Home / Finance / Reserve Bank of India suggests that demonetisation allowed black money to enter banking system

Reserve Bank of India suggests that demonetisation allowed black money to enter banking system


People gather in central Delhi for a protest against the government's decision to withdraw 500 and 1000 Indian rupee banknotes from circulation, India November 28, 2016.

Cathal McNaughton | Reuters

People gather in central Delhi for a protest against the government’s decision to withdraw 500 and 1000 Indian rupee banknotes from circulation, India November 28, 2016.

India’s surprise move to ban several bank notes last November — aimed at rooting out illicit cash — appeared to have achieved the opposite of its intended goal, according to a report from the country’s central bank.

The Reserve Bank of India said in its annual report on Aug. 30 that 99 percent, or around 15.28 trillion rupees ($238.7 billion), of the demonetized 500- and 1,000-rupee notes were deposited or exchanged for new currency. That figure suggests that most people — including corrupt officials, businessmen and criminals said to have hoarded their illicit wealth in cash — have managed to preserve their fortunes.

India’s Finance Minister Arun Jaitley reportedly told a conference in New Delhi that illegal money had indeed found its way into the banking system, but said authorities are investigating 1.8 million bank accounts and 200 individuals to identify and tax that “black money.”

Opponents of Prime Minister Narendra Modi were quick to jump on the RBI’s findings as proof that demonetization had failed. For one, former Finance Minister Palaniappan Chidambaram asked on Twitter if the whole effort had been a laundering scheme.

“Critics have presented this as overwhelming evidence that demonetisation failed in its stated aim of clamping down on illicit wealth, known colloquially as ‘black money,'” Shilan Shah, India economist at Capital Economics, wrote in a Wednesday note.

“After all, the rationale was that demonetisation would penalise those storing illicit cash as they would be unable to declare it,” he added.

A report by the Financial Times said complex money-laundering networks sprang up in Asia’s third-largest economy after the demonetization scheme was announced. Wealthy individuals, attempting to evade tax authorities, sold the banned notes at a discount to brokers who dispatched low-income Indians to deposit or exchange them at banks.

Others turned to friends and relatives to help channel their undeclared cash into the banking system.

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