One of the first casualties in the din of the noise around demonetisation has been a failure to really debate, understand and grasp the full contours of the changing landscape as the new world unfolds right in front of our eyes. This is rather depressing. We, with a ringside view of one of the most drastic moves in the history of independent India, are not watching the show, but getting distracted with frivolities of partisan politics. The situation is aggravated by the hate for an individual that results in freak shows, blocking the real picture. The invocation of tatvampushan apavrinu [Ishavasya Upanishad] has never been apter than now, as the face of reality is clouded by the gold of dubious origins, seen as puppets dancing on a string on the world stage.

To do ourselves justice, therefore, we must step back and take a detached look at the myriad data points whirling in the dust storm. Nothing aids detachment as much as the cool clean breeze of mathematics. Let us be guided by the numbers to see if we can make some bold predictions about the nature of what the Indian economic situation will be after the impact of demonetisation plays out.

The basics first. The Indian GDP is estimated to be 125.41 lakh crore, and the cash circulation in India before demonetisation was to the tune of 17.54 lakh crore, making it nearly 14% of cash-to-GDP ratio (the current official estimates are 12%), one of the highest in the world, compared to similar economies at 4-5% of cash to GDP ratio. Even the traders of India, a community notorious for loving their money in liquid cash, have felt the pain of the cost of cash enough to commission a white paper on it. The more controversial, but interesting, numbers are on the scale of ‘black money’ in the system. Its estimates vary wildly — from 5% to 30%.

However, typically, the size of the black economy in the Indian system is considered to be around 20% of the GDP, based on a World Bank study, whose methodologies have been reused by the Union government even during the Congress regime. This takes the size of the black economy to be at Rs 25 lakh crore to Rs 28 lakh crore. On the other hand, typically, cash as the percentage of the black economy is estimated safely to be around 25% of the black GDP. That the black cash in the system is to the tune of 4.5 lakh crore would, thus, be a conservative estimate. Some prior studies have kept the size of the black cash to be at 3.35 lakh crore. Of course, we are already familiar with the figure of Rs 15 lakh, which is 86% figure of the cash in high denomination notes.


Armed with the numbers then, we can begin to make sense out of the mayhem. The cash in circulation is worth about Rs 17.5 lakh crore, and about Rs 4.5 lakh crore is the amount in black, which will be burned at the end of this exercise. That is, when the demonetisation is done, the government does not expect cash in circulation worth Rs 4.5 lakh crore to be returned as it is from dubious sources. Or, the amount will be subject to a heavy penalty and cease to exist. Assuming that the black cash is essentially in high-value notes (a very safe assumption), there is Rs 13 lakh crore worth of legitimate cash in circulation. Now, if the government is indeed seized of the problem of cash, and wants to promote cashless transactions, clearly it would like to see a lower amount of cash floating around. Assuming a figure of 5% of the cash-to-GDP ratio in line with other similar economies, it would like to see no more than Rs 9 lakh crore of cash in circulation. Of this amount, around Rs 2.5 lakh crore of cash was in small denominations in the system already before the exercise started. This essentially means that Rs 6.5 lakh crore of cash is what the GoI will replace in lieu of the Rs 15 lakh crore it will take out.

New currency notes

If the reasoning above is correct, we will see Rs 15 lakh crore worth of high denomination notes being replaced by only Rs 6.5 lakh crore of cash. However, not all of the replacement will be in similar high denomination notes. Of the replaced cash, a significant portion will be in small denomination notes. It may be noted that, even before the new high denomination notes were introduced, around Rs 50,000 crore of new cash was injected in small denomination notes. Let us say, finally, of the new cash, the amount in the form of high-denomination notes is Rs 4 lakh crore (we can revisit this calculation later).

Therefore, apart from the Rs 4.5 lakh of black money being burnt, we expect that Rs 6.5 lakh crore of high denomination notes will never come back to the market. Put another way, only 25% of high-value denomination will come back. Considering it’s a bold prediction, let’s see how it stacks up against available information.

Based on reports available so far, around Rs 60,000 crore to Rs 1 lakh crore of money has been distributed, as against Rs 3.5 lakh crore to Rs 6 lakh crore of deposits being mopped up. This number is indeed less than the 25% range that we expect. Further, we hear that it would take 6 months to print sufficient bank notes, which means that in the 50 days that the government has, only 25% of high denomination notes will come back.

Now, is this indeed a goal that the BJP-led NDA government is pursuing? Or, are we reading a pattern in the numbers which don’t exist? Well, as far back as July of this year, before the IDS started, and much before the mayhem of 8 November set in, Prime Minister Narendra Modi had already spelt out his intentions for all those who were open to listening to him.

Much like his 2012 speech in Gujarati as a chief minister asking for demonetisation, we cannot say that the man has not been consistent in what he has wanted to do — and about his views on the same. If one is not sufficiently convinced, one can refer to a more recent data point, where Finance Minster Arun Jaitley talked about the reliance for cash being something the government wanted to discourage.

Women in Patna display pass books of their bank accounts opened under the Pradhan Mantri Jan Dhan Yojana. [Photo: PTI]


It is amply clear that apart from the more volubly stated goals of the effort, the one of removal of fake currency and destruction of the black economy, a significant drive is to have a cashless economy. Certainly, a cashless economy does serve the first two goals; so it’s not really in conflict, but a cashless or a low-cash economy is actually a bigger change being asked of the Indian populace than the stated goals. While there is an easy acceptance of the first two goals, Indians are by nature fiscally conservative, preferring cash-based transactions. The reduction of cash in the system under the exercise is the bitter medicine of a changed behaviour that the government is asking Indians to swallow — with the sugar coating of more acceptable ends.One would be tempted to argue that this is a coercive method for social engineering; however, we do need to note that despite the Jan Dhan Yojana being a significant success in terms of 20 crores of additional uncovered population brought within the umbrella of formal banking, the new bank account holders have only started making use of them post demonetisation. That is even to move towards a system which is beneficial, a certain institutional push is needed. A single pronged strategy may not go all the way, but a two-pronged strategy would arguably give better results, and now we are now seeing the second prong of the JAM scheme in action.

Satyakam Sudarshan 

Courtesy: SirfNews