It is estimated that around 8% of the black economy is held in the form of cash. So, 8% of Rs. 75 lakh crore is held in cash. So, around Rs. 6 lakh crore of black money is held in cash.
And Bloomberg quoted a government lawyer as telling the Supreme Court that he does not expect Rs. 5 lakh crore to return (Of course, even at one’s most optimistic, one cannot expect 100% of black money in cash not to return).
So, Rs. 6 lakh crore appears to be a reasonable estimate of black money in cash.
As of March 31, 2016, the total amount of currency issued (of denominations of Rs. 500 and Rs. 1000) was around Rs. 14.5 lakh crore or 213 billion dollars.
The government has demonetised denominations of Rs. 500 and Rs. 1000. So, it is estimated that, of the total high value demonetised currency of Rs. 14.5 lakh crore, Rs. 6 lakh crore is ‘black’ (as above) and balance Rs. 8.5 lakh crore is ‘white’.
The government was hoping that a large part of the black money part of the Rs. 500 and Rs. 1000 notes would not come back in exchange or as bank deposits.
For instance, if the government got back only Rs. 8.5 lakh crore out of Rs. 14.5 lakh crore, then it could claim 100% success – as the owners of Rs. 6 lakh crore black had not returned the currency and taken a 100% loss.
At the other extreme, if the banks got back all Rs. 14.5 lakh crore, then the government would be totally unsuccessful as all Rs. 6 lakh crore ‘black’ had been ‘laundered’ and had become ‘white’.
When any organisation or the government carries out any activity, it tends to lay down the outcome that it expects from that action to determine whether it has succeeded in its objective.
The government has not specifically laid down its measure of success. But its counsel has informed the Supreme Court that the government expects that around Rs. 5 lakh crore will not be returned. So, that can be considered the government’s benchmark of success.
One can also lay down another measure to indicate success. And that relates to the cost: benefit exercise for this operation.
But what is the cost to the country of this operation?
According to the Centre for Monitoring the Indian Economy (CMIE), the transaction cost of demonetisation until December 30, 2016, is estimated at around Rs. 1.28 lakh crore or 19 billion dollars, around 0.9% of GDP. That is around Rs. 1,000 per every man, woman and child in this country. CMIE has said that this is a conservative estimate. Also, the CMIE has said that the cost will rise if the chaos continues until the end of the financial year.
Then, there is the loss to the country’s GDP in F.Y. 2016-17 and F.Y. 2017-18 as a result of disruption of economic activity. There are various estimates ranging from 0.5% (Fitch) to 3% (Ambit Capital) for the loss of GDP.
On December 7, 2016, the RBI has estimated that the GVA will drop by 0.5% in F.Y. 2016-17. Thus, the consensus figure for loss of GDP for F.Y. 2016-17 is 0.5%.
Let us work on a drop of 2% for next year (F.Y. 2017-18), which is the estimate made by former Prime Minister, Dr. Manmohan Singh in a speech in the Rajya Sabha. A 2% drop in GDP next financial year alone would mean a loss of around Rs. 3 lakh crore.
Thus, the loss to the country over the next 15 months from the very act of demonetisation would be around Rs. 4.3 lakh crore (Rs. 1.3 lakh crore + Rs. 3 lakh crore).
As per R. Gandhi, Deputy Governor of the Reserve Bank, speaking on December 7, 2016 after the monetary policy announcement, Rs. 11.5 lakh crore have already been deposited in banks. That leaves around Rs. 3 lakh crore still not deposited out of a total of Rs. 14.5 lakh crore. And there are 22 more days to go and when more black money may be deposited.
In fact, Mr. Hasmukh Adhia, Revenue Secretary, is quoted in The Indian Express as saying that he expects all the demonetised notes to come back!
A far cry from the estimate that around Rs. 5 lakh crore would not come back into the banking system.
So, it appears that we may lose Rs. 4.3 lakh crore in GDP over the next 15 months and our gain is zero. Of course, this move may set the country on the path to digital financial transactions and increase the tax base over the long run. But is it worth Rs. 4.3 lakh crore in the short run?
Disclaimer: The opinions expressed within this article are the personal opinions of the author.