notes were back in the banking system, with about a month more left to deposit the old notes. According to the report, small and medium scale businesses, which hold 40% to 50% of the demonetised notes, have found ways to push back money into the system.

He further reasons that the sudden increase of deposits in Jan Dhan accounts, the entire amount of Rs 29,000 crore is from just 3 crore accounts out of the total 25 crore Jan Dhan accounts. That means, 3 crore Jan Dhan accounts were used to launder money. Had these been genuine deposits, they would have been spread evenly across 25 crore accounts, not just 3 crore accounts.

My Take

The sudden announcement of demonetisation was an rude shock to most people. They invented ingenious ways to exchange/deposit their money.

One of the ways people found was to buy gold from jewelers who reopened shops and continued selling their stocks till they lasted on the night of Nov 8/9, charging exorbitant prices.

There are reports of people using the bank accounts of others, apart from Jan Dhan accounts as mentioned above. There were millions of bank accounts which were either dormant or rarely operated accounts many of which could be used by hoarders. Also, there were such accounts offered on hire.

Then there were some bank officials who colluded with money hoarders to exchange notes illegally, and many such officials were caught red-handed.

Temple accounts and accounts in cooperative banks were misused. Post offices, railway, petrol pumps and many other agencies were authorized to exchange/receive banned notes. Taxes and bills of utilities such as electricity and some others could be legally deposited using banned notes.

Practically every department of the central and state governments was involved in exchange/deposit of invalidated currency. All these present several millions of legal and illegal opportunities to launder money for those who really had black money. And they used the available opportunities.

Those who suffered untold hardships were the poor people and those who were not black money hoarders.

Handling Payday Rush Post Demonetisation

Banks, private sector, governments and public sector enterprises are bracing up to face the challenges that will unfold during the first payday season since the sudden notes ban announcement. Banks across India are getting ready, though reluctantly, to face a massive rush for cash.

Though salaries get credited to the accounts of employees, they need to withdraw cash either from banks or ATMs. This will double or triple the queues that are still found before ATMs and bank branches. Additionally, a vast number of ATMs are still not recalibrated and hence unusable. Added to that, even before the expected payday rush, ATMs used to be emptied out no sooner than they were replenished with cash.

That means, longer queues, and a huge loss of working days on a national level. Besides, the restrictions on withdrawal of cash will be another impediment. This will put additional pressure on banks to fill up their ATMs and to permit higher withdrawals to reduce the queues.

The demonetisation of high value currency notes announced on November 8 took 86% of cash out of circulation all on a sudden. The result is a huge cash crunch affecting almost all people, especially the lower middle class, farmers and the poor.

So, whoever could manage to exchange old notes or withdraw from their accounts are hesitating to spend except for basic and urgent necessities. This resulted in an artificial cash shortage because money as usual did not go into circulation. That means, newly printed notes would not get back to the system as fast as expected.

Well before the payday season, the government and banks have been preparing to deal with the situation, but not, expectedly, enough. As per reports, banks are expected to see disbursal up to 30% more than usual due to withdrawals from accounts of salaries and pensions.

Ever since demonetisation was announced, the Reserve Bank of India (RBI) was planning to meet the challenges of the first payday rush. Accordingly, the RBI has promised ‘there will be improvement in cash supply’ to meet the rush, and there will be more new Rs. 500 notes.

However, several bank branches did not get the new Rs. 500 notes at all. Only adequate supply Rs 500 notes will ease the banking system. It is because this particular denomination has been the standard one for easy transactions. People are reluctant to receive Rs 2000 notes as they are difficult to use for daily transactions.

After cash crunch hit people, Rs 100 notes took the role of Rs 500 notes too. Banks too were dispensing this smaller denomination, making its circulation increase by 150% since demonetisation. And, people have started hoarding Rs 100 notes also, resulting in more crisis.

Though the weekly withdrawal maximum limit has been fixed at Rs 24,000, several banks have imposed their own limits, saying they cannot allow more than Rs 10,000 for shortage of notes. Even withdrawals from Jan Dhan accounts have been limited to Rs 10,000 a month, at least for now.

What can be understood from various reports is that, though government security presses are trying hard, they are unable to print enough currency to replace the banned notes to meet the demand. The problem is not with disbursing banks, but with the supply of notes. So, till the government can supply sufficient number of notes of the required denominations, the problems are likely to continue. And the withdrawal restrictions will also continue.

Let us see how the payday rush worsens or eases the current crisis.

Black Money Links to Garib Kalyan

On June 26, 2016, PM Narendra Modi provided an opportunity to black money holders to disclose their incomes under the Income Declaration Scheme (IDS) and be part of a transparent system. He also announced the government will neither ask the source of the untaxed wealth nor conduct any investigation on the matter.

Now, the government is going to give another chance to convert unaccounted money by introducing the Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana (PMGKY).

The value of the banned Rs 500 and Rs 1000 currency notes was 86% of the total money in circulation when demonetisation was announced on November 8. It amounts to over Rs 14 lakh crores. Out of this, between November 10 and 27, only Rs 8.45 lakh crore (including exchange of Rs 33,948 crore) has come back to the banks. That leaves a whopping sum of over Rs 5.55 lakh crore still hoarded. Where will it go?

One possibility is the remaining invalid notes may find the way to the banks somehow and become transparent, white money!

In the initial phase of demonetisation shock therapy, people burned crores of rupees (a Mumbai-based hawala operator reportedly burned old notes worth Rs 500 crores). Some persons slipped in old notes into temple hundis. Many others invented their own jugaad to convert banned notes. The result was unbelievably long, serpentine queues in front of banks.

Initially, under shock, despair and confusion, a lot of people privately exchanged old notes at whatever rates they could get. Some others hired unemployed people to stand in queues and exchange notes. And some enterprising jugaad masters even started illegal exchange rackets. All these privately exchanged money had to finally end up in the banks. So, the bank queues further stretched to miles, and new dubious means opened up.

Reportedly, a few bank officials were arrested recently while illegally exchanging old notes bending RBI guidelines. The rate of commission charged by them is 30%. That is only the tip of the iceberg. If a few were caught, how many more are not caught and, perhaps, still earning huge amounts of commission?

People also invented several new monetization channels. Some of these are Jan Dhan accounts, temple’s bank accounts, tapping cooperative banks, and many more such conversion routes. These, and more, were reported by newspapers and electronic channels.

There is a possibility of most of the hoarded money finding the way into banks before the deadline. Yet another possibility, as the government banks on, is that the money can be attracted by a new scheme.

And here is what’s on offer. The new chance, the Pradhan Mantri Garib Kalyan Yojana (PMGKY scheme) is a one-time scheme that will remain open only till December 30.

Those who want to use this chance have to pay tax, penalty and surcharge totaling 50% of the unaccounted money. The 50% is made up of income tax @ 30%, penalty @ 33% of tax (or 10% of declared amount) and PMGKY cess @ 10% of the declared amount.

They also will also have to deposit 25% of the disclosed sum in the PMGKY scheme fund at zero interest rate for a lock-in period of four years.

Those who miss this chance still can declare the hidden income by filing tax returns at the end of the financial year. But they will have to pay tax at a punitive rate of 60% and surcharge @ 25%, leaving only 25% with them. In some cases, an additional penalty can be levied at 10%. In case of misreporting or other irregularities, the levy of 50% can go up to 200%.

The aim is to use a part of tax dodgers’ money for the welfare of the poor, as the name of the scheme suggests.

Bankers Blues and Customers’ Woes

The Axis Bank Currency Conversion Case

Officials Axis Bank in Kashmiri Gate, Delhi, converted scraped notes worth Rs 30 crore for a hawala operator. On Friday, the Income Tax (I-T) department searched the bank premises and the residences of two senior bank officials who exchanged new Rs 500 and Rs 2,000 notes for old notes worth Rs 30 crore. The bank officials took 30% commission in gold bars from the hawala operator. Delhi Police had alerted the I-T officials after the arrest of a person with Rs 3.5 crore on November 21. According to Axis Bank, the customer who deposited the amount has been operating a current account for four years and deposits were made in his accounts. According to I-T officials, red flags were raised since a Gujarat bank official was caught receiving bribe of Rs 4 lakh in new Rs 2,000 notes on November 18. This is the first case of direct evidence of bank officials’ involvement in illegal conversion of banned notes and their collusion with hawala operators.

Four Employees of Bank of Maharashtra Suspended

Udgir is a small town in Latur district of Maharashtra. Four employees of the Bank of Maharashtra branch in Udgir exchanged invalid currency notes worth Rs 15 to 20 lakh fraudulently. They were caught and suspended. These bankers simply made unauthorized entries in the accounts of several customers. They too charged a commission of 30% from a local trader – seems to be the standard rate. Another employee of the bank promptly alerted the customer whose account was manipulated. The victim customer got frightened, rushed to the bank and made a hue and cry thereby alerting the manager and other staff. Inspector Balaji Sontakke of the crime branch of Latur said that their teams reached the bank where an audit was going on. He said depending on the outcome of the audit, a case would be registered.

The Noida Banker Helping a Friend Caught

Manoj Sharma, the branch manager of Oriental Bank of Commerce, Noida Phase 2, Uttar Pradesh, was caught by police while to helping a ‘friend’ change his black money. Sharma was caught while handing over Rs 1 lakh to the friend who had come with 25 ID proofs to cheat RBI rules on exchanging scrapped notes. The manager closed the bank on the pretext of running out of cash. Alert and aggrieved customers informed the District Magistrate N P Singh that ‘a few people were being entertained inside the branch’. Immediately Singh asked police to raid the branch. Police nabbed Sharma red-handed, while a long queue was waiting outside. Singh said that the police had shot a video of the incident as evidence and that a report had been sent to the bank’s Chairman and the finance ministry. According to the local people, black money hoarders do not have to stand in queues because they have their ‘friends’ in the bank, who help them by accepting several IDs provided either by the bank staff, or obtained from mobile phone shops. Another bank manager from Meerut reported that some persons approached him for IDs in bulk to exchange Rs 5 lakh worth of old notes, but he refused the offer.

Bank Accounts for Hire

Financial Intelligence agencies have dug up over 1,650 bank accounts which are on hire. Some people have been letting out their scarcely operated accounts for monthly rents from Rs 10,000 to Rs 15,000 to black money hoarders. One person had hired as many as 115 accounts. Agencies, which are scanning deposits made since November 8, issued show cause notices to such account holders. Agencies are trying to find out whether it is an organised racket, or run with connivance of bank staff. They are also looking into the role of bank staff in letting out accounts to convert black money. Reportedly, some bank officials were demanding 20% to 25% commission for depositing black money. On Thursday, agencies analyzed Suspicious Transaction Reports (STRs) from various states. They found 462 accounts from Bihar, 308 from West Bengal and 98 from Punjab had sudden surge of operations since Prime Minister Narendra Modi announced the demonetisation drive.

Jan Dhan Account Holders Caught Unawares

Jan Dhan account holders in Ludhiana alleged that they are refused withdrawals from their bank accounts. Bank officials said the trouble is only for accounts showing ‘dubious transactions’ and they had frozen such accounts. They said they have noticed that “gullible people are depositing hoarded cash into their Jan Dhan accounts”. The officials also said the frozen accounts are of people who have not fulfilled the Know Your Customer (KYC) norms and deposited cash after November 9.

Are Bank Officials Trading Your KYC Documents?

Several customers are stumped as bank officials tell them that they have already exchanged old notes, though it may be their first visit to the bank after demonetisation was announced. They allege that bank officials may be misusing their KYC documents. Some customers suspect that some bank officials may be misusing photocopies of KYC documents submitted with their banks. A Reserve Bank of India (RBI) official said that customers are not required to submit photocopies of any such documents but they can just show bank officials any of their identification proofs. If banks have customer’s KYC details, there is no need to provide additional proof. The official advised if there is any instance of manipulation, customers can approach the banking ombudsman.

Are Jan Dhan Yojana Accounts Repository of Black Money?

News reports indicate that there is a sudden surge of deposits in Pradhan Mantri Jan Dhan Yojana accounts following demonetisation of Indian currency announced on November 8. The deposits since have soared by around Rs. 27,198 crore in 14 days.

The Pradhan Mantri Jan Dhan Yojana (PMJDY) was launched on August 28, 2014 for promoting financial inclusion by providing banking services to the disadvantaged segments of society and with the objective of ensuring at least one bank account for every household.

As on 23 November 2016, total balance in 25.68 crore Jan Dhan bank accounts was Rs. 72,834.72 crore, as against the total balance of Rs 64,252.15 crore on 9 November. Out of 25.68 crore accounts 22.94 per cent are zero balance accounts, though the number of zero balance accounts have slightly declined.

However, the government and RBI have been alerting Jan Dhan account holders not to misuse their accounts by allowing black money hoarders to deposit the scrapped bank notes into their accounts, or allowing conversion of black money.

There are also reports that the Income Tax department is looking into the sudden surge in deposits, though the final data on the deposits will be available only after December 31. However, as the RBI has asked banks to send comprehensive reports, including denomination-wise deposits, these account holders need to be cautious and not misuse their accounts.

Also, there are various reports showing that unscrupulous hoarders of currency notes, hawala operators and even some business men using the Jan Dhan accounts, paying even a commission to the account owners.

The problem with many account holders is that many of them are either poorly educated or illiterate. They simply do not understand the implications of illegal currency conversion. For a poor person, money is only money and he or she cannot differentiate between black and white money.

What makes situation serious for these account holders is that the accounts were almost dormant for quite a long time and all of a sudden, when high value currency could not be exchanged elsewhere, most of them went and deposited the money accumulated with them in their bank accounts. Within limits, they are safe, but exceptionally bulged accounts may not stand the scrutiny of the tax sleuths.

And it is quite normal for rural India to keep whatever savings they have at their own houses. Even money for the marriage of girls are saved and accumulated in cash. Several people buy and sell land and other high value items using cash. That is the kind of economy in rural India. So, these people can be easily exploited by money lenders, cash hoarders, blade companies and other illegal operators.

Demonetisation hit hawala and fake currency the most

People standing in queue outside a private bank to deposit and exchange Rs 500 and Rs 1000 currency notes at Salt Lake City, Kolkata, West Bengal, India.

Following the demonetisation drive by the government, a lot of people who have accumulated Rs 500 and Rs 1000 notes have panicked and acted in bizarre ways. Some others destroyed/burned money that they thought could not be used. Several real estate dealers, transport operators, wholesale traders and others who used to do business in cash only adapted strange ways to convert their defunct bank notes to legal tender. Here are some of the instances that I could read today.

A 60-year-old woman named Mariyumma Muhammed, a native of Kotukkara near Kondotty in Kerala’s Malappuram district, went on Saturday to the SBI branch at Kondotty with 49 currency notes of Rs 1000 denomination (Rs 49000). Finding 37 of the notes counterfeit (Rs 37,000), the SBI officials informed the police who arrested and later remanded her to judicial custody. On questioning, she said her sons working in the Gulf sent the money through Hawala channels. The money was meant for construction of a house.

According to various reports the counterfeit currency notes seized from various places in Kerala in the last few years were printed outside India. Continued and intensive checking and seizure of fake currency by the authorities only forced the operators to change their modus operandi to transport and use Indian Fake Currency Notes (FICN).

According to reports, FICN operators have widespread networks in Kerala and Karnataka and receive over Rs 50,000 crore through Hawala. Almost all the money meant for funding terrorism and other antinational activities enters India through this route.

In another case after the demonetisation drive, Sumit Kumar Tudu of Kendrapara district in Odisha was arrested by Odisha police. He went to deposit Rs 2.5 lakh in the SBI branch at Khurda town near Bhubaneswar. The bank officials found 42 fake notes of Rs 1,000 and 10 fake notes of Rs 500 totaling Rs 47,000. Deba Prasad Kanhar, the in-charge of SBI Khurda, said that they informed the police. Sumit Kumar Tudu claimed that he is the son of a bank officer and his father asked him to deposit the money in his father’s account.

In another sad case, a 48-year old man named Unni, a Kerala State Electricity Board (KSEB) employee, who came to deposit Rs 500,000 worth banned high denomination notes in the State Bank of Travancore in Thalassery, fell to his death from the second floor of the building.

Interestingly, within days of introduction of the new Rs. 2,000 note, Ashok, an onion grower in Chikkamagaluru in Karnataka, was cheated by a stranger with a photocopy of the note on Saturday morning, which he came to know only when his friends told him later.

The new 500 and 2,000 rupee notes are considered "high security" notes having several new security features and cannot be easily counterfeited compared to the now invalid notes.

As a result of demonetization, the Hawala racketeers in Mumbai have taken the worst hit and no transaction is likely to take place in the near future. Business circles in Mumbai fear it will pull down businesses that are accused of heavily depended on such illegal money.

Banks in the country received 3 trillion rupees ($44.4 billion) in the in the first four days after the government’s move to ban high denomination notes on November 8, the Finance Ministry said on Sunday.

The Reserve Bank of India (RBI) on Sunday directed all banks to submit daily reports of cash withdrawals across the counter and through ATMs in order to compile accurate data of currency circulation.

That finally comes to drying up of all the resources of fake currency notes and money in the illegal money transfer circuit, at least for now. Also, a lot of money that avoided the banking route will now get deposited and there will be a huge churning in the entire Indian economy. Of course, there are difficulties being faced by the common people, but I think it help in the long run.

Demonetisation of banknotes in India: some political reactions

Queue at an ATM for money in Howrah, West Bengal, on 8 November 2016

Since Indian Prime Minister Narendra Modi declared Rs 500 and Rs 1,000 notes invalid on Tuesday in a sudden and unexpected move for demonetisation of high value banknotes and replacing them with newly printed notes of denominations Rs 500 and Rs 2,000, he has got a mixed bag of reactions. Some are hailing the move while some others are severely criticizing it. How some of the politicians reacted to the move are below.

Indian National Congress criticised the central government's move to ban Rs 500 and Rs 1,000 notes. Congress Vice President Rahul Gandhi said that it shows how little Narendra Modi cares about ordinary people. On November 11 Gandhi stood in queue outside the State Bank of India on Parliament Street in New Delhi to experience the ‘pain of the people’. He talked to some people to know their troubles. He said to news reporters who interviewed him, “Poor people are in trouble, I am here to get Rs 4, 000 exchanged. Neither you (the reporters) nor your crorepati owners nor the Prime Minister will understand the problems faced by people.”

Punjab Pradesh Congress Committee (PPCC) president Captain Amarinder Singh on Wednesday criticised the manner in which the government handled demonetisation. Singh said, “Though the move was a step in the right direction in order to curb corruption, terror funding and black marketing, the way it had been handled had led to chaos, with the small farmers, traders, daily wagers and the poor the worst hit.”

West Bengal Chief Minister and the chief of Trinamool Congress Mamata Banerjee tweeted, "I want to know from the PM how my poorest brothers, sisters who've received their week's hard earned wage in one Rs 500 note will buy atta, chawal, tomorrow?" She told the press in Kolkata on Saturday that despite ideological differences she is ready to work with CPI (M), Congress, Samajwadi Party, and Bahujan Samaj Party ‘to save the country’.

Delhi Chief Minister Arvind Kejriwal (AAP) alleged, "Demonetisation is a big scam... People close to BJP were alerted in advance. There were heavy deposits in banks in July-September quarter. Who deposited these thousands of crores suddenly?"

Mulayam Singh Yadav, the chief of Samajwadi Party (SP) that rules Uttar Pradesh, said on Thursday at a press conference in Lucknow, “The sudden ban on high denomination notes has caused immense hardships to commoners, farmers and the poor, the demonetisation has been done by the NDA government with an eye on elections, and not keeping plight of people in mind.” He further said, “We are against black money. SP has fought against it. We do not want use of black money in elections.” He demanded a rollback of the ban ‘for a few days in view of the wedding season’.

Uttar Pradesh Chief Minister Akhilesh Yadav (SP) asked the government to ‘take all possible steps to minimise inconvenience to common people’, adding, "Central government must set up special banking counters in villages and district centres to assist the public, villagers and farmers."

Bahujan Samaj Party (BSP) chief Mayawati told reporters in Lucknow, “Economic emergency like situations have been created by the government to hide their inefficiency. Poor people, middle class citizens, small businesses and farmers have been hit the most and not the people who have black money.”

The Communist Party of India (Marxist), CPI (M), on Wednesday alleged that the move will burden ordinary people and increase bureaucratic harassment of people. Sitaram Yechury, the CPI (M) General Secretary, described it as ‘poorly planned’. He tweeted, "To uncover the illicit money trail, we demand that the govt release the name of Top 100 defaulters of bank loans". "This demonetisation is attempted as a gimmick to divert attention from serious social and political failures of this govt in past 2.5 years."

Pinarayi Vijayan, Chief Minister of Kerala - ruled by the CPI (M)-led Left Democratic Front (LDF) - criticized the demonetisation saying, “It has to be understood that those who are having black money were aware of this earlier and hence they have not been affected with this. It has only affected the common man the most. The Centre has implemented this without looking into the practical difficulties face by the people." He wanted time till December 31 for people to use the existing notes.

Goa Chief Minister Laxmikant Parsekar (BJP) told reporters on Wednesday the demonetisation would not affect tourists who had arrived in the state. He said, “Like other people, the tourists can convert up to Rs 4,000, and usually they avail the facilities using credit cards. The inconvenience will be only for a day. From day after tomorrow, they can withdraw from ATMs”. He said he was personally happy with the ban which was to curb corruption, black money and terrorism. “There are some politicians who have stashed black money in their go downs. They are now having the sleepless nights,” he said, further adding that the clampdown on black money will also ensure that there is a ‘cleaner pre-election period’”.

Andhra Pradesh Chief Minister and the Telugu Desam Party (TDP) chief N Chandrababu Naidu described it as bold step. However, he suggested that reintroduction of high denomination notes should be revisited and urged the government to look for alternatives.

Swaraj Abhiyan leader Yogendra Yadav tweeted, "Positive move against counterfeit currency. Govt overplaying impact on black money. Opposition overplaying transitional problems."

It appears that demonetisation was initially welcomed by the people and political parties in India, with a few exceptions. But it is usually alleged that black money is used by politicians to influence voters during elections. State Assembly elections are going to be held in UP, Punjab, Goa, Uttarakhand and Manipur early next year. So, experts see a political angle in the move. However, the negative reaction to the government’s order, claiming to curb black money and counterfeit banknotes, is not as much as it should be for such a drastic move.

As a result of demonetisation, most people ran short of cash, and there was no way to exchange the higher value notes. Neighbourhood shop keepers and other traders refused to accept the banned notes. Banks were closed immediately after the currency ban to replenish their old currency stocks with the newly printed series of 500 and 2000 rupee notes.

According to political analysts, its impact is expected to show up in the assembly election outcomes in the five states of Punjab, Goa, Uttarakhand, Uttar Pradesh, and Manipur to be held early next year.