Demonetisation was NOT about Black Money. Here's Proof...

Jan 5, 2017

In this issue:
» Modi conveniently ignored the very root of corruption and black money
» Global economic policy uncertainty witnesses steepest ever rise...
» Top trading strategies for 2017
» Market roundup
» ...and more!
Ankit Shah, Research analyst

When demonetisation was announced on 8 November, 2016, our research team at Equitymaster thought it was a bold reform...a potential game-changer for the Indian economy.

But we don't simply form an opinion and go on vacation. We continue to monitor the facts, the numbers, and the reality on the ground. And if the truth demands it, we change our position.

As the influential 20th century economist John Maynard Keynes put it:

  • When my information changes, I alter my conclusions. What do you do, sir?

This way of thinking and processing information stems from our more than two decades of experience tracking, analysing, and evaluating stocks.

As the demonetisation saga unfolded, we saw the flaws...the big loopholes...the poor planning and execution. And we warned readers that demonetisation might not be the magic wand Mr Modi said it would be.

And now, a not-so-shocking Bloomberg report confirms our suspicion.

On 8 November, the demonetisation drive rendered high-denomination notes worth Rs 15.4 trillion worthless. Mr Modi expected about Rs 5 trillion of that amount to remain undeclared as it may have escaped the tax net illegally.

But as per Bloomberg, 'people with knowledge of the matter' have disclosed that banks have received Rs 14.97 trillion as of 30 December 2016, the deadline to exchange the old bank notes.

That means 97% of the Rs 500 and Rs 1,000 notes in circulation until 8 November have returned to the banks.

Commentators say that's a big blow to Mr Modi's fight against black money.

But we have a question: Was this really a fight against black money?

Ask any random, illiterate stranger on the street who they think controls the largest chunk of black money in the system.

Without a single doubt, they will point to politicians and political parties.

It is strange how street wisdom could escape the mind of the country's prime minister.

If his fight was seriously against black money and corruption, he should have targeted the very root - electoral corruption.

A piece in Business Today nails the problem:

  • The decisive role money plays in polls creates a vicious cycle of corruption. A candidate who spends crores on his election goes on a recovery spree to make his investment pay back by all means, howsoever dubious. It does not take long for the politician-bureaucrat nexus to develop for making money. This unholy alliance between the two most powerful instruments of governance makes corruption unstoppable.

But instead of uprooting black money from the political parties, Mr Modi has done just the opposite. In the so-called fight against black money, a key beneficiary of black money has been conveniently overlooked - the 1,866 political parties in India.

A draconian law is allowing political parties to get away with hundreds of crores in anonymous donations. Much of it is in cash, which the parties can deposit in a bank account without scrutiny.

Meanwhile, you and I must give detailed explanations for every deposit we make. Either now, or when the Income Tax officials come calling.

Something is not right. In fact, it's disgusting, this state of affairs.

Vivek Kaul, our big-picture expert, has been unravelling the truth behind the demonetisation drive ever since Modi announced it on 8 November, 2016.

Now he is on a mission to bring back equality between the people and the political parties.

But his success depends on you. Vivek asks you to sign a petition that he promises to send to the president of India requesting that Section 13A of the Income Tax Act be repealed.

Your signature will help him get closer to his goal of 25,000 signatures by 6 January 2017 (as I write he has already crossed 21,486 signatures).

Join Vivek in his mission. Sign the petition now.

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The Fight For Equality: Are We Losing?

If you go by what Section 13A of the Income Tax Act 1961 says, then you know political parties in India are special...They get privileges that ordinary mortals like you and I can't ever expect.

Like for instance, during the notebandi drive, political parties were free to deposit Rs 500 and Rs 1,000 notes in their bank questions asked! (As long as the amount per donor was less than Rs 20,000).

But you and Ihad to furnish an identity proof while depositing our hard earned demonetised money.

Well, there is no denying that we are losing the fight for equality...But all is not lost yet.

Join over 12,000+ citizens who have signed a petition to set this right...

Read and sign the petition today...(Petition closes 6 January)


As an aside, you're invited to discuss...debate...and analyse the burning issues of today with Vivek Kaul and some of our finest minds at the Equitymaster Conference 2017. Mark your calendar for 21 January 2017. More details here.


We're just few days into 2017. If we look back, 2016, like 2015, or every year before that, was a watershed year full of surprises. It started with the China scare, followed by Brexit, Trump's victory, easy money policies, and last but not the least, demonetisation. Indeed, the year 2016 once again reminded us of the most essential features of the global economy: uncertainty and volatility.

Reports suggest that the year 2016 saw a huge escalation in uncertainty ever. As you can see in the chart, the global economic policy uncertainty (EPU) index rose by a massive 149% in the 11 months to November 2016. This was the steepest rise ever and reflected the shocking events that took place in 2016.

Global Economic Uncertainty Index at All-Time High

The sharp rise in index was seen as the global economy saw many unpredictable events in 2016. Most of the brunt came from Brexit, Trump's victory, and the continuation of easy money policies by central banks around the world.

An interesting bit here is that the index for India stood more subdued as against the global one. This meant that economic policy in India stood more stable than the global economy.

But this doesn't mean that India is sailing safe amid the volatile times. The demonetisation move has fueled enough uncertainty in the Indian economy. In fact, the EPU index for India surged in November and December after the government scrapped old Rs 500 and Rs 1,000 notes. Further, it is also said that the index will see an upward trend until mid-2017. So, be prepared for some unexpected bumps ahead.


Coming to investments... 2016 was a flat year for the stock markets. The Nifty dipped nearly 12% in the first two months of the year. It then rallied quite smartly for the next six months...before caving in again.

Finally, the index ended the year with gains of just 3%. Now isn't that a disappointing result indeed for Indian stock market investors? Even a fixed deposit returns over twice that figure. For all the risk stock investors take, is a 3% return really worth it?

We understand that not all investors have a three...five...ten-year horizon. Some like to take advantage of short-term market swings.

If that's you, you'll want to pay attention...

Our friend at Profit Hunter, Apurva Sheth, scored winner after winner with his Secret Profit Signal Strategy in 2016.

Now, you are probably thinking this is all history...and you're right.

But Apurva is now ready to reveal what he believes will be a very lucrative strategy for 2017...a strategy that could help you make money without taking undue risk.

Yes, this is Apurva's Post-Demonetisation Trading Strategy...

And he's going to share all the details in a webinar this Friday, January 6, at 5pm. Sign-up here to watch.


In the meanwhile, the Indian indices have been trading firmly in the green. Barring the IT sector, all major sectoral indices are trading on a positive note with metal, oil & gas, and auto stocks leading the gains. The BSE Sensex is trading higher by 228 points, while the NSE Nifty is trading higher by 77 points. The BSE Mid Cap and BSE Small Cap indices are trading higher by 1.1% and 0.9% respectively.

04:50 Investing mantra

  • When you locate a bargain, you must ask, 'Why me, God? Why am I the only one who could find this bargain?' - Charlie Munger

Today's Premium Edition.

A Time-Saving Valuation Shortcut from Ben Graham

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13 Responses to "Demonetisation was NOT about Black Money. Here's Proof..."


Jan 11, 2017

Some lines have been missed out in my earlier post of Jan 9 which needs rectification.The rectified version may be read as under:

PM Modi in his speech has never spoken about the quantum of illegal tender which would not come back into the system but spoken about how terrorists and illegal activities were being funded with counterfeit notes across the borders. It's unfortunate that some of the so called learned economists to hog the limelight have come out with such idea and give a twist to the entire demonetisation exercise............

The error is regretted



Jan 9, 2017

EM claims about unbiased reporting.But many of the analysts writing such articles seem to be writing such articles to meet the deadlines of filling up the space.PM Modi in his speech has never spoken about how terrorist activities and illegal activities were being funded with counterfeit notes from across the border.It's unfortunate that the so called learned economists to hog the limelight have come out with such idea and give a twist to the entire Demonetisation exercise. For your kind information, the demonetisation exercise was referred to the earlier Governments not less than 15 times and none of the earlier PMs had the courage to implement this. Inconsistencies have been the hallmark of economists who change their stances at the drop of a hat.EM analysts unfortunately seem to follow suit.On one hand they claim almost entire quantum of notes returning to the system, and on other hand they claim that businesses have shut down because of demonetisation. If businesses were being run with legal tender and almost all the demonetised money has returned to the system, it is the businesses being run with illegal tender which has shut down. Is it not good for the economy and beneficicial to the organised businesses and legitimate tax payer??Can Equity Master analysts explain this??.

Like (1)


Jan 7, 2017

Demonetisation is NOT a failure.
Here is proof :-
1. Opposition political parties are still clamouring.
2. Many jan-dhan a/cs are flush with disproportionate deposits. These are surely black money.
3. Raids on the likes of Ram Mohan Rao (ex chief sec of TN state), Sekar Reddy etc has unearthed tons of cash and yellow metal. These are surely black money.
4. Forensic audit of high deposits is still on. Am sure more cockroaches are lurking there.

You need more proof ??

Like (2)

Zephry DSouza

Jan 6, 2017

The Supreme Court of India has come down heavily on the Board for Cricket Control of India and mandated certain reforms which include limited terms for officials , among other reforms!!! Will somebody please tell me why that is good for cricket but not good enough for politicians???? Senator Ted Cruz has just introduced an bill for the amendment of the American Constitution limiting the terms of Senators to two terms and those of the House Reps to Three terms!!!! If the Modi government is really serious about the corruption in the country, then the root of all corruption is the Politician!! Limit his term !!! that would make a big difference to the climate in India !! Does he have the same courage to do this as he did with Demonetisation?????

Like (2)

shankar Pillai

Jan 6, 2017

I don't agree with you but same time your article can't be fully ignored. Today because of too much of Bhakthi...people may not agree with your view.

Like (2)


Jan 6, 2017


Your comments on politicians and black money is well taken and true in its form and spirit..

However, the argument that success of demonetization is measured by cash not returned to bank is irrational and misplaced.

Obviously for all stated reasons, 100% of old notes will be tendered post new tax rules.
Cos, now they can pay 50% tax/ penalty thereby making other half legal and legitimate rather than loosing the entire sum. So why won't they tender; as opposed to letting it expire worthless.
Why shd one burn it, when one has a legal avenue to claim amnesty in a way thats is documented and well structured by IT Dept.

Im pretty sure that therz enough wisdom in RBI and Govt to presume that 100% notes in circulation wd return bak to bank cos of the reasons stated above ...

Incase 100% money gets back, then one needs to defntly call this exercise a great success as all money deposited in banks need not be legal and are up and available for scrutiny.

Moreover, RBI Governor has clearly stated tht during his press conf after the meeting of monetary policy commite on Dec 8 2016...
His words goes like this ..
"The withdrawal of legal tender status does not extinguish anything from RBI's balance sheet. There is no question of special dividend just by withdrawal of legal tender character."

kindly google to see...

RBI Governor and the Govt was much aware of the possibility of no dividend and the same wd have been much discussed with the govt much before the announcement of Nov 8 2016.

I fail to understand the intention of such article, when such infos are clearly available in the public domain ..

Hav a grt respect for equitymaster and hav been following it for last 10 years ..

Request not to use such platforms to show political affiliations ...

Black money is also often reffered as spurios illegal fake money ..
Dont u think such things has been extingushed ...

Every idea need a start and if an elected PM with a clear mandate ..comes up with such moves it has to be appreciated rather than claiming for a 100% perfect execution..that too esp in a country that do nt hav a history of any such initiatives ..
When u see and find a man
Call him a man ...

Its not politicans ..
Its the irresponsible statements of such responsible citizens that ruins the country ...

Like (3)

Sunil Doshi

Jan 6, 2017

Quantity of reading material from EQM has grown exponentially,affecting Quality.I have started avoiding some
EQM names,but pray Ankit Shah is not one of them.

Like (3)

parimal shah

Jan 5, 2017

I full agree the political part MUST accept donation by digital mode only, even 5 rupees must be by digital payment. This has to be ensured by people of India and not by politicians. They will never agree.

Also, Mr Modi may have erred on saying he is targeting black money.
Yet, we can not ignore the fact of fake currency in the country - this as stopped. The quantum does not matter but people were losing genuine money when bank detected fake currency and refused to accept it. No one compensated the common man who was actually a victim rather than the generator of the fake currency.

Second, the stone pelting and such activity by the miscreants in Kashmir that was occurring stopped the very next day.

It is a fact that implementation of demonetization was inept and some bank and RBI employees behaved in extremely unethical manner - these are institutions of faith and trust; and the guilty should be punished with a harsher punishment than otherwise due.

Like (3)


Jan 5, 2017

Good I stopped my subscription for the premium edition of 5 min. Otherwise i may have to read it daily. and what i find, Advertisement for your Vivek pauls intelligence.

Like (2)

Shankar Ramani

Jan 5, 2017

Your views need to be moderated with the complete set of facts. Even the Government and specifically the FM admitted demonetization is also a lot about going digital and towards less cash and not all about black money. Secondly, the Economic Times reports that RBI is still counting the notes. Even if the 97% report is true, we need to appreciate that the statistics on black money can only be tentative at best - corruption and black money in India is a problem of many decades - it is unreasonable for anyone to expect the Government to get it precisely correct. Demonetization needs to viewed as a stepping stone and good start to a long term effort in reducing corruption and also going to a cashless economy, for ushering in digital transformation and for future initiatives such as BTT and eventually lower income tax for the middle class.

It's easy to pounce on some Bloomberg report - do you know the credibility of such Bloomberg reports and what they quote as "sources with knowledge of the matter"? Such sources can be the biggest scam in news reporting and media, often inferred views and sometimes as bad as Chinese whispers.

You and EM in general also has a bias that Vivek Kaul's effort is a silver bullet. Your efforts to gather signatures for the petition is causing you to mix things up and look at demonetization through a lens that's convenient to you and gets people to sign the petition.

I am not an ardent fan or supporter of Modi or the government and I did sign Vivek's petition because I believe it's a good cause, you'll need to be more careful and objective in your writing in considering all angles. There are enough critics and analysts out there, but everyone is always reacting. Let's give credit to the government for being a thought leader and more importantly, being brave and bold enough to make a start on the war against corruption.

Like (2)
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