Black Money is Back Under the Mattresses

One of the major aims of demonetisation was the destruction of black money. The idea was that those who have black money will not deposit it into the banks, for the fear of getting caught, and in this way black money would be destroyed.

Quiet Easily Done (QED), as they say.

On November 10, 2016, the finance minister Arun Jaitley explained the logic in an interview, where he said: "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."

Or as the then attorney general Mukul Rohatgi put it: "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."

What happened was exactly the opposite of what Jaitley, Rohatgi and many others who came out in support of demonetisation, were expecting. Around 99.3% of the demonetised currency was deposited into the banks.

This failure to destroy black money called for a change of the real aim of demonetisation and which is precisely what is happening.

Now the story going around on WhatsApp forwards and being put forward by the blind supporters of the Modi government, is exactly the opposite of the hope of the black money being destroyed.

The black money was deposited into the banks and that works for the good of the country, we are now being told.

As per this story, all the black money which was uselessly lying in the vaults and homes of people, and under their mattresses as well, is now a part of the Indian financial system, and hence, is being put to some good use. Earlier it wasn't.

While, on the face of it, this sounds like an explanation, the data doesn't really bear it out.

Let's try and understand this step by step.

1) The Reserve Bank of India recently released its annual report for 2017-2018. Among other things, this report has also declared the household financial savings. Household financial savings also include savings held in the form of currency and deposits. Let's take a look at Figure 1, which plots this out.

Figure 1:  

GNDI in Figure 1 stands for Gross National Disposable Income. It defined as the gross domestic product (GDP) plus all transfers in cash and kind received from foreigners minus all transfers in cash and kind to be paid to foreigners.

Let's take a careful look at Figure 1. The deposits as a percentage of GNDI in 2016-2017 jumped to 6.3% of GNDI. They were at 4.6% of GNDI in 2015-2016.

This was primarily because of all the demonetised money that was deposited into banks. In 2017-2018, the deposits fell to 2.9% of the GNDI, from 6.3% a year earlier. Meanwhile, household financial savings held in the form of currency zoomed to a seven year high of 2.8% of the GNDI. It was at 1.4% of GNDI in 2015-2016.

What has happened here? In euphemistic terms people are building their cash positions again. Hence, a large portion of the deposits have been withdrawn and are now held as cash or currency.

This basically means that a significant portion of the black money which had been deposited into the banks at the time of demonetisation, has been withdrawn. It is back in the vaults of people in the form of cash, and under their mattresses as well. Black money is back to being black. It is no longer a part of the financial system, as we are being told.

2) Let's look at some more data.

As per the White Paper on black money released in May 2012, around 4.9% of the black money (or wealth to be more precise) found during search and seizure operations carried out by the income tax department, was held in the form of cash. This works as a good proxy for the total amount of black money which is held in the form of cash or currency. (Black money is not held just in the form of cash. It is held in other forms from gold to insurance policies to real estate).

Over and above this, the ministry of finance press release which accompanied the demonetisation decision of the Modi government, stated: "The World Bank in July, 2010 estimated the size of the shadow economy for India at 20.7% of the GDP in 1999 and rising to 23.2% in 2007."

Let's work with this figure, like the government did. Black money in India was at around 23.2% of the country's GDP. The black money held in the form of currency was around 4.9% of this. This basically meant that black money held in the form of cash amounted to around 1.4% of the GDP (4.9% of 23.2%).

The GDP of 2015-2016 was Rs 13,764,037 crore. 1.4% of this works out to around Rs 1,92,697 crore. The GDP of 2016-2017 was Rs 15,253,714 crore. 1.4% of this works out to around Rs 2,13,552 crore. Given that demonetisation happened in November 2016, which was a little over the middle of the year, we can take the average of the two numbers to come out with an estimate of black money held in the form of cash.

The average works out to around Rs 2,03,124 crore. Given that around 99.3% of demonetised money came back. We can assume that 99.3% of the black money held in the form of cash or currency was also deposited back into the banks. This works out to around Rs 2,01,702 crore, which we can round off to Rs 2,00,000 crore.

3) The savings in the form of currency in 2017-2018 were at 2.8% of the GNDI or Rs 4,75,544 crore. In 2015-2016, they had stood at 1.4% of the GNDI or Rs 1,96,243 crore. The difference works out to Rs 2,79,301 crore. Hence, the savings held in the form of currency or cash have gone up by Rs 2,79,301 crore. This is much more than Rs 2,00,000 crore, or the total amount of black money held in the form of cash or currency and deposited back into banks at the time of demonetisation.

What does this tell us? It tells us that the black money held in the form of cash which had been deposited into banks and was supposedly being put to good use, has been withdrawn, and is now all back to where it originally belonged-under the mattresses of people.

Hence, the point about the black money is being put to some good use, is basically rubbish. This also means that people who are still in the business of defending demonetisation, now need to need to think of newer advantages to WhatsApp.

by Vivek Kaul.