Have black money hoarders fooled government in spite of demonetisation?

Before you cry sacrilege, let me clarify that I am all for weeding out black money from the economy. This would lead to better revenues and foster growth in the long run, even if it is causing us some initial hardships.

Those hardships have got more to do with the failure of our banking system and inadequacy of the cash logistics system rather than a government decision.

Demonetisation targets illegal hoarding of cash, which is, admittedly, rampant in India. Not all of it is black money as such, but the economy is heavily cash-driven. And like any cash-driven economy, it provides ample scope to unscrupulous people to tuck their money away from the government and taxmen. The system is abused for aiding corruption and more alarmingly for bankrolling terrorism and criminal activities.

Economists were predicting anything between Rs 3-5 lakh crore as "black money" circulating in the economy. On November 29, amid the din in the Rajya Sabha, the MoS for finance said there were 1716.5 crore pieces of Rs 500 notes and 685.8 pieces of Rs 1,000 notes in circulation on November 8 - the day PM Narendra Modi announced demonetisation.

So the cash available that day in India was around Rs 15.44 lakh crore. This can be further broken down into Rs 6.86 lakh crore in Rs 1,000 notes and Rs 8.58 lakh crore in Rs 500 notes.

A day before the minister spoke in the Upper House, the RBI said Rs 8.54 lakh crore in the form of banned currency notes had been deposited back into the banks. Now banks have cash-in-hand for day-to-day business and the RBI maintains a cash reserve ratio (CRR) that is directly proportional to the cash the banks hold.

According to the cash with banks on November 8, the CRR should had been around Rs 4 lakh crore. So already some Rs 12.54 lakh crore is already with the banks. If you add another odd Rs 50,000 crore as the amount banks hold for day-to-day transactions, a figure of Rs 13 lakh crore can be reached.

This is a very interesting figure. It implies that only about Rs 2.5 lakh crore worth of demonetised currency exists in the system that is yet to come to the banks. Even if you make allowances for smaller denomination notes, the amount of money in demonetised notes should not be more than, say Rs 3-3.25 lakh crore.

That leaves us with a pertinent question - where is the windfall for the government on black money?

We are left with only a few conclusions - one, black money is not in large denomination notes or two, black money launderers have successfully managed to plough such money back into the banking system - and there may be a third option, that black money is being ploughed back into heads like agricultural income, land or bullion. Take your pick.

Also read: Demonetisation is dragging India to an age of chaos and disruption