RBI's just retired Deputy Governor R Gandhi has defended demonetisation. In an exclusive chat with CNBC-TV18's Latha Venkatesh he argues that the government now has the list of the richest depositors and will see higher tax to GDP ratio in the current year. Gandhi also added that final tally of how many old notes were returned will be known only after June 30.
Below is the verbatim transcript of the interview.
Q: I am sure the last four months have been the most challenging months, last six months actually must have been the most challenging six months of your 30 year career?
A: That is true, definitely the most challenging and very satisfying as well.
Q: Let me take it from the word satisfying. We have just got the numbers for the Pradhan Mantri Garib Kalyan Yojana (PMGKY) which was the tax levied on people on tax evaded money which you bought during the demonetisation process. Now, that is Rs 2,300 crore which means about Rs 4,600 crore is all that has been declared as tax evaded money. That looks like a very small fruit for the mammoth effort you took.
A: First of all, it is tax related, that is government. So, as a RBI person, I will not be able to answer that question. But as an individual, I can make a mention about that, deliberate a little more on that.
The issue is that the demonetisation, one of the major objectives was to eradicate black money. The very definition of black money is that something which is unaccounted. Now, we have brought the things into account. People have put their money into their accounts. So once it has come into the accounts, it is for the tax administration to analyse it and to see that whether they have properly paid their taxes or not, number one.
Number two, just now what you mentioned, this is voluntary disclosure that yes, up to this much people have put in money around this time. So, rest of the people, they might be taking another way, may not be necessarily paying taxes even after declaring it or putting it into their account or they are not showing it fully. It is for the tax administration to go after them and get the money which the government should be taking.
Q: But that is still a whole lot of accounts, is it not? I mean several crore accounts.
A: Of course, it is not going to be easy to go after them, but to help them out, modern day model building is available, systems are available, one can narrow down. Now, because specific information about who has deposited how much, that information is available in the hands of the authorities. So, they should be able to do an ABC analysis, they can start with the big shark first, biggest ones first and they can go down if they want to go down.
So, that way it is a patient exercise that they may have to do. It may be time consuming yes, or it may be requiring more number of people that may be alright, but they will be able to narrow down instead of casting their net too wide. They can give a very specific focused attention.
Q: Is the RBI privy to how many accounts had more than Rs 10 crore deposits or more than Rs 2 crore, deposits in crore?
A: Not RBI because we do seek such information to be reported to us. Banks do have and tax authorities have the full legal rights to ask for that, based on the income tax provisions, whatever is available, as per that if they ask, banks have to give.
Q: So, your sense is that in the year FY18, the government is better armed to ensure more direct taxes?
A: Government is better armed for better tax compliance, yes.
Q: In this process, have you been able to unearth a lot of fake notes? Is there any number you can share?
A: That is yet to be because that verification of the notes which have come back, that is still going on. That will be quite a few months away because there were a lot of individually, each individual piece of note has to be verified. That is quite a task, so we have to wait for that.
Q: The other number which all of us were very keenly awaiting was how much of the notes was returned. On December 10, when you last spoke to the press on this issue, you had said Rs 12 lakh crore. Now, has the RBI not finished checking, are we likely to, do you have another figure for us?
A: Not yet, obviously. Of course, right now I am no longer in charge also, so I do not have that figure with me anymore. I will not get any more also until you announce it. Through you, I may be knowing down the line. Anyway, thing is that this will be the final figure. Once we declare the figure from the RBI, that is going to be the final, once and for all. Thereafter it is history. So naturally, RBI will have to take extra care before announcing this is the figure and that is what it is doing.
Q: But can you give us a ball park figure? If it was Rs 12 lakh crore on December 10, are we likely to end up with Rs 14 lakh crore, Rs 15 lakh crore?
A: We are not going to have more than Rs 3 lakh crore.
Q: No, it will not be, but even Rs 3 lakh crore is a very big haul.
A: It is not going to be more than Rs 3 lakh crore because Rs 12 lakh we already mentioned.
Q: But, when is RBI likely to announce that? You must have seen a large part of the double counting and the checking. When do you think we can expect that number?
A: One is the current window that is still available for NRIs, that is not yet over, it is going to be up to June 30. And necessarily I would think that the RBI would wait for that kind of final number. Before that it is not final. Even if a figure is given, it has to be tentative. So, tentative figure, at any point, everybody can give, that is a different issue. But if you want to really have the final figures, then the window has to be closed.
Q: So, it will be after June only that we should expect this number from RBI?
A: I would presume so.
Q: How much is the double counting? You were giving us numbers regularly till December 10. After that, you stopped. What is the double counting you fear? What are the avenues of double counting?
A: In banking transactions, all the people who have worked in banks, who know about banking will be able to appreciate what I am going to say. As a running organisation, at any point in time, there will be several mistakes will be happening.
Q: Such as?
A: That is credit, instead of credit it may be debit, or instead of one type of credit, it is another type of credit. For example, in currency operations, from the RBI, we send remittances to the currency chest and from the currency chest, signed notes come back to RBI. The currency chest gets cash from the branches from some other banks and they also send cash to their own branches or some other banks.
Each one of these have a different type of transaction. It has to be accounted differently. When it is going from RBI, they are not supposed to get any credit for that because it is RBI money, going from RBI into the currency chest. But they may account it, somebody by mistake may account it as deposit. This has to be ferreted out. For that only, we have periodic audit, periodic balancing, physical checking also. So, through those kind of checks and balances, these mistakes come out. Then we make the corresponding accounting ends.
Q: And what about at the bank end, in those days of demonetisation, where could the mistakes have happened?
A: From the banks also, because different branches remit to them, specified bank notes (SBN) come from the public to the branches. One branch sends SBN to another branch, then some other bank sends SBN to one bank or post offices send. And all of them independently report to RBI, our government, their head office. So, there will be chances of multiple counting or what we call double counting, it is possible. That patiently, we have to tick off everything and everything is okay. It is a painful exercise.
Q: I can imagine. It is Rs 15.4 lakh crore and it is 4,500 currency chests and I guess, 90,000 branches in India today?
A: No, 1,40,000 branches.
Q: How did RBI prepare for the demonetisation exercise? How many people, I am sure you must have had a count of how many vans went and what is the time they took to make rounds from one branch to another, can you just tell us the highlights of all the entities and all the processes you must have planned?
A: Demonetisation is only an extension of what we otherwise normally have been doing.
Q: I agree but it is 10x?
A: Yes. You have to see the whole exercise in two parallel activities. One related to introduction of new series of notes. Introduction of new series of notes we would have done in any case, whether demonetisation was there or not, still we had been planning for this and that was already publically announced also that it will be coming. So, that meant that new series of notes had to be designed, related currency paper has to be produced and it has to be printed and other inputs have to be gathered, this is a standard manufacturing exercise which we have all along been doing. So, that pre-planning was there already. Which should come first, which precedes what, which succeeds what, all those kind of planning was there.
Q: So, you all had planned even for the printing papers?
A: Yes, printing paper, the security thread that has to go into it and various types of inks, whether it is offsetting etc.
Q: So, you had a stock of all that before November 8 2016?
A: Yes we had to carefully plan. Yes before November 8. So, that planning was already there. What got added to it because of demonetisation exercise was the sheer number of notes which needed to be printed.
In the normal course if we would have been introducing only new series of notes, it is not in exchange of this magnitude. That we could have taken it at our own pace and the minimum number of notes which are required to be introduced at one go that much only will be there. Here the excessive was that we have to be printing a lot.
Q: Something like almost 19 billion notes or almost 20 billion notes?
A: That was the calculation we had been doing during the strategizing exercise.
Q: I am only going by what was available in the RBI annual report in July, that the total number of 500 rupee notes were about 15 billion and the total number of 1000 rupee notes were 6 billion. So, assuming that 6 billion became 3 billion because it was 2000 rupee notes, we were going with a number of 18 billion notes, was that what you all were working with?
A: If the objective was to meet one is to one then those kind of calculations definitely have to be made. During strategizing we have to see whether it is possible to have one is to one.
Next question is whether we will be able to produce that much by what time. Whether that time was acceptable?
Q: We had calculated that it would take up until June, was that wrong? To print 18 billion RBI would need, the printing presses would take upto end May or early June.
A: That was wrong because in normal course we have established installed capacity in all the four presses that we know and we have been operating typically on two shift basis. So, third shift was available to enhance our production.
Q: What about the vans reaching the branches, did you all had to plan that as well?
A: Yes. Normally remittances we used to do once a week typically. Whereas this time since we had to reach 4000 currency chests in so short a while, we had to plan it totally differently.
So, we tried to create a hub and spoke model. Obviously we cannot reach all the 4000 chests by ourselves, so we selected crucial points in the country and there we supplied and we asked those chests to supply to the nearby spoke currency chest. That is way we quickened the process of reaching out.
Also normally when we remit one full load of truck will go to one chest itself or 4-5 chests will be distributed. This time around at least one box of 2000 should be available in every currency chest. That way we saw to it that on the day when we started every currency chest had new currency, that was a big plan. Including Saturday, Sunday our people had to work.
Q: Did you had to increase the number of vans?
A: Yes.
Q: How many fold?
A: It is all a distributed process, from presses every day cash was moving to the RBI and from RBI to the hub chest and from hub chest to the other chests. So, every place we were calling for additional resources.
Q: When did you all start this massive exercise of calling for more vans, calling for more ink, calling for more printing paper?
A: Luckily it is all a distributed decision. The hub chest themselves were about 700-800. So, in all those locations we asked them, you assist to reach your spoke chest how many you will be requiring.
Q: But you could have done that only after November 8, is it not, so openly? But before that, could you do anything without leaking out the information?
A: Moving the cash, it happened before. It happened during entire October. Entire October, it was moving. As a part of introduction of new series.
Q: So, it went under the guise of normal introduction of new notes, so that nobody would suspect.
A: If you think back, we were told that December 31, the withdrawal limits would go away. When did you realise that it is not going to be December, by how much did you think you would err? Because, even I think February end is a very good achievement considering that our calculation gave us the impression that it might take until May, February is a good achievement. So when did you get the impression that definitely by January or February, I will be in control?
A: We were watching the pace of remonetisation, pace of withdrawal and we were looking for symptoms of money coming back, the other denominations coming back. So that started happening in early January itself.
Q: So, that made you confident?
A: Yes, and we have been watching. Day by day we were watching and the pace of withdrawals came down.
Q: So, now you feel we are normal?
A: We are perfectly normal.
Q: Finally, you worked under so many governors and deputy governors and especially in the last four terms, it has been very different. YV Reddy for instance, was a RBI man. He was seven years Deputy Governor then five years governor, so that is one kind of relationship. Subbarao was at least there in the system, you knew him as Finance Secretary and various other positions. The other two gentlemen were really new to you, Rajan and Urjit Patel are really outsiders. They were fleeting visitors into India. What does it mean to a Deputy Governor or to an Executive Director? Does the relationship change?
A: Yes, in terms of comfort, knowing a person earlier, that is one level of comfort.
Q: So, Reddy, you were most comfortable?
A: Because we know him for long time. Dr Rajan or Dr Patel, yes relatively new comers, but they were youngsters in comparison. Dr Rajan was very easy to move with because he had been a professor, moved with his students. So, it was a very comfortable feeling to be with him. And Dr Patel, because he was a Deputy Governor. So again, we had the camaraderie of being a fellow colleague.
Q: How much does a Governor impact the RBI? You are from the ranks. Is RBI one of those fighting machines which can manage irrespective of who the Governor is or does the Governor make a big difference?
A: Governors make a difference in terms of their approach to issues that is there. But, Dr Subbarao did mention in his speeches that system will not allow Governor to commit mistakes even if he or she wants to commit because we have a well-established process of decision making. Ideas can come from the Governor, a lot of ideas will come, but it will not be an executive order. It will not be treated as an executive order. It will be debated whether the idea can be fructified, to introduce that what needs to be done, what kind of ring-fencing, if we see any pitfalls in that. That is why we go back and forth. That is the way final decisions will be taken.
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