From note ban, government eyes Rs 3 lakh crore windfall

NEW DELHI: Some time after the torture of standing in long queues at the bank branches ends for most Indians, the government is likely to laugh all the way to the bank - the Reserve Bank to India to be precise.

Of the Rs 14 lakh crore worth of Rs 500 and Rs 1,000 notes that have been scrapped, roughly Rs 3 lakh crore are not likely to be exchanged for new notes ever. This entire extinguished or disappeared black money will be profit to the RBI, and will be transferred to the central government as dividend.

On the balance sheet of the RBI (just like any central bank in the world) currency in circulation is a liability item. Currency that goes out of circulation is equivalent to reduction in liability. In this case, the reduction will be sudden and large, without the need to create new currency of the same amount.

What the government should and could do with the expected Rs 3 lakh crore bonanza is subject to different interpretations and suggestions - ranging from bolstering public finances to boosting infrastructure to building hospitals, affordable housing and schools.

"There will definitely be higher dividend to the government and this can be done under the prevailing law," said a former RBI governor who did not wish to be identified. But another former governor, D Subbarao, is not so sure. "Will the RBI treat 'the promise to pay' as a continuing liability and transfer an amount equivalent to the wealth destroyed to a special reserve? Or will it treat this as an extinguished liability and account for it as 'profit'?" he was quoted as saying in a report in the Business Standard newspaper. However, he also said that "as required by law the profits have to be transferred to the government."