Free Reports

Can We Finally Say Demonetisation is Dead?

Dec 7, 2016


When the Facts Change, I Change My Mind. What Do You Do, Sir? - often wrongly attributed to John Maynard Keynes.

In the press conference that followed today's monetary policy, one data point and one clarification, has essentially made clear that Narendra Modi's big demonetisation plan is not going the way it was expected to.

When the plan was announced a month back on November 8, the one big aim of the plan was to tackle black money along with fake currency notes. Black money is essentially money that has been earned through legitimate or illegitimate means, but on which taxes have not been paid.

As on November 8, 2016, 685.80 crore Rs 1,000 notes were in circulation. Over and above this, 1,716.50 crore of Rs 500 notes were in circulation. The total value of demonetised notes amounted to Rs 15.44 lakh crore.

These notes were demonetised and suddenly had no value. These notes can be deposited in banks and post offices, up to December 30, 2016 and the money will be credited in the bank account or the post office savings account.

  The Fight Against BLACK MONEY
Here's What It Means For YOU And YOUR Money...
  The Fight Against BLACK MONEY Modi's move to scrap the Rs 500 and Rs 1,000 note could impact YOU more significantly than you think.

We are talking impact on...

YOUR Investments. YOUR Property. Effectively, YOUR Wealth

It's absolutely critical for you to understand completely, and accurately, how this impacts you.

And that's why, we are releasing this special report, which you can claim for FREE. No strings attached.

Go ahead, grab your copy now...And be among the first to know what Modi's fight against black money really means for you...

Download This Special Report Now. It's Free.

As soon as you sign up, You will start recieving Vivek Kaul's Diary,
a Free-for-life newsletter from Equitymaster

NO-SPAM PLEDGE - We will NEVER rent, sell, or give away your e-mail address to anyone for any reason. You can unsubscribe from Vivek Kaul's Diary with a few clicks. Please read our Privacy Policy & Terms Of Use.

The Reserve Bank of India (RBI) in a press release dated November 28, 2016, had said that Rs 8,11,033 crore worth of demonetised notes had been deposited back with the banks. Over and above this, Rs 33,948 crore worth of demonetised notes were exchanged for new notes as well as notes that continued to be legal tender. Initially, notes of up to Rs 4,000 could be exchanged. This was increased to Rs 4,500. Then decreased to Rs 2,000 and finally done away with.

By value the demonetised notes of Rs 500 and Rs 1,000 formed more than 86 per cent of the currency in circulation. The hope was that a certain portion of this currency would be black money held in the form of cash. And this black money would not be deposited into banks, for the fear of generating an audit trail.

In the process, black money would be destroyed. QED.

This logic seemed flawless that almost everybody bought it initially, including yours truly. The belief was that almost 20 per cent of the high denomination notes are black money. (I am yet to figure out how experts writing on the issue arrived at this figure. But once they did, almost everyone seemed to use it).

The total value of the demonetised notes stood at Rs 15.44 lakh crore. Given this, 20 per cent of Rs 15.44 lakh crore worked out to around Rs 3 lakh crore. It was then said that this amount will not make it to the banks. The assumption was that those with black money will not manage to get their old demonetised notes exchanged for the new or the currently legal ones.

Thankfully, I did not fall for this totally. In the letter dated November 11, 2016 (Modi's Next Shot on Black Money Should...) I had worked with the assumption that around one-third of the black money won't get converted and hence, close to Rs 1.1 lakh crore of currency will get destroyed.

In fact, almost every other analyst and economist talked about close to Rs 3 lakh crore being destroyed. It was rather amateurish of them to assume that the Indian public won't be able to convert their black money into white. There are various ways through which this has happened, which I will discuss in a separate piece.

As mentioned earlier up to November 27, 2016, Rs 8.11 lakh crore of demonetised notes had made it back to the banks. Since then, the RBI hasn't put out any new data. Nevertheless, in the press conference that followed the monetary policy today, the deputy governor of RBI, R Gandhi, said that close to Rs 11.55 lakh crore of demonetised notes had made it back to the banks.

This means that around 75 per cent of the demonetised notes are already back with the banks. (Rs 11.55 lakh crore divided by Rs 15.44 lakh crore of demonetised notes). With 24 days still to go until December 30, the last day of depositing demonetised notes, chances are almost all the demonetised money will come back to the banks.

This is something that the Revenue Secretary Hasmukh Adhia told The Indian Express: "The government expects the entire money in circulation in the form of currency notes of Rs 500 and Rs 1,000 which have been scrapped to come back to the banking system."

Given this, the question of black money being destroyed does not exist. What this means is that the black money in the system has been exchanged for new notes in various ways.

There is another angle here which was the subject of multiple WhatsApp forwards. And this is how it went. Every rupee out (except Re 1 notes) there in the financial system is essentially a liability for the RBI. (If you look at the Rs 100 note carefully, you will see the RBI governor saying, I promise to pay the bearer the sum of one hundred rupees, for example).

The hope was that with Rs 3 lakh crore not coming back to the banks, the liabilities of the RBI will shrink. To that extent, the asset side of the balance sheet of the RBI would also need to shrink and that would lead to the RBI giving the government a special dividend of Rs 3 lakh crore.

Other than being a subject of many WhatsApp forwards this was something that many economists also wrote about in their research reports. Those against this logic said that, just because the notes don't land up with the banks, does not mean that the RBI's liabilities come down.

Today at the press conference, the RBI governor Urjit Patel was asked about this and he said: "They still carry the RBI's liability as long as only the legal tender characteristic is withdrawn." This basically meant in simple English that the RBI balance sheet wasn't going to shrink and there was no question of a special dividend.

So where does that leave the Modi government? Revenue Secretary explained this to The Indian Express when he said: "Do you think that by simply depositing money in the bank account makes black money into white? It doesn't. It will become white when we charge taxes, when the Income Tax department can reach up to them by issuing a notice and questioning them."

The question is how many people will the Income Tax department go after, given their limited resources. Also, is this the way a government should go about raising revenue, by disrupting the entire economy?

Further, many people who have put money into banks are prepared to litigate and take this to court. As noted journalist Sucheta Dalal recently wrote: "Tax experts and retired income-tax commissioners have been confidently encouraging people to deposit their unaccounted money as this year's income under Sections 68 and 69 of the Income-tax Act and get away by paying 30% tax. While there is a good chance that this may lead to litigation, case law from the two previous instances of currency demonetisation in India (1946 and 1978) may support this stand."

All this brings us to the question whether demonetisation was really required? Will the tax that the government manages to collect through this effort, be more than enough to make up for the slowdown in economic growth that demonetisation is likely to cause?

Also, I really don't like the idea of the income tax department being allowed a free run.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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 "Can We Finally Say Demonetisation is Dead?". Click here!

22 Responses to "Can We Finally Say Demonetisation is Dead?"


Feb 5, 2017

I've come across few articles by you opposing Demonetization /trying to argue that demonetization is not a good move. You questioned( Seeing is not believing article in value research) the views of many people who are supporting demonetization. What you failed at is making an attempt to understand why so many of us supported/have been supporting such move inspite of /despite of inconveniences. The math wouldn't not add up, who cares? Others and you , use math to drive your point. You include /exclude line items based on what opinion you want to drive. Many members support demonetization because it's an emotional victory over those members who we believe accumulated wealth in wrong ways, at our cost, at society's cost. Because we could not /can not do against them for years, and someone hurt them , that made us feel good. How did you miss this point? I am not rationally arguing, that line of argument : how many notes are in circulation, how many came back, what are the second and third order effects of demonetization, digitization etc etc : am no subject matter expert. I am happy during my life time I saw a BIG action and courage from someone , some one hurt people with bad behaviour. Thats all matters to me. I am shameless. I never voted in India, I never cared to vote, I am ~40. I make sure (will change my mind if I see a party with better thinking and actions), I vote for BJP, I will influence members in my network to vote for BJP. All remaining things equal, I am convinced, this party would do different/better than any other party at this point. If ones takes good actions, health is bound to improve.


B B Raina

Dec 16, 2016

If all you said is true, then why political parties are going crazy over DeMo. Money demo = money received back. It is also possible that Rs 15.44 lakhs crore demo notes is grossly underestimated. Okay I agree there were huge inconveniences caused to the public but why are political parties so upset about it. It is clear they have found themselves to be standing on a huge garbage of 500 and 1000 rupee notes unable to put it to any use. And there lies the real story. If Demo is dead why are the political parties flogging the dead horse. Is it merely the politicking and flogging the govt or there is something more sinister to it.
Time will tell.


Like (1)


Dec 9, 2016

We are too optimistic about the outcome of demonetisation like:
a. more and more people coming under banking system
b. curb on black money
c. govt in control of money
d. breakage in the funding of terrorism.

Well all the agendas were announced by PM of 8-Nov-2016 and had asked for 50 days time. Already 30 days time has elapsed and suddenly we find the change in the narrative (from black money to cashless). If cashless was the objective then why demonetisation?

Coming back to the original objectives as citing Revenue Secretary wordings "Depositing in bank does not mean the money has whitened and the cost of demonetisation will have to be borne by the fraudsters", this idea seems good, but can we get 1.28 lakh carores just by taxing? If not, isn't it a loss of taxpayers money just because the drive had not been defined, estimated, planned, executed properly even though the intent might be good.

Like (1)


Dec 9, 2016

The Demonetization has brought multiple changes in the Society which also need to be considered while analyzing its success / failure--1.It has forced all the sections of teh society like Farmers/ Hawkers and other unorganized sector people to forcefully deposit money in Bank. Even if due to Technical or tools of Tax planning they may get away during current FY, they may have to be cautious of filing IT returns etc. 2. Having kept substantial money in the Banks, it requires lot of planning for Cash transactions in real estate/ jewellery purchases. 3. There has been a substantial decline in anti national activities including riots etc which is a welcome step. 4. The substantial sections of the society who are getting subsidies under various Govt schemes may be exposed and help Govt for future strategies. 5. Let us review after 1 year the impact on society including NON MONEY aspects also. We should not limit to only financial aspects for such an action at National Level.

Like (1)

Krishna Kumar

Dec 8, 2016

Dear Mr. Kaul, Why do you sound more like a headline grabber and TRP hungry writer? you quote "This is something that the Revenue Secretary Hasmukh Adhia told The Indian Express: "The government expects the entire money in circulation in the form of currency notes of Rs 500 and Rs 1,000 which have been scrapped to come back to the banking system." However, I thank you for retaining the link -objectivity in you isn't dead yet- because I could find out that Revenue secretary hasn't said anything like that. I also understand that irrespective of what he said, 11.85lakh cr has already got back into the system and many have succeeded at converting black into white. But I am sensible enough not to take this as end of demonitisation. We still don't know at what cost these have been converted and man poor people would still have been benefited from this conversion. And post this action overall circulation of cash in the economy should come down and this is definitely helps in a big way to fight black money. What stops you from overlooking this aspect? Fear of loosing TRP?

Like (3)


Dec 8, 2016

I do not find any reason for the urgency to conclude that demonetization is dead.Govt has set Dec30 as the deadline and let us wait and watch. Corruption has become so rampant and some point in time clean up has to start. Sorry, I do not agree with you

Like (2)

P S Rao

Dec 8, 2016

If there is any substance in the assumption that 3L crore is black money and if we assume that the entire money is deliberately deposited in the banks to show it as current year income ( with an intention that the depositor will contest any adverse calculation from income tax department), then we can safely calculate that at least 30% of 300000 crore = additional 90000 crore income tax to state Exchequer as current year revenue. Then, there is also surcharge in some cases. I do not know what %age is this amount of total collection every year. Add to this, the GDP growth due to litigation costs to black money depositors. Then, there is lot of consumption of tea, snacks, petrol, diesel, paper for photo copying, tax consultant fee etc.etc. to go through this litigation grind. Thus this adds to GDP.

It seems, if this demonitization is done every year, there would be some addition to tax collection. Govt is at liberty to stop this scheme when balance tilts into a loss.

Like (2)

bharat rajguru

Dec 8, 2016

i have stopped reading mr. kaul. truly he appears to be in the bandwagon of rahul-kejri-mamata and all those dirty politicians-beaurocrats-whitecollar people who, with misuse of their real intelligence and talents have led india to a land of lazy-self destructive-foolish masses who can easily be ruled with arrogance leading to a cozy life for themselves.
if not modi, then who would you appreciate: maya for installing statues of herself,mentor,party symbol with public money and leading a levish life style, digvijay who never respected any true indian icons but praised enemies of india and indian people, the chatukar's like manishankar aiyyer, renuka chaudhuryand so on. you never said a word on all these people who done a great harm to real economy. i can understand why? because corruption helps the lifestyle that you witty, intelligent, smart, talented people like.
Mr. Kaul, please restrict yourself to economics and not politics

Like (2)


Dec 8, 2016

Every policy has Pros and Cons. The analysis on equitymaster states only cons, what about the benefits of this policy? The analysis is getting more and more one sided.

Like (1)


Dec 8, 2016

Dear MR.Vivek
It is too early to say that this demonetisation exercise has failed. Only after December we will come
to know the exact facts and figures. By March 17 a clear understanding will emerge. I admit that there are
side effects but let us weight and watch whether the benefits outweigh the side effects. I am worried looking at the struggle of a large section of the population, at the same time, i see a much larger group scurrying to convert their loads of unaccounted income. You have earlier said that the tax base is abysmally low and the income declared by most of the tax payers is much lower than their actual income. Don't you think that this exercise will widen the tax base and capture more taxable income? don't you think that this will give relief to honest tax payers who have been bearing the burden for so long? Are you siding with honest citizens or with the other side??

Like (2)
Equitymaster requests your view! Post a comment on "Can We Finally Say Demonetisation is Dead?". Click here!