As expected, the first round of clarifications on the withdrawal of Rs 2,000 notes has come via the government’s favourite whipping boy, the State Bank of India. One may recall SBI had done most of the punishing heavy lifting after the chaotic demonetisation of November 2016.
SBI has now clarified that no identification or filling of forms will be needed for those wanting to exchange the Rs 2,000 notes. Presumably this clarification comes in the wake of widespread apprehensions that the government would go after those who come to exchange their Rs 2,000 notes. So the government is now saying that those who come to exchange their notes, Rs 20,000 at a time, are presumed innocent and will not be targeted by the Income Tax Department. No questions will be asked and no identification will be sought.
But how does this square with the government’s avowed objective to clean the system of black money, which is being hoarded mostly in Rs 2,000-denominated notes? Such paradoxes are, of course, par for the course with this regime.
The SBI has, however, further clarified that the depositors – not exchangers – of Rs 2,000 notes will be identified as they will have to fill the relevant form provided by the banks. The tax authorities will certainly subject this lot to close scrutiny.
Post demonetisation, the finance ministry had officially said in a press statement, “When cash is deposited in the banks, the anonymity about the owner of the cash disappears. The deposited cash is now identified with its owner giving rise to an inquiry, whether the amount deposited is in consonance with the depositor’s income. Accordingly, post demonetisation about 1.8 million depositors have been identified for this enquiry. Many of them are being fastened with tax and penalties. Mere deposit of cash in a bank does not lead to a presumption that it is tax paid money.”
One presumes the finance ministry will follow the same principle for depositors this time round. However, as per the SBI statement, there is one escape route provided – those exchanging their notes will not be identified nor asked any questions.
So there is a clear incentive now for those holding Rs 2,000 notes to just go for an exchange rather than deposit the money in the bank and be scrutinised for income tax purposes.
However, the exchange of notes has been made very difficult as only Rs 20,000 can be changed at a time.
For instance, someone holding Rs 2 crore in 2,000-denominated notes may have to visit the bank 1,000 times in the next 129 days (until September 30) to withdraw their money in lots of Rs 20,000 each. Small businesses, especially in the informal construction sector, use cash for working capital and may prefer quick exchange of notes rather than depositing the money for a longer period, pending scrutiny.
But Indians have good practice of how to beat the system. Many who have large sums of Rs 2,000-denominated notes will probably employ thousands of people to exchange the notes, Rs 20,000 at a time.
There are bound to be long queues for this reason in the weeks and months ahead. The total value of Rs 2,000 notes in circulation is about Rs 3.62 lakh crore. As many as 18,100 lakh pieces of Rs 2,000 notes have to return to banks before September 30. It will be a complicated exercise, no doubt.
Another spin reportedly given by SBI on behalf of the government is that the exercise will be smooth as there are around 1.55 lakh bank branches and each branch, on average, will have to handle only 11,677 pieces of Rs 2,000 notes. This average number hides the fact that most of the queues will be concentrated in the urban and semi-urban branches, where there will be massive pressure. Consequently, it may not be as smooth an exercise as the SBI envisages.
In a way, the complicated procedures are aimed at targeting some specific groups which may be holding Rs 2,000 notes in larger quantities. People with smaller amounts may be able to exchange it without being identified. But what will a political party do if it has a large stash of say Rs 100 or Rs 200 crore? It will be very difficult to withdraw such large sums through proxy individuals within such a short span of time. It cannot deposit the money either. Funds will be needed for several crucial state elections in the last quarter of 2023.
The BJP will have a natural advantage as it has arranged for itself the bulk of the funding via electoral bonds in a non-transparent manner. And it has created enough fear among businesses who may want to fund the opposition parties via electoral bonds. Consequently, businesses prefer to give cash to opposition parties. Heads I win, tails you lose, is the best way to understand the ruling party’s election funding policy. The withdrawal of Rs 2,000 notes is but a small component of this Machiavellian method.