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Demonetisation and the Mystery of Rs 3 Lakh Crore

Dec 9, 2016


As soon as prime minister Narendra Modi announced the decision to demonetise Rs 500 and Rs 1,000 notes, the analysis of the decision started.

Any such analysis needed the total amount of black money held in the form of cash. Of course, no one knew the right answer to the total amount of black money held in the form of cash by Indians. So, assumptions were made. The one assumption that many analysts and economists ended up making was that 20 per cent of the demonetised notes were black money held in the form of cash.

The 20 per cent figure was just assumed. No explanations were offered for it. It was probably because it was not too big nor too small. And gradually almost everyone who was analysing the issue was using it. But where did the number come from? Or was it just a case of a case of circular mill of ants, where the analysts and economists writing later, just followed the assumptions of the ones who had already written on the topic.

Here is how the argument worked. The total value of demonetised notes stood at Rs 15.44 lakh crore. Let's assume that 20 per cent of the demonetised notes are black money held in the form of cash. This implies that around Rs 3 lakh crore is black money held in the form of cash.

This money will not be deposited into banks because it is black money (which has turned out to be a totally naive assumption) because any black money deposited into banks would generate an audit trail for the income tax department. Further, every rupee out there is a liability for the Reserve Bank of India(RBI). If Rs 3 lakh crore of demonetised notes do not make it back to the banks, then the liability of RBI shrinks to that extent.

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If the liability side of the balance sheet of the RBI shrinks by Rs 3 lakh crore, the asset side needs to shrink as well. And that implies that the RBI would give a special dividend of Rs 3 lakh crore to the central government.

Many economists wrote long reports on this. The long reports led to some editorials as well (including one by an editor who I tremendously respect). These reports were then turned into WhatsApp forwards and passionate discussions happened around it.

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."

But the question of where did the 20 per cent assumption come from, remains. Could a better assumption have been made?

In May 2012, the finance ministry released a White Paper on Black Money. And that had some very interesting data points. Take a look at the Table 1 below, which deals with the search and seizure operations carried out by the income tax department.

Table 1: Value of assets seized (in Rs. Crore)
Year Cash Jewellery Other assets Total Undisclosed Income Admitted
(in Rs Crore)
2006-07 187.48 99.19 77.96 3,612.89
2007-08 206.35 128.07 93.39 4,160.58
2008-09 339.86 122.18 88.19 4,613.06
2009-10 300.97 132.2 530.33 8,101.35
2010-11 440.28 184.15 150.55 10,649.16
2011-12 499.91 271.4 134.3 9,289.43
Source: White Paper on Black Money

The cash seized at the time the search and seizure operations were carried out by the income tax department, is a miniscule portion of the total undisclosed income. This becomes clear from Table 2.

Table 2:
Year Cash Total Undisclosed Income Admitted (in Rs Crore) Proportion of cash in total undisclosed wealth
2006-07 187.48 3,612.89 5.2%
2007-08 206.35 4,160.58 5.0%
2008-09 339.86 4,613.06 7.4%
2009-10 300.97 8,101.35 3.7%
2010-11 440.28 10,649.16 4.1%
2011-12 499.91 9,289.43 5.4%
Total 1,974.85 40,426.47 4.9%
Source: Author calculations

If we look at data for the period of six years of close to 24,000 seizure and search operations, cash formed around 5 per cent of the undisclosed wealth. Also, the proportion varied from 3.7 per cent to 7.4 per cent over the years.

There are multiple things that this data tells us. First, that people who have black money do not store it in the form of cash. There are better ways of storing that wealth. And more importantly, the government had this information. In fact, the government would have updated information on this and not just to 2011-12.

Second, assuming that 20 per cent of the demonetised notes were black money held in the form of cash, was a terribly wrong assumption to make. This also explains why so much demonetised money has already come into the banks.

In the press conference following the monetary policy of December 7, R Gandhi, one of the deputy governors of the RBI said that close to Rs 11.55 crore of demonetised notes had already made it back to the banks. This amounts to close to 75 per cent of the demonetised notes. Of course, some black money has been converted into white in the process as well. Nevertheless, what Table 2 tells us very clearly is that very little black money is held in the form of cash. Hence, what is coming back to the banks is largely white money.

What this clearly tells us is if the analysts and economists hadn't worked with the 20 per cent figure of black money held in the form of cash, they would have never come up with the Rs 3 lakh crore special dividend that the RBI would pay the government.

If they had assumed a 5 per cent figure (as per the White Paper) they would have come up with a special dividend of around Rs 77,000 crore (5 per cent of Rs 15.44 lakh crore of demonetised notes). And Rs 77,000 crore sounds nowhere as sexy as Rs 3 lakh crore.

I guess that explains everything.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at

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.

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17 Responses to "Demonetisation and the Mystery of Rs 3 Lakh Crore"


Dec 14, 2016

give this bloke a break. he is not stating that the total percentage of black money in the economy is necessarily 5%, he is merely saying that based on sample data of previous seizure actions, the average amount of black money of total wealth was 5%. he is not saying this number is correct or incorrect; he is only stating that this number has more evidence than the 20% number used by many economists and policy analysts which was based on no evidence.

Like (1)

Anuj K

Dec 12, 2016

You have compared data on different planes. As per the data 5% of all undisclosed income is cash. But what is the % of 'black' cash in the total 'cash' in the economy?

This data is not available in your post and in my opinion you have erroneously used outcome of one data set as an input for another data set to draw a false concussion. I often see such behaviour from journalists but expected better from an economist.

Like (1)

VMK Menon

Dec 11, 2016

DM is not for black money alone, but for fake currencies being circulated by anti nationals and used for anti national purposes.
Let us hope this exercise may help to eliminate some % of fake currencies in our country.

Like (1)

Suresh Ramamurthy

Dec 11, 2016

I am not an economist nor as erudite as Vivek and others who decipher demonetisation. However, my take is that we needed to do this to clearly drive a few things.

1. To clearly tell people that this government is not weak and will take tough and difficult decisions when required.

2. This will propel the people to move to online/digital modes of payment. We need to remove cash from transactions to root out corruption and this is one such step. We cannot be cashless economy but we can be less cash economy

3. It is clearly proved that because of demonetisation, border skirmishes and violence after death of leaders have come down because of lack of liquid cash

4. Why are we jumping the gun? This is one step. Forget the rhetoric of what for this was done. We need to take baby steps before we fly. Modi ji is not a novice to implement demonetisation as he clearly knows that there will be a fallout even within his party. Let us be a bit patient to see the next steps which will complement the current action.

5. Let us wait for the official numbers to come by January and then start making comments rather than taking half baked information .

6. It is sad that most of the political parties do not want people from lower strata to adopt digital means. The moment an illiterate becomes literate , many of our politicians will lose. This is a major reason that many of our politicians want people to stay the same way as they are.

Unless you try something new , you will not know whether it will make a difference or not. A step has been taken which is tough and has brought a lot of inconvenience to people . Let us however hope that a lot of follow up steps will be taken to take our country to a corrupt free one.

Like (1)

Bhalchandra Upadhyay

Dec 10, 2016

Sir, Now I am converting myself as a regular reader of your articles. All information based on facts and figures and well analysed. Really thought provoking.

Like (1)

Salil Gupta

Dec 10, 2016

The Mystery of Rs 3 Lakh Crore to be replaced with the mystry of 75L crore?

Fig 1 : 5 per cent of the undisclosed wealth is cash

How does it become relevent to following?

Fig 2 : (5 per cent of Rs 15.44 lakh crore of demonetised notes)

Rs 77,000 crore may not sounds nowhere as sexy as Rs 3 lakh crore but is just as arbitarary

Like (1)


Dec 10, 2016

I have trouble understanding the tables
Year Cash Jewellery Other assets Total Undisclosed Income Admitted
(in Rs Crore)
2006-07 187.48 99.19 77.96 3,612.89
The columns dont add up, so there is something more which could be in the form of cash

2006-07 187.48 3,612.89 5.2%
This presumes that all the undisclosed income in the form of cash has been seized.

Am i missing something here?

Like (1)

Maheshchandra Chourushi

Dec 10, 2016

Very apt description!

Like (1)

Nikesh shah

Dec 10, 2016

Sir, I am a regular reader of your article and like your analysis which is based on facts. In this article u have given that around 5 percent is unaccounted cash that were found during searches over years. But there are huge unaccounted assets that were seized. Now now assets can be bought without cash being paid. So if a person found with unaccounted assets Worth say 1 cr then he must have paid cash which is lying with seller who is not searched. So this cash is in system though may not have unearthed. Any number if search can not unearth it. Only move like this can force people to deposit in to bank. Also what ever been deposited down not become white. Now people who fail to explain the source will be required to pay tax. If by paying tax black become white then there is no issue. Kindly dealt with this , and enlighten me.

Like (2)

Sudesh Kumar

Dec 10, 2016

The undisclosed income uncovered during raids:
"What proportion is it of the likely unaccounted wealth?"
The figures quoted are worth that much only.
The point that is missed is that corruption is not at individual level; it is institutionalized and that includes "banks".

Like (2)
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