Result of Demonetisation 2016: Vindicates stance of CD Deshmukh and IG Patel who said no to demonetisation as RBI chiefs in 1946 and 1978..

We usually say in monetary economics (and even in other branches of economics), read history carefully. More often than not what was said previously remains true until today.

So when Government in accordance with RBI Board announced to demonetise the Rs 500 and Rs 1000 notes, this blog just dug some history. In this post it pointed to statements of RBI Governors who refused to demonetise currencies during their regime in 1946  and 1978. This led Governments then to use the ordinance route.

CD Deshmukh in 1946 said:

It was really not a revolutionary measure and even its purpose as a minatory and punitive gesture towards black-marketing was not effectively served. There was no fool-proof administrative method by which a particular note brought by an individual could be proved as the life-savings of the hard-working man who presented it or established as the sordid gains of a black-marketer. Another loophole of which considerable advantage was taken was the exemption of the princely States from scrutiny or questioning when such notes were presented by them. In the end, out of atotal issue of Rs.143.97 crores, notes of the value of Rs.134.9 crores were exchanged up to the end of 1947 as mentioned in the Report of the Board of Directors of the
Reserve Bank. Thus, notes worth only Rs.9.07 crores were probably “‘demonetised “, not having been presented. It was more of “conversion “, at varying rates of profits and losses than “demonetisation.

IG Patel in 1978 echoed similar thoughts:

such an exercise seldom produces striking results. Most people  who accept illegal gratification or are otherwise the recipients of black money do not keep their ill-gotten earnings in the form of currency for long. The idea that black money or wealth is held in the form of notes tucked away in suit cases or pillow cases is naïve. And in any case, even those who are caught napping— or waiting—will have the chance to convert the notes through paid agents as some provision has to be made to convert at par notes tendered in small amounts for which explanations cannot be reasonably sought. But the gesture had to be made, and produced much work and little gain. 

So, this time around what changed? Nothing much.

RBI released its much anticipated Annual report today. In its statement on accounts, RBI just sums up demonetisation (SBN means Specified Bank notes which were demonetised) k:

XI.6.2 Liabilities of Issue Department- Notes Issued

…..

Until June 30, 2017, SBNs were received by the Reserve Bank either directly or from bank branches/post offices through the currency chest mechanism. Some of these SBNs are still lying in the currency chests. The value of the SBNs received by the currency chests has been credited to the banks’ account on “said to contain basis”. Till such time these notes are processed by the Reserve Bank for their numerical accuracy and authenticity, only an estimation of SBNs received back is possible.

Subject to future corrections based on verification process when completed, the estimated value of SBNs received as on June 30, 2017 is ₹15.28 trillion.

Moreover, vide notification no G.S.R. 611 (E) dated June 20, 2017, Government of India allowed District Central Cooperative Banks (DCCBs) to deposit SBNs accepted by them from their customers within the period of 10th November to 14th November, 2016. Further, in terms of AP (DIR series) circular no. 45/2015-16 dated February 04, 2016, rules governing import and export of Indian currency notes to, inter alia, Nepal are different vis-à-vis other countries. As such, Reserve Bank is in discussion with Government of India with regard to the acceptance or otherwise of SBNs held by citizens/Financial Institutions in Nepal.

Therefore, the value of notes in circulation is subject to adjustments to be made after the completion of the verification process of the SBNs received as also for the notes to be received from DCCBs and Nepalese citizens/ Financial Institutions.

The value of demonetised notes amounted to Rs 15.44 trillion on the eve of 8th Nov as per State Finance Minister Sonowal.

This implies nearly 98.9% of currency came back. It could even go higher if we get notes from Nepal and other countries. Some notes are lying in the chests as well. This could make the return figure higher than 100% as has been suggested by few people in the past.

All in all, this blog has written several posts on demonetisation questioning the move from several possible angles. But nothing could be better than quoting two previous RBI Governors who stood against the move and how these things stand true until today..

In all the gray clouds there is a silver lining too. RBI has given figures which are pretty much in line with what most people have thought. It could have given some other figures as well.

More posts on RBI Balance sheet and accounts to follow..

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