In a surprise move, Prime Minister Narendra Modi demonetized high value currency on November 8th 2016. Yes...Within minutes the old 500 and 1000 rupee notes were no longer legal tender. The aim of this move....Destroy black money in the economy and the corruption fueled by it. Destroy fake 500 and 1000 rupee notes which were fueling terrorism in India.
PM Modi assured the honest citizens of India, deposit all your old 500 and 1000 notes in banks and post offices up to any limit within December 30th 2016. The old notes could also be exchanged subject to limits. Now, citizens with black money had a problem...How to deposit these old 500 and 1000 rupee notes hidden in cupboards and mattresses?
Now, 86% of currency by value was in these old 500 and 1000 rupee notes. Yes, INR 15.44 Lakh crore worth of currency in old 500 and 1000 rupee notes was scrapped. It was widely believed that about INR 3 Lakh crores would not be exchanged or deposited. This was all that black money hidden in cupboards and mattresses fueling corruption and terrorism. These notes would be burnt or destroyed so that the individuals behind them would never be caught. For the RBI, currency notes are a liability.
The rupee notes that go out of circulation (say they are destroyed), reduces this liability. RBI does not need to print new currency against these destroyed notes. These entire extinguished notes (black money which has disappeared), will be a profit to the RBI and will be transferred to the Government as a windfall profit.
So was demonetization a success? Let's find out. Want to know more on tax planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.
Take a look at the annual report released by RBI. It says that out of the INR 15.44 Lakh crores of rupee notes taken out of circulation because of demonetization of high value notes, INR 15.28 Lakh crores has been returned by the public through deposits.
RBI data shows that 99% of banned notes have been returned. The Prime Minister had demonetized old 500 and 1000 rupee notes of value around INR 15.45 Lakh crores on November 8th 2016. Now, INR 15.28 Lakh crores has been returned to the system by way of deposits by the public. Critics of demonetization are calling it a flop show. They say the value of the 1% of notes that have not returned to the RBI, was just INR 16,000 Crores. Where is the INR 3 Lakh Crore profit to the Government?
This is what FM Arun Jaitley has to say, "Measuring the success of demonetization on the basis of how much cash has come into the system shows “an inadequate understanding." Banks and Financial Institutions have reported a rise in the number of suspicious financial transactions. This means that citizens having black money have been forced to deposit this money in banks using illegitimate ways.
Demonetization was a way to force citizens with black money to deposit money in banks, where suspicious transactions would be flagged by banks.
Critics are saying that as 99% of estimated INR 15.45 Lakh crores which was banned has been returned, demonetization is a flop. Where are the promised returns? But, this is the small picture. Yes, the Government doesn't have much to show in terms of returns from demonetization, but it has succeeded in creating a deterrent against black money and its creation and accumulation. Citizens with black money have been sent a very important message...You are under scrutiny, You cannot escape.
Most of the high value notes have found their way back into the legitimate economy. It is now the work of the tax department and other investigative agencies to scan all the bank accounts and catch citizens who have made illegal deposits during demonetization.
About INR 1.25 Lakh crores of black money has been detected and around INR 1.75 Lakh crores is under scrutiny. All this has been possible only because of demonetization. Because a large amount of high value notes are now in the banking system, investigative agencies can check the legitimacy of cash deposited.
FM Arun Jaitley lists out the successes of demonetization. Formalization of the economy, increasing the tax base, cashless economy and digitization, attack on black money and so on. Demonetization has starved Maoists and Separatists of cash. The main successes of demonetization have been eliminating fake currency, destroying terror funding, Pulling in the non formal economy into the formal economy which expands the tax base and thus employment, promoting cashless and digitization of payments and making India a less cash economy.
The real success of demonetization has been the expansion of the tax base and an increase in both direct and indirect tax collections. Aren't loan interest rates coming down?
You must be wondering why the success of demonetization cannot be questioned in spite of 99% of banned notes returned? Tax evaders have managed to legalize unaccounted money by using proxies to make deposits, high value purchases are made using back-dated bills and corrupt bank officials have helped the rich. Now it's up to the tax department to catch these unscrupulous citizens. The drive against black money has led to the discovery of many shell companies, with more than 1.75 Lakh shell companies used in money laundering, shut down. Be Wise, Get Rich.
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