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What Black Money? Government May Be In For Shock

Thursday, 01 December 2016, 03:30 Hrs
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NEW DELHI: The main reason given by the government for demonetising high denomination notes was to curb black money. Various estimates have been made of the quantum of such money -- which is not expected to be deposited in banks -- ranging from 3 lakh crore to 5 lakh crore.



But if one goes by the deposit trends so far and the projections, the black money expected to be purged may be much less. The Narendra Modi government may thus be in for a shock.



On Tuesday, in a reply in Rajya Sabha, the Minister of State for Finance, Arjun Ram Meghwal, said that there were 17,165 million pieces of 500 notes and 6,858 million pieces of 1,000 notes in circulation on November 8, 2016, the day Modi made the announcement of demonetising the two high denomination notes.



The total amount of high denomination currency circulating in the system on that day was, thus, 15.44 lakh crore (8.58 lakh crore in 500 notes and 6.86 lakh crore in 1,000).



On November 28th, the Reserve Bank of India (RBI) announced that 8.45 lakh crore (8,44,962 crore) in the banned high denomination notes had been deposited in the banks between November 10 and November 27. Banks were closed on November 9.



This was the value of banned notes deposited in the banks in 18 days, out of the 50 days that the government has permitted bank customers to do so. That too, when huge queues outside banks detered many people from putting money into their accounts.



Further, all commercial banks in India have to maintain a portion of their deposits with the RBI known as cash reserve ratio (CRR). The RBI uses this to manage liquidity in the system.



On November 8, the total amount of actual cash with the RBI as CRR was 4.06 lakh crore (4,06,900 crore), according to the weekly bulletin of the central bank. This is cash, sent mostly in large currency notes according to bankers, by the banks on any incremental deposit that they have, thus adding to their CRR deposit held with the RBI.



Additionally, banks retain money with themselves to manage day-to-day affair and to provide money on demand by customers. According to the RBI, the average cash-to-deposit ratio of banks in India is 4.69. If four percentage points from this goes as CRR to RBI, amounting to 4.06 lakh crore (on Nov 8, say), the cash with banks would average around 70,000 crore. This would include all denominations, of course.



So, if we take the money deposited in 20 days and add the November 8 CRR to it, that amounts to 12.50 lakh crore. If we further add a portion of the cash-in-hand on November 8, say 50,000 crore, the total amount of money which is not with public in old notes is 13 lakh crore.



There are still 30 days left to deposit banned currency notes. At the rate at which money is being deposited, it stands to reason that 2 lakh crore or more would come into the system till December 30, thus throwing to the winds all calculation of the government to tackle black money.



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.



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Source: IANS
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