Of Demonetisation, Black Money and Jan Dhan Accounts

On March 10, 2017, the Reserve Bank of India published a document titled Macroeconomic Impact of Demonetisation – A Preliminary Assessment. One of the things that the document analyses is the number of new Jan Dhan accounts that were opened after demonetisation came into effect and the money that flowed into them.

On November 8, 2016, the prime minister Narendra Modi made the announcement to demonetise Rs 500 and Rs 1,000 notes. Until December 30, 2016, these notes could be deposited into bank accounts and the money was credited against them.

In the aftermath of demonetisation, one of the theories offered was that many Jan Dhan bank accounts were opened and black money was transferred into these accounts. Is that correct? Take a look at Figure 1.

Figure 1 

So, what does Figure 1 tell us? It tells us that the number of Jan Dhan accounts opened in the aftermath of demonetisation did go up. As the RBI document referred to earlier in the column points out: “Post-demonetisation, 23.3 million new accounts were opened under the Pradhan Mantri Jan Dhan Yojana (PMJDY), bulk of which (80 per cent) were with public sector banks . Of the new Jan Dhan accounts opened, 53.6 per cent were in urban areas and 46.4 per cent in rural areas.”

But as can be seen from Figure 1, Jan Dhan accounts were being opened even before demonetisation came into force. And that is why the curve keeps sloping upwards even before November 2016.

I have considered data from September 2016 to see if the pace of opening of Jan Dhan accounts went up dramatically post demonetisation. It doesn’t seem so from Figure 1.

Let’s take a look at some more data. Figure 2 maps out the week on week increase in the opening of Jan Dhan accounts in percentage terms.

Figure 2 

What does Figure 2 tell us? It tells us very clearly that there was largely no spike in opening of Jan Dhan accounts during the post demonetisation period. The only spike came in the second half of December 2016, when the pace of account opening was faster than it was in the past.

This basically lays to rest one theory about many Jan Dhan accounts being opened post demonetisation, in order to deposit black money into them. But that does not mean that black money did not find its way into Jan Dhan accounts? Take a look at Figure 3. It basically maps out the total amount of money in Jan Dhan accounts from early September onwards.

Figure 3 

Figure 3 makes for a very interesting reading. Before demonetisation came into effect on November 8, 2016, the pace of increase in the total money deposited in Jan Dhan accounts was very slow (the curve is almost flat). Post demonetisation the deposits saw a very rapid spurt. On November 9, 2016, the total deposits had stood at Rs 45,636.60 crore. This jumped by 40.8 per cent tor Rs 64,252.20 crore, a week later on November 16, 2016. It jumped again by 13.4 percent for the week ending November 23, 2016.

What happened here? As soon as the demonetisation announcement was made people started to move their black money into Jan Dhan accounts. This is very obvious from Figure 3, with a spurt in deposits of close to 41 per cent in the week following the demonetisation announcement. One of the ways this was done was when small traders and merchants gave interest free loans to their employees in old demonetised notes and asked them to deposit this money in the Jan Dhan accounts. This was done on the understanding that loans would later be cut from their salaries.

The government was not caught napping for once. It limited the total amount of money that could be deposited into Jan Dhan accounts to Rs 50,000 on November 15, 2016. As a ministry of finance press release on the same day put it: “Information has been received that there is sudden spurt in the quantum of deposits in several Jan Dhan Accounts. There are also reports of unscrupulous elements using Jan Dhan Accounts of poor and innocent persons to convert their black money into white. Such spurt in deposits will be looked into closely. Jan Dhan Account holders are requested not to allow their accounts to be misused by anyone.”

This basically ensured that Jan Dhan accounts as a conduit of black money wasn’t a very viable proposition anymore. Hence, people had to find other ways of depositing their black money into normal bank accounts.

As the RBI document points out: “Jan Dhan accounts contributed 4.6 per cent in total accretion of aggregate deposits of SCBs in the post-demonetisation period.” This happened primarily because the government reacted quickly and limited the total amount of money that could be deposited into a single Jan Dhan account at Rs 50,000.

Further, the government is unlikely to disturb the Jan Dhan account holders. And given that those who converted their black money into white using the Jan Dhan route are likely to get away with it.

The column originally appeared on Equitymaster on March 15, 2017