The Reserve Bank of India was likely burdened with additional interest payments amounting to tens of thousands of crores because of the sum of black money back in the banking system after demonetisation, former RBI governor Raghuram Rajan told the Hindustan Times.
In its annual report released on August 30, the central bank said nearly 99% of the demonetised Rs 500 and Rs 1,000 notes had been returned to the banking system. This means that black money hoarders had found ways to turn their illegally attained cash white, and those sums will now earn interest.
Rajan believes that this interest burden could be as high as Rs 24,000 crore annually if we estimate that there was around Rs 4 lakh crore of black money in circulation at the time of the note ban in November 2016.
“One of the costs that people have not paid enough attention to is that this was money sitting, if you believe it was black money, it was sitting in people’s safes or in their basement,” he told Hindustan Times, while talking about the short-term economic costs of demonetisation. “It wasn’t earning any interest. Once it gets into the formal system, if you haven’t identified it as bad money, these are people gaining interest on it.”
Tackling black money was one of the government’s key objectives behind the demonetisation drive. Lessening the dependence on cash was another one of its aims, which, too, appears to have failed.
“I point this out because this is something that people misinterpret,” Rajan said. “They are saying we have formalised the savings. The savings were there. They were just financing the government free of cost.”
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