New Delhi can now follow the money. Nine months after Prime Minister Narendra Modi abruptly scrapped high-value currency notes, India’s central bank revealed in its annual report on Wednesday that 99 percent of the $240 billion in circulation has been handed over to banks. This so-called “demonetisation” policy left behind a precious paper trail.
The effort to remove 86 percent of the total value of bank notes from the system was designed to force Indians to give up or burn their illicit wealth rather than deposit it into financial institutions and risk attracting scrutiny about the source of the funds. The return of almost all the big bills suggests the premise failed or that there might have been many counterfeits in circulation.
That’s not all bad news, though. Along with a surge of cash deposits, the Reserve Bank of India says there was a quantum leap in the number of suspicious transaction reports filed by banks and other intermediaries. These increased by an astonishing 345 percent in the year to March. That is valuable data for tax authorities to trace funds that have previously not been declared, and could help to boost tax revenue over time.
This can be added to the list of positive effects that have emerged from Modi’s bold cash call. There was an acceleration in the transmission of the central bank’s policy rates to lenders, thus lowering borrowing costs, and a positive change in the way India’s wealthy class talks about corruption, tax, and compliance.
It is hard to conclude, though, that the unorthodox monetary experiment was worthwhile. A more than doubling of costs to print replacement notes and to airlift them to far-flung areas of the country is one reason why the RBI will now pay New Delhi less than half the annual dividend of $11.7 billion it was expecting. The sudden withdrawal of cash also has weighed on productivity. Annual economic growth fell sharply in the first three months of the year, to 6.1 percent, from 7 percent in the previous quarter.
Even so, Modi may reap an unexpected dividend. It’s up to the taxman now to use this information to hunt for still more cash