India's central bank says almost all banned notes returned

RBI report raises questions about success of government's shock 'demonetisation' move in late 2016

Indians protested in November 2017 to mark a year since the government announced its 'demonetisation' policy. Reuters

India's central bank has said almost all currency notes scrapped two years ago have been returned to the banking system, raising questions about the point of the controversial attempt to tackle illegal money.

The Indian economy suffered a sharp downturn after Prime Minister Narendra Modi stunned the country in November 2016 by withdrawing 86 per cent of banknotes from circulation in a move known as "demonetisation".

He said the decision to scrap all 1,000-rupee and 500-rupee notes was necessary to clean up India's graft-ridden economy, suggesting that hoards of undeclared wealth - known as "black money" - would be unearthed.

The government set a deadline for the banknotes to be deposited in bank accounts or exchanged for new tender, which it said would leave people hiding large sums of illegal cash with a difficult decision: either declare the money and face possible criminal action or do nothing, rendering it worthless.

However, the Reserve Bank of India said in its annual report late on Wednesday that it had completed its assessment of demonetisation and found that 15.3 trillion rupees (Dh795 billion) worth - or 99.3 per cent - of the devalued bills had been returned.

The RBI gave no explanation for what that meant for the success of the policy.

But analysts and opposition politicians said it proved Indians were not hoarding undeclared or counterfeit notes at home.

They argue instead that illegal money is hidden through so-called "benami" transactions, where assets such as properties are registered in false or third-party names, which the cash ban did nothing to combat.

"The report shows that demonetisation has failed in its primary objective," said Ashutosh Datar, a Mumbai-based economist.

Indians are heavily dependent on cash. Around 90 per cent of everyday transactions were being carried out in cash at the time of the ban.

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Critics say demonetisation caused unnecessary suffering to millions of India's poor who operate outside of the formal economy while the IMF said this month that it had caused "an acute monetary shock".

India's economy grew 7.5 per cent in the quarter preceding Mr Modi's announcement but growth fell as low as 5.7 per cent in mid-2017 as it reeled from demonetisation and other economic reforms, including the introduction of a nationwide goods and services tax.

While 5.7 per cent growth is impressive by the standard of western economies, commentators say Asia's third-largest economy - with its population of 1.25 billion - should be expanding at around 8 per cent.

India's economy has since bounced back and grew 7.7 per cent for the quarter from January to March this year, the highest rate since before the demonetisation.