Will the government gain monetarily from lost black money?

MUMBAI: Away from the winding queues and social media chatter, there is a debate brewing among policy makers, RBI eggheads and economists on whether the government stands to gain monetarily from currency notes which do not flow back into the white economy.

There are those who believe that de-legalised notes which are neither exchanged nor deposited with banks can be used to improve government’s finances as ‘extinguished’ currency bills lower the liability in RBI’s books. But, the monetary policy and legal departments of RBI think that the central bank’s books cannot be used like a corporate balance-sheet where a reduced liability translates into gains, said an RBI official. “Notes are not exactly liability in the usual sense,” said another.

Deadline for note-swap

Indeed, RBI has set no time limit for the exchange of the old Rs 500 and Rs 1,000 rupee notes. Prime Minister Modi, in his speech on the evening of November 8, had said that those who are unable to deposit their notes by December 30 can deposit the notes in specified offices of RBI up to March 31, 2017 after submitting a declaration form. But the RBI communiqué soon after the announcement makes no mention of a March 31deadline.

The subtle difference between the speech and the RBI notification, which has gone largely unnoticed, reflects the thinking within the central bank: the monetary authority is in no hurry to entirely extinguish notes (that are no longer legal tender), show a lower liability in its books and create a transferable surplus; more so, as RBI’s accounting policies are different from accounting standards followed by companies and other business establishments.




Legal, accounting hurdles

But the central bank will have to take a call (on notes that are not tendered) if the government comes out with a legally binding directive. In fact, last week, finance minister Arun Jaitley said that some more legal steps are needed if the demonetised currency has to be extinguished.

Till now the government, preoccupied with addressing the cash chaos, has not made any future claim on demonetised notes that do not return to the banking system. Jaitley’s recent observation on extinguishing demonetised notes has been the only statement on the subject from a senior government functionary. But, RBI has maintained a studied silence on the issue — refusing to respond to ET’s queries.

Speaking to ET, Manish Sampat, Partner at CNK & Associates, the auditors to RBI for 2015-16, said: “Currently, as per the accounting policy, currency notes in circulation are accounted for as a liability of the issues department Balance Sheet of the Reserve Bank of India.

The liability on account of the currency notes not returned till the stipulated date will continue to remain as a liability, unless there is an ordinance/order from the government to this effect, as these are promissory notes issued by RBI. Thus, liability on account of currency notes not returned can be extinguished after a Government of India order.”

According to Sampat, at present, there is no such reserve where this can be credited nor is there a policy on how to account for extinguishment of this liability. “What effect this will have on reducing the fiscal deficit of the government is an issue on which I cannot comment as this is not an accounting matter. This is a matter to be decided by the RBI and Government of India,” he said.

Till November 8, the value of Rs 500 and Rs 1,000 notes in circulation was more than Rs 15 lakh crore, of which roughly 20% (about Rs 3 lakh crore) is estimated to be black money.

The question is: If a chunk of it does not come back to banks or RBI by March 31 or June 30 (when RBI closes its accounts), will New Delhi give up its claims on these notes which, it may view, have been identified and isolated by the government’s direct action against black money.

According to the chief economist of a private bank, RBI may book such unaccounted liability as ‘demonetisation reserves’ for a few years and conduct asset sales as and when required to accrue to the government as profit transfer.

But there may be legal hurdles. “When a currency ceases to be a legal tender, all it means is that the physical note stops being in circulation for public usage. Issued notes are still valid, i.e. promise of the RBI, guaranteed by the Central government. Once they stop being legal tender, the precedent in India (and also other common law countries) is that they continue to be exchanged by the specified offices of the central bank. In the event the notes are sought to be extinguished in entirety by an administrative action, a constitutional challenge would exist,” said Veena Sivaramakrishnan, Partner at the law firm Juris Corp.

“In any event, once the notes are extinguished by an administrative action, there is no need for any reserve to be maintained by the RBI and even if so maintained, it can, as required under law, be passed on to the Central government,” she said.

At present, the discussions on the possible influence of demonetisation on the central bank’s balance-sheet are mired in principles of law and accounting. But it may cease to be just an academic debate once the dust settles.