{"id":4803,"date":"2016-12-09T15:22:40","date_gmt":"2016-12-09T09:52:40","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=4803"},"modified":"2016-12-09T15:22:40","modified_gmt":"2016-12-09T09:52:40","slug":"demonetisation-and-the-mystery-of-rs-3-lakh-crore","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2016\/12\/09\/demonetisation-and-the-mystery-of-rs-3-lakh-crore\/","title":{"rendered":"Demonetisation and the Mystery of Rs 3 Lakh Crore"},"content":{"rendered":"
<\/a> 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<\/a>. 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n In the press conference following the monetary policy on December 7, 2016<\/a>, 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.”<\/em><\/p>\n But the question of where did the 20 per cent assumption come from, remains. Could a better assumption have been made?<\/p>\n 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.<\/p>\n Table 1: Value of assets seized (in Rs. Crore)<\/p>\n
\n<\/a>As soon as prime minister Narendra Modi announced the decision to demonetise Rs 500 and Rs 1,000 notes<\/a>, the analysis of the decision started.<\/p>\n