RBI recovers almost all banned currency notes: report

By Suvashree Choudhury and Neha Dasgupta

MUMBAI/NEW DELHI (Reuters) - Indians returned almost all of the estimated 15.4 trillion rupees ($242 billion) in high-currency bills removed from circulation in a shock move late last year, the Reserve Bank of India (RBI) said in its annual report out on Wednesday.

A total of 15.28 trillion rupees was returned to the central bank through lenders, a number that could renew scrutiny about the effectiveness of the measure announced by Prime Minister Narendra Modi in November.

By rendering 500 and 1,000 rupees illegal in one stroke and imposing restrictions on how the money could be returned to lenders, Modi had been intending to make it difficult for hoarders of undeclared wealth, or black money, to exchange their undeclared cash for legal tender.

But it seems that nearly all of it was returned by individuals, implying that there was a very small amount of unaccounted money held in cash by those seeking to conceal it.

Finance Minister Arun Jaitely however stressed that the exercise was not just aimed at unearthing unaccounted wealth but also about improving digitisation, getting more people under the tax net, and curbing terrorist financing.

"The real object of demonetisation was formalisation, attack on black money, less cash currency, bigger tax base, digitisation, a blow to terrorism," Jaitley said.

"And we do believe that in each of these areas, the effect of demonetisation has been extremely positive."

According to official data, direct tax collection went up 19 percent during April-July from a year ago, while digital transactions have also seen a sharp rise - but still remain quite small compared to cash.

In a separate statement, the government said the transactions of more than 300,000 firms were under suspicion post demonetisation, while 37000 shell companies were identified as involved in hiding black money.

Economists say the measure has had a positive impact, including bringing in cash into the banking system, and hence lowering the cost of loans, even as significant parts of the economy were disrupted.

"While this shows that demonetisation exercise has not yielded a large one time gain, it has led to financialisation of dormant savings and helped bring down lending rates," said A. Prasanna, economist at ICICI Securities Primary Dealership Ltd in Mumbai.

Modi's so-called "demonetisation" bill contributed to the growth easing to its slowest pace at 6.1 percent in January-March, its slowest pace since late 2014 as large parts of India's economy was dependent on cash transactions.

Jaitley said the impact was temporary, adding that a greater number of banking transactions will help the economy recover quickly.

Although opposition parties tried to make a big issue out of disruption caused by demonetisation, it has failed to dent the appeal of Modi's Bharatiya Janata Party (BJP), which has since scored key electoral wins, including a victory in Uttar Pradesh.

($1 = 64.0150 Indian rupees)

(Reporting by Suvashree Dey Choudhury; Additional reporting by Devidutta Tripathy; Editing by Rafael Nam and Alison Williams)