RBI report puts a dampener on demonetisation promise as the government stands by the policy


NEW DELHI: The RBI, in its annual report for 2017-18, predicted strong growth for the economy while analyzing the consequences of the reform measures taken during the fiscal year by the government.


One of the main takeaways from the annual report of the RBI is that it states the Indian economy is set to continue in its growth pattern. The report stated in part, “Infrastructure holds the key to unleashing the impulses of faster growth”. With regards to outside factors in the past year, India is not immune to global economic shifts despite good growth numbers. The report stated that factors such as a normal monsoon and growth in the services sector will contribute towards the growing economy.

With regard to monetary policy, the RBI stated it will continue to towards achieving a medium-term target for retail inflation of 4%. Inflation risks remain, but the report stated that would be upside risks throughout the remainder of the year; rising commodity prices particularly of crude oil and some global financial market developments have to be taken into consideration.

The main take away from the report has to do with demonetisation. The report stated that around Rs 15.31-lakh crore of the total Rs 15.41-lakh crore of demonetised currency notes have been returned. This means that Rs 10,720 crore of banned notes did not return to the system. This puts a dampener on the government’s claim on black money. The report stated, “Compared to the previous year, there was an increase of 35 % in counterfeit notes detected in the denomination of Rs.100, while there was a noticeable increase of 154.3 % in counterfeit notes detected in the denomination of Rs. 50.”

Former chief statistician of India, Pronab Sen said of the results, “It (return of most currency notes) comes as no surprise. Very little of unaccounted wealth is kept in cash. Most of it goes into real estate, gold and stock market”. One of the main tenants of demonetisation was the a large share of old notes held by tax evaders and others would suffer losses and not exchange their currency for new notes, as a way to avoid legal scrutiny. The BusinessLine editorial states that the stated goal wasn’t achieved, “The ban has failed to unearth significant counterfeits as promised, with the proportion of fake notes detected by banks in FY17 and FY18 amounting to 0.00001 per cent of the notes in use”.

The opposition has criticised the government for failing to realise the goals it set in particular with relation to demonetisation and in general with relation to curb tax evasion and other financial criminals; take Nirav Modi and Vijay Mallya. A report of the Standing Committee on Finance on demonetisation is currently deadlocked in parliament.

Ahead of a meeting in May where RBI Governor Urjit Patel appeared before the Standing Committee on Finance, Veerappa Moily headed a panel on discussing financial sector issues including demonetisation. BJP MP’s stalled the adoption of the draft report by the committee. The draft report stated that as a result of demonetisation, there was 1% GDP loss and unemployment in informal sectors. The report in general is critical of demonetisation and demanded the government conduct an objective study of the policy and its economic impact since its implementation.

The Tribune editorial criticises the government in this regards, “The Modi government’s biggest policy decision to flush out black money has officially turned out to be a colossal failure… either the country never had any black money at all, or the entire black money has been laundered”. Finance Minister Arun Jaitley, in light of the report, said demonetisation achieved a larger purpose, “The larger purpose of demonetisation was to move India from a tax non-compliant society to a compliant society”. While the government has remained steadfast on its policy and its impact, the criticism in light of the RBI annual report’s data on demonetisation is not likely to go away.

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