What Happened to Modi’s Big Promise on Black Money?

Recovering black money and cleaning up the financial system were major promises made by Modi and the BJP since 2014. Not only has there been no progress on the black money front, but the recent electoral bonds episode has also shown that much of the corruption has become legalized and formal.

Back in December 2013, as the Bharatiya Janata Party’s (BJP) campaign for the 2014 general polls gained momentum, the party’s star campaigner and Prime Minister designate Narendra Modi’s main focus was on arresting corruption and recovering black money from illegal cash hoarders. The former Gujarat chief minister went all out against the Congress-led UPA regime for failing to catch black money hoarders. Modi even promised to bring back black money stashed abroad by Indians, and these promises connected with the masses instantly.

The BJP-led NDA government came to power in 2014. In the next two years, nothing significant happened regarding black money. However, in November 2016, the biggest move from the NDA government came when Modi appeared on national television on November 8, 2016, to announce that 500 and 1000 rupee denomination currencies would be deemed invalid by midnight that day. The Indian central bank, which is the guardian of the financial system and authority on currency management, was kept on the sidelines during the entire episode.

Modi pitched demonetization as the NDA government’s biggest move against black money, corruption, and fake currency notes. Hundreds of people reportedly died in distress, millions of small industry units were forced to shut down as supply chains remained disrupted for months, and even big companies suffered as the purchasing capacity of the common man weakened.

What Did Demonetization Do to Black Money?

Nearly 10 months after Prime Minister Narendra Modi announced demonetization, the Reserve Bank of India (RBI) finally released provisional figures on the count of old Rs 500 and Rs 1000 notes that were returned to the banking system. The number did not make either the government or the central bank happy, as it showed that nearly all the money had returned.

The RBI estimated that the value of specified bank notes (SBNs) received as of June 30, 2017, was Rs 15.28 trillion. The total value of invalidated Rs 500 and Rs 1,000 notes at the time of demonetization was Rs 15.44 lakh crore, or around 86 percent of the currency in circulation. This meant that 99 percent of the demonetized currency found its way back to the banking system. Only a little over Rs 16,000 crore of Rs 15.44 lakh crore was not returned.

In other words, with almost all the Rs 500 and Rs 1,000 notes returning to bank counters, the theory that black money stashed in cash outside the formal system would be extinguished fell flat.

What About Black Money?

How much black money has been recovered since the note-ban exercise? This is difficult to assess as there are no recent estimates of how much black money was recovered since demonetization. However, in February 2019, then Finance Minister Piyush Goyal told Parliament that Rs 1.3 lakh crore in black money had been recovered through various anti-black money measures, including demonetization.

In his book “I Do What I Do,” former RBI governor Raghuram Rajan disclosed that he never supported the idea of a note ban and felt that the short-term impact of the exercise could outweigh the long-term gains. The government had originally expected that at least Rs 3-4 lakh crore in black money would be extinguished outside the banking system due to demonetization alone. Data suggests that demonetization was a failure in unearthing black money in the system. Meanwhile, instances of black money seizures continue.

In August 2023, the Income Tax department said it detected black income of more than Rs 150 crore after raiding several business groups that run hospitals in Haryana and Delhi-NCR. Similarly, the department detected undisclosed income of more than Rs 250 crore during searches against two business groups involved in silk sarees trade and chit funds in Tamil Nadu. There are several such instances across the country.

Counterfeit Notes on the Rise

A second objective of the exercise, tackling forged banknotes, also seems to have failed. Counterfeit Indian currency notes increased by 10.7 percent in the financial year ended March, the Reserve Bank of India (RBI) said in its annual report released in May last year. The central bank detected a 101.93 percent rise in fake notes of Rs 500 denomination, while fake notes of Rs 2,000 increased by more than 54 percent.

The RBI report showed an increase of 16.45 and 16.48 percent in counterfeit notes of Rs 10 and Rs 20, respectively, in fiscal year 2022. Fake Rs 200 notes rose by 11.7 percent. Counterfeit notes detected in denominations of Rs 50 and Rs 100 declined by 28.65 and 16.71 percent, respectively, the report showed. Of those, 6.9 percent were detected at the RBI, with the rest 93.1 percent at other banks.

In 2016, the year when demonetization was launched, 6.32 lakh counterfeit pieces were seized across the country. In the next four years, a total of 18.87 lakh fake notes were seized across the country in various denominations, according to RBI data.

Most fake currency notes seized in the post-demonetization years were in the Rs 100 denomination—1.7 lakh pieces in 2019-20, 2.2 lakh in 2018-19, and 2.4 lakh pieces in 2017-18. Compared to previous years, there was an increase of 144.6 percent in fake Rs 10 notes, 28.7 percent in Rs 50 notes, 151.2 percent in Rs 200 notes, and 37.5 percent in fake notes of Rs 500 [Mahatma Gandhi New Series] denomination, the RBI data showed.

The public memory is short. Even the Congress-led opposition parties have stopped asking questions about the outcome of the demonetization exercise and Modi’s promise on black money.

The Electoral Bonds Scam

On February 15 this year, the Indian Supreme Court scrapped the electoral bonds scheme, calling it ‘unconstitutional’. The SC held that the scheme violates Article 19 of the Constitution by not disclosing the funding to political parties. The SC consequently struck down provisions in the Companies Act, Income Tax Act, and Representation of the People Act relating to electoral bonds. After repeated demands from the court, State Bank of India (SBI), the country’s largest lender, on March 12 submitted the electoral bond data to the Election Commission of India (ECI) as ordered by the Supreme Court on March 11. The SC has asked the ECI to upload all the data on its website by March 15, 2024, for the public. The ECI confirmed that it has received the data from SBI on electoral bonds.

On March 11, the Supreme Court dismissed SBI’s request for an extension until June 30, 2024, to disclose details of electoral bonds encashed by political parties, including the date of encashment and the denomination of the electoral bond. SBI has been directed to disclose the details by the close of business hours on March 12. Who was the biggest beneficiary of electoral bonds? According to estimates, the ruling BJP received around Rs 8251.8 crore of the total electoral bonds sold worth about Rs 16518 crore.

Black Money via Electoral Bonds?

There is a possible black money/hawala angle to electoral bonds. Many companies with small or negative net worth have contributed to electoral bonds, purchasing hundreds of crores of rupees worth of bonds. Where did these companies get such huge amounts of money? Did someone use these firms as channels to direct black money to politicians in return for favors?

According to a report on the financial news website Moneycontrol, financial data from FY19 to FY23 shows that several of the biggest electoral donors made donations multiple times their net worth and cumulative profits for FY19-FY23. Another report in The Hindu newspaper said 33 loss-making firms donated electoral bonds worth Rs 582 crore, of which about 75% went to the BJP. In other words, not only did the NDA government’s note-ban scheme fail to recover black money, but the ill-conceived electoral bonds scheme also added a layer of quid-pro-quo channels that were arguably used by companies to route suspicious transactions through the formal financial system.

In the 2024 polls, black money is no longer a major discussion point. No Indian opposition party has seriously taken up this issue in election rallies. Modi’s promise on black money remains a broken and forgotten promise.