MUMBAI • Indians deposited 99 per cent of the high-currency bills removed from circulation last year, the Reserve Bank of India (RBI) said in its annual report, denting the central bank's profit and dealing a blow to Prime Minister Narendra Modi's drive to unearth unaccounted wealth.
A total of 15.28 trillion rupees (S$324 billion) was returned to the central bank through lenders, a number that could renew scrutiny about the effectiveness of the shock measure announced last November.
By rendering 500- and 1,000- rupee notes illegal in one stroke and imposing restrictions on how the money could be returned to lenders, Mr Modi had been intending to make it difficult for hoarders of undeclared wealth, or black money, to exchange their cash for legal tender.
But it seems that nearly all of it was returned by individuals, implying there was a very small amount of unaccounted money held in cash by those seeking to conceal it.
The cash ban had prompted the central bank to print new currency notes, reducing the profit and cutting annual dividend payout to the government by half.
The bank spent 79.65 billion rupees to create new cash in the year through June 30, it said in its annual report published on Wednesday. That was the highest amount in at least 17 years and compares with 34.21 billion rupees and 37.6 billion rupees for the previous two years.
"This data proves that demonetisation was a total failure," said Mr Mohan Guruswamy, chairman of the New Delhi-based Centre For Policy Alternatives, who had advised a previous government led by the current ruling party.
Total amount of currency bills deposited after rupee ban.
Percentage of banned rupees deposited.
Increase in direct tax collection in April-July 2017, compared to a year ago
"The Prime Minister obviously had overstated his case. You've lost so many jobs across sectors. How can people trust Mr Modi and his numbers?"
Finance Minister Arun Jaitely, however, stressed that the exercise was not just aimed at unearthing unaccounted wealth but was also about improving digitisation, getting more people under the tax net, and curbing terrorist financing.
"The real object of demonetisation was formalisation, attack on black money, less cash currency, bigger tax base, digitisation, a blow to terrorism," Mr Jaitley said.
"And we do believe that in each of these areas, the effect of demonetisation has been extremely positive."
According to official data, direct tax collection went up 19 per cent during April-July from a year ago, while electronic payments have risen 21 per cent since November to 113.7 trillion rupees in July.
In a separate statement, the government said the transactions of more than 300,000 companies were under suspicion post-demonetisation, while 37,000 shell companies had been identified as involved in hiding black money.
Some economists say the measure has had a positive impact, including bringing cash into the banking system, and hence lowering the cost of loans, even as significant parts of the economy were disrupted.
"While this shows that demonetisation exercise has not yielded a large one-time gain, it has led to financialisation of dormant savings and helped bring down lending rates," said Mr A. Prasanna, an economist at ICICI Securities Primary Dealership in Mumbai.
Mr Modi's so-called "demonetisation" Bill contributed to the growth easing to its slowest pace at 6.1 per cent in January-March, its slowest pace since late 2014, as large parts of India's economy was dependent on cash transactions.
Mr Jaitley said the impact was temporary, adding that a greater number of banking transactions will help the economy recover quickly.
Although opposition parties tried to make a big issue out of disruption caused by demonetisation, it has failed to dent the appeal of Mr Modi's Bharatiya Janata Party, which has since scored key electoral wins, including in the state of Uttar Pradesh.