chartered accountant
Published on 8 April 2025
The Impact of India's Demonetization and the Rise of the Indian Institute of Accounting
Introduction
The announcement of demonetization in India by Prime Minister Modiji on a nationally televised address marked a significant economic shift. At the time, I was in Abu Dhabi, surprised to learn that the ₹500 and ₹1000 notes were no longer legal tender. The government's intention was to combat black money, with estimates suggesting that approximately ₹500,000 lakh crores of unaccounted wealth was within the system.
Impact of Demonetization
Upon announcing demonetization, a window opened for citizens to deposit the old currency from November 8, 2016, to December 30, 2016. Contrary to expectations, the Reserve Bank of India (RBI) reported that nearly 97% of the withdrawn currency—around ₹15.30 lakh crore out of ₹15.41 lakh crore—was re-deposited. This prompted analysts to declare that the effort had failed to eliminate black money, with unreturned banknotes amounting to ₹10,720 crores according to the RBI.
The resultant hardships faced by the common populace and the economy were substantial. It was noted by financial experts that the repercussions of demonetization would persist beyond the expected duration.
Methods of Circumvention
The ruling establishment believed that professional accountants aided wealthier individuals in circumventing the demonetization measure. This occurred through methods such as:
- Purchasing gold with old currency.
- Conversion of cash in gathering places.
- Significant conversions via cooperative banks, where discrepancies were facilitated, including backdated transactions.
Despite the Indian Income Tax Department issuing numerous notices related to clandestine cash deposits, effective follow-up seems limited.
Government Response and Establishment of IIA
Following the perceived inadequacy of the demonetization exercise, Prime Minister Modiji’s address on July 1, 2017—coinciding with the rollout of GST—was particularly critical of the Institute of Chartered Accountants of India (ICAI). This led to the formation of the National Financial Reporting Authority (NFRA) aimed at overseeing auditing standards for companies, signaling a shift to undermine professional accountants.
The rising incidents of bank fraud, particularly in PSU banks, highlighted ongoing issues within the banking sector. The RBI’s reports on financial fraud provide alarming figures (in crores):
| Year | 2018-2019 | 2019-2020 |
|---|---|---|
| PSU Banks | 63,283 | 1,48,400 |
| Private Sector Banks | 6,742 | 34,211 |
| Foreign Banks | 955 | 972 |
| Financial Institutions | 553 | 2,048 |
| Small Finance Banks | 8 | 11 |
| Private Banks | 2 | 2 |
| Grand Total | 71,543 | 1,85,644 |
These figures prompted the establishment of policies to reform the Indian accounting landscape, culminating in the proposal for the Indian Institute of Accounting (IIA).
Key Features of IIA
The draft proposal for the IIA includes several significant features:
- An entrance exam post-class 12 to evaluate applicants.
- Admission criteria based on exam scores.
- A five-year program leading to dual qualifications.
- A practicing license as a CPA (Certificate to Practice Accountant), distinguishable from the American CPA.
- The institute will follow the successful models established by IIT, IIM, and the National Law School, Bangalore.
- The course will be open to international candidates to attract talent.
- Specific rules governing the establishment of IIAs have been outlined.
Reactions from ICAI
As discussions around IIA progress, there are two primary perspectives within the ICAI during the central committee deliberations scheduled for April 5, 2022:
- Accept the reality of the changes and adapt accordingly.
- Advocate for the establishment of an ICAI University to encompass IIAs, a proposition unlikely to gain governmental approval.
The 45th report by the Standing Committee on Finance, presented in the Lok Sabha and laid before the Rajya Sabha, indicates the government’s indifference to ICAI's monopoly. With the anticipated shift to the IIA, it is essential for ICAI to realize the evolving landscape of accounting in India, including the possibility that even demands for ICAI to control disciplinary committee leadership may not be met given current governmental sentiment.
Conclusion
The introduction of the Indian Institute of Accounting signifies a pivotal change in the accounting profession in India, requiring ICAI to reassess its position in light of new challenges and competition. As the landscape evolves, embracing these changes may determine the future relevance and effectiveness of accounting standards in the country.