Exposed: 7 lies in Modi government's response to RBI data on DeMo disaster

The Reserve Bank of India's annual report that has put out conclusive data on demonetisation has confirmed what many have been saying for a long time – that the sudden ban on nearly 90% of the currency in circulation in the country was a disaster.

Nearly 99% of the money that was in circulation before the note-ban was imposed has come back to the RBI. The government had then expected that a large part of this money would not come back, believing that it was black. 

Experts warned the government repeatedly that most of the black money was held not in cash, but in real estate, gold and securities. A ban on cash would not help the government if its objective was to crack down on black money, they said. Those experts have been proved right as the 
return of all that money can have only two implications: 

• Only white money – money within the system and well accounted for – came back and the government saw no windfall of any black money.
• Some amount of black money was converted into white by surreptitiously sending it into the banking system.

Additionally, the government announced that between November 2016 and end of May 2017, a total of Rs 17,526 crore has been found as undisclosed income.

Even though authorities are yet to conclude their probe into the nature of this money, black or white, it is merely Rs 9,500 crore more than the cost of printing the new currency notes. Was this small a gain worth the pain of the loss of about a 100 lives, millions of informal sector jobs, lakhs of money in small savings and a significant fraction of the country's total GDP?

It appears that the government knows that the RBI data has cornered it because the government's response in the last 24 hours has been absolutely insane. The Finance Ministry release is a document of lies, misdirection and inconsistencies. Sample some of its assertions vis-a-vis the reality -- 

1. The “several objectives” of demonetisation were:

“(i) flushing out black money 

(ii) eliminating Fake Indian Currency Notes (FICN)

(iii) to strike at the root of financing of terrorism and left wing extremism 

(iv) to convert non-formal economy into a formal economy to expand tax base and employment and

(v) to give a big boost to digitalization of payments to make India a less cash economy.

During his dramatic speech, while announcing the note-ban, Prime Minister Narendra Modi had only talked about corruption, black money, fake notes and terror funding. 

Formalisation of economy and digitisation of payments were campaigns started later and they, in any case, are independent of measures like demonetisation.

The Income Tax department is still silent on how much black money it has been able to unearth because of the note-ban. Fake notes, as we know are already back in circulation. 

2. “The Government had expected all the Specified Bank Notes (SBN) to come back to the banking system to become effectively usable currency.”

This is at variance with what Attorney General (AG) had told the Supreme Court on 15 November 2016. The AG had categorically said the government was expecting Rs 10 to 11 lakh crore “to come in” 

3. “The fact that bulk of SBNs have come back to the banking system shows that the banking system and the RBI were able to effectively respond to the challenge of collecting such a large number of SBNs in a limited time.”

What does that even mean? All that money came back because people were forced to deposit it. In no way does that refute the conclusion that the government's expectations of destroying black money were belied.

4. “A significant portion of SBNs deposited could possibly be representing unexplained/black money.”

If that is indeed the case, it means that people who had made money by evading tax on it simply succeeded in depositing that money into their bank accounts without it being detected and held accountable for tax-evasion. And if that is indeed the case, then demonetisation simply helped some people turn black money into white. 

5. As a result of demonetisation, the number of IT returns (ITRs) filed has gone up by 24.7%, advance tax collections of Personal Income Tax have gone up by about 41.79% and Personal Income Tax under Self Assessment Tax (SAT) has gone up by 34.25%.

How does that square with other taxation numbers government had put out earlier? 

Income tax on individuals and businesses went up by 14.5% in 2016-17, a rate that was also achieved in 2013-14 without any measure like demonetisation. 

Additionally, the share of taxes on corporate incomes fell below 60% in 2016-17, share of direct tax collections in total tax collection fell below 50% for the first time in 10 years and the number of income tax assessees grew by only about 2% from 2015-16. 

6. “As a result of demonetisation of SBNs, terrorist and naxalite financing stopped almost entirely.”

The government has told Parliament on record that 10 terror attacks were recorded in 2014, 11 in 2015, 15 in 2016 and three until March 15 this year. 

A report by the US State Department has said that the number of terrorist attacks in India went up by 16% in 2016. 

As for Naxalism, 35 districts were classified as “badly affected by Maoism” by Home Minister Rajnath Singh in 2017, up from 26 in 2013. 

7. “India has continued to be on path of one of the strongest growths in the world.”

Latest government data has revealed that economic growth slipped to a three-year low of 5.7% from April-June 2017, down from 6.1% in the preceding quarter and 7.9% in April-June 2016-17. 

Earlier, the Economic Survey had said in February that demonetisation would lead to a 0.50% drop in GDP growth this fiscal. 

The government's harried response to conclusions drawn based on RBI's data only exposes its insecurity, indicating that the reality might finally be dawning upon its mandarins. Note-ban has not brought about any welcome change that wouldn't have been possible without the damage that it caused. That is proof enough that note-ban was at least an ill-conceived move, if not a well-planned conspiracy.

What is worse is that the audacity behind the decision holds the government guilty of a reckless handling of the authority vested in it by the public. To put it simply, it amounts to a breach of the trust reposed in the government by the public. That, in effect, demonetisation nothing short of a scam.