Did a Few People Know About Demonetisation in Advance? - By Vivek Kaul

Conspiracy theories normally accompany all big-game changing events. The decision of the Modi government to demonetise Rs 500 and Rs 1,000 notes, from the midnight of November 8, 2016, is one such event.

It is now being said that a section of the population knew in advance that demonetisation was coming and high value notes of Rs 500 and Rs 1,000, would no longer have any value. Anecdotal evidence in the form of WhatsApp forwards showing massive deposits made into banks before the demonetisation move was carried out, has been offered on this front.

This suspicion becomes even more pronounced when one looks at the jump in deposits held by banks as of end September 2016, in contrast to earlier periods. Look at Figure 1, which plots out the quarterly increase in bank deposits, over nearly 15 years.

Figure 1

This Figure 1 clearly shows that the increase in bank deposits between end of June 2016 and end of September 2016, was the maximum, in absolute terms, since March 2002. Rs 1,83,035 crore of bank deposits were added during the three-month period between end June and end September 2016.

How do things look when it comes to growth in percentage terms? Look at Figure 2.

Figure 2:

Between end June 2016 and end September 2016, deposits with banks grew by 18.2 per cent. This is clearly not the highest since March 2002. But all other peaks came at significantly lower deposit bases, many years back. The highest growth in quarterly bank deposits in the dataset considered, came in 21.8 per cent between end December 2009 and end March 2010.

Since then nothing has come even close to this. Hence, for the three-month period ending September 2016, the quarterly growth in bank deposits was the highest in six and a half years.

How do things look when we look at them on a monthly basis? Look at Figure 3.

Figure 3:

As can be seen from Figure 3, deposits of banks increased by Rs 1,66,437 crore between end August 2016 and end September 2016. This is clearly the highest nearly in five years. In percentage terms, this amounts to a month on month increase of 16.3 per cent, the highest since December 2011.

This growth in deposits of Rs 1,66,437 crore was just a little less than the total monthly growth in deposits over the previous twenty months between end of October 2014 and end of August 2016. The total growth in deposits between October 2014 and August 2016 had stood at Rs 1,71,108 crore just a little more than Rs 1,66,437 crore.

The question is why was there such a huge jump in bank deposits in the month of September 2016? Was it because a small section of people came to know of demonetisation in advance and started depositing money in banks to ensure that their money continues to be of value?
In a report written in April 2016, Soumya Kanti Ghosh, the group chief economic adviser of the State Bank of India (SBI), the largest bank in the country, had said: “There are suggestions in public domain and even analysis that are suggesting that higher denomination notes may be replaced.”

This is something that both the Reserve Bank of India as well as the government need to explain. What was the real reason behind this deposit surge? One explanation offered has been the Seventh Pay Commission. Nevertheless, higher salaries of current government employees and higher pensions of ex-government employees, cannot explain this massive deposit surge of Rs 1,66,437 crore during a period of just one month. Unlike the previous Pay Commission, this time the Pay Commission awarded higher salaries and pensions almost on time, and hence, arrears, if any, weren’t huge.

This jump needs to explained as well as investigated. Given that the IT department is sending in notices to people who have been depositing a large amount of cash since high-denomination notes were demonetised, the deposits that were made in September 2016, also need to be investigated.

Equally intriguing is the fact that between end September 2016 and end October 2016, the deposits with banks dropped by 10 per cent or Rs 1,19,193 crore, which is the highest drop in the last five years. Something clearly doesn’t add up here.

The column originally appeared in Vivek Kaul’s  Diary on November 21, 2016