Free Reports

How Politicians, Lawyers, Corporates, Journalists and Economists, Took Us for a Ride on Demonetisation

Sep 4, 2018


Dear Reader, if you have read be regularly over the past few years, you know what my stand on demonetisation has been from day one. Any move that makes 86% of the country's currency useless overnight, couldn't have been good for the country.

I have said this constantly from November 8, 2016, without wavering on it.

But everyone has not looked at demonetisation in the same way (and not surprisingly, if people looked at everything in the same way, the world would have been such a boring place).

Since November 8, 2016, scores of politicians, lawyers, corporates, journalists and economists, have come out in support of the move, putting all their common sense at bay.

One of the main aims of demonetisation, we were told over and over again, was the destruction of black money. The logic behind this was first explained by the finance minister, Arun Jaitley, in an interview on November 10, 2016, days after demonetisation.

Jaitley explained the logic"Obviously people who have used cash for crime purposes are not foolhardy enough to try and risk and bring the cash back into the system because there will be questions asked."

Soon, after this people started coming up with estimates of the amount of black money that would be destroyed in this way. The then attorney general Mukul Rohatgi explained the logic in the following way: "There is roughly Rs 17 lakh crore rupees in circulation. Our estimate is that approximately Rs 11 to Rs 12 lakh crore will come back into the banking system through this scheme. Again, our assessment is that Rs 3 to Rs 4 lakh crore which doesn't return is prima facie is the black component of the currency in circulation."

--- Advertisement ---
Want big returns from small caps? Your strategy is what matters most…

A lot of people dream of making big returns from small caps.

But most of them don't have any strategy in place for achieving that, and just go by a friend's suggestion or their gut feeling while investing in small caps.

Wrong method!

After 10-plus years' experience of picking out high-potential small companies, Equitymaster has uncovered and finetuned a strategy to make big returns from small caps.

To know what that strategy is, just click here…

The total value of the demonetised Rs 500 and Rs 1,000 notes had stood at around Rs 15.42 lakh crore. Of this amount, Rohatgi expected Rs 3 lakh to Rs 4 lakh crore would not come back to the banks. The logic, as Jaitley had explained very convincingly, was that those who have black money would not deposit it into banks, for the fear of getting identified and questioned.

Of course, Rohatgi wasn't the only person who made this claim. It was made by many other people at that point of time. Here is what the economist Ajit Ranade wrote in a column: "This is a giant currency swap as a first step, a shock-and-awe treatment which destroyed perhaps Rs 2-3 lakh crore of black money stock with a possible adverse impact in the short run."

Economists Jagdish Bhagwati, Vivek Dehejia and Pravin Krishna, wrote: "Suppose we accept the estimate that one-third of the approximately Rs15 trillion [Rs 15 lakh crore] in demonetised notes is black money." These economists wanted us to believe that Rs 5 lakh crore of demonetised notes were basically black money held in the form of cash.

They didn't bother to explain where the assumption of one-third of demonetised notes being black money had come from. This is surprising given that Jagdish Bhagwati for many years was in contention for the Noble Prize in economics and one would expect him and his co-writers to explain the logic behind what they write.

Economist Bibek Debroy who was with the NITI Aayog at that point of time said: "People have made estimates that may be 10 per cent will not come back." 10% of demonetised notes amounted to around Rs 1.54 lakh crore.

Hence, in this way a lot of demonetised money was supposed to get destroyed.

Of course, nothing like this happened. Rs 15.31 lakh crore or 99.3% of demonetised notes were deposited into the banks. In the process, almost no black money was destroyed. Since this piece of information came out in the latest edition of the annual report of the Reserve Bank of India (RBI), we have been told that all the black money is now being put to some good use, instead of lying with people.

The trouble is, as I explained yesterday, this black money is now back with the people. And anyone who expects the income tax department to go after this black money should look at the search and seizure data of the income tax department. It will tell them very clearly, how limited the abilities of the income tax department are on this front.

Now let me get back to the topic I was trying to address in this piece. People did not stop at speculating the total amount of black money that would be destroyed. They also came up with a theory, as per which the government would get a Rs 3 lakh crore special dividend from the RBI.

How did this logic work? The outstanding currency notes are a liability for the central bank of any country. And this is true for the Reserve Bank of India (RBI) as well. If black money held in the form of cash of Rs 3 lakh crore did not come back into the banks, liabilities of the RBI would come down to that extent, we were told.

If the liabilities came down by Rs 3 lakh crore, the assets of the RBI's balance sheet would have to reduce by the same extent, for the balance sheet to balance. In the process, the government would get a special dividend of Rs 3 lakh crore. Or so were told.

As the senior journalist Swaminathan Aiyar put it: Modi can demand - and the RBI governor will surely agree - to hand over almost all the Rs 3 lakh crore to the government as a special dividend."

The special dividend story was also put forward by stock brokerages. The only trouble was that it had no legal basis. In the press conference following the monetary policy on December 7, 2016, the RBI governor Urjit Patel, put the special dividend theory to rest. He clarified that just because the notes don't come back to the RBI, it does not mean that the liability of the RBI will come to an end. As he said: "They still carry the RBI's liability as long as only the legal tender characteristic is withdrawn."

In fact, this is precisely how the RBI has acted on the currency that wasn't returned to banks. As the RBI annual report points out: "The total value of specified bank notes in circulation as on November 08, 2016, post verification and reconciliation, was Rs 15,417.93 billion [Rs 15.41793 lakh crore]. The total value of specified bank notes returned from circulation is Rs 15,310.73 billion [Rs 15.31073 lakh crore]."

This basically means that around Rs 0.11 lakh crore or around Rs 11,000 crore, has not come back into the banks. The RBI puts the exact value of the demonetised notes that did not come back into the banks at Rs 10,720 crore (Rs 107.20 billion) And this amount is showed under the head "other liabilities" under Schedule 3 of the balance sheet of RBI. No special dividend has been given to the government.

The larger point being that people came up with the special dividend theory despite knowing that it was not possible.

This is not where it ended. There was also spin around government collecting several lakh crore through taxes. As the then defence minister Manohar Parrikar put it: "A minimum of Rs 2 lakh to Rs 3 lakh crore in taxes will be collected and once this tax comes to the government, it will help fulfil the needs of the common people and the poor."

This was something that KV Kamath, chairman of BRICS Bank, and former bossman at ICICI Bank, also said: "as much as Rs 2.5 lakh crore might come into government coffers by way of taxes."

Too many people, who gain from being a part of the system and had to show their loyalty towards it, misled us on demonetisation. The trouble is that none of the so-called gains of demonetisation have materialised. And hence, it is important to call these people out.

(This piece would not have been possible without this series of tweets by Chirag Patnaik).


Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul's Diary

PS: Senior research analyst, Richa Agarwal, has discovered a way to identify potentially winning small-cap stocks early. This strategy has delivered triple-digit returns within a few years. To know more, click here.

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "How Politicians, Lawyers, Corporates, Journalists and Economists, Took Us for a Ride on Demonetisation". Click here!

8 Responses to "How Politicians, Lawyers, Corporates, Journalists and Economists, Took Us for a Ride on Demonetisation"

Alphonse Janarthanan

Sep 6, 2018

Very good article Now the question is by what name shall we call these experts".


Hem Bansal

Sep 4, 2018

1. The money deposited in old notes not white in full. I Tax has to declare the black part.

2. How much was fake currency out of the money deposited, is still not clear.

3. Still almost all families have old notes which they found hidden somewhere after the last date of deposit. Even if we assume 1000 per family it will come out to be 25000 Crore.



Sep 4, 2018

How do you explain tax collection going up, real estate prices remaining static, inflation being sober, number of income tax returns going up, digital transactions increasing?
I know number of poor people in my area exchanging demonetised notes at discount. These people earned percentage of black money from black money.

Like (1)

Surojit Ghosh

Sep 4, 2018

I could not agree more with your thoughts. These spin doctors need to be exposed as they cause immense harm to the country economically, socially and politically.

Like (1)

avinash bhalchandra ketkar

Sep 4, 2018

I simply want to ask why so much cash was held out of banking fold ? why ex chief minister of maharashtra advocating 98% cash transactions in economy as justifiable. Politicions, traders, burocrates taken it for granted till perpatuitity existance of black economy, their gorakhdhanda to continue and flurish as in congress regime , let the people die they will not bother. 8 nov 2016 put break on this nonsence. committed judiciary selfish politicions looting the country leads the people to say that british rule was much better than congress rule. lastly unlimited cash transactions, number two economy is nobodies birthright. notebandi was right surgical attack is amply clear due to the fact opposition it faced by concerned quarters.

Like (1)

Sajid Khan

Sep 4, 2018

Very Bold Article and the truth.

Like (1)

Girish Anant Patkar

Sep 4, 2018

The pity is that people in India like yourself ( i can understand that the opposition parties) are celebrating that the governments effort to destroy black money has failed ! All of us know that huge amounts of unaccounted cash is circulating in the economy and therefore demonetization should be applauded as an attempt to shock shake and stir the system from " nothing will happen " attitude.

Dishonest Indians should not be hailed as heroes who have beaten the system ! Data analytics will surely call out those who have deposited unaccounted cash in bank accounts of friends , relatives , employees, etc etc like it did with lacs of khokha companies. But the problem is humongous volume and time !


Like (1)

Gautam M

Sep 4, 2018

Seems Mr Vivek Kaul's needle is still stuck in the same place. God only knows what is the personal trigger behind this.

Only one thing I can surmise from this present article, A case of numbers going awfully wrong. It happens. It happened also with Mr Kaul with many of his predictions falling awfully or woefully short. You have to live with such things as it is difficult to predict at the beginning of an event, the final numbers. The last line of the article mentioning about additional taxes collection, Mr Kaul is conveniently forgetting that it is demonetization that has increased the tax base with many elements depositing taxes. Ofcourse numbers are not in the 1 - 2 lakh crores, I agree and more in thousands of crores, but nevertheless the fact is it has happened. Mr Kaul seems not to appreciate this fact but seems hell bent to prove his superiority in finding fault lines.

Like (1)
Equitymaster requests your view! Post a comment on "How Politicians, Lawyers, Corporates, Journalists and Economists, Took Us for a Ride on Demonetisation". Click here!