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Why govt move may wipe out Rs 140000,00,00,000 illegal money

black money crackdown Updated: Nov 10, 2016 15:37 IST
Aloke Tikku
Rs 1000 notes

People queue up at the Reserve Bank of India on Parliament Street in Delhi to exchange or deposit their currency notes.(Arvind Yadav/HT PHOTO)

When former prime minister Morarji Desai declared high denomination currency notes illegal in 1978, a little over Rs 125 crore of such notes came into the banking system. But the remaining Rs 20 crore stacked up in black was lost.

If that story were to be repeated today, the economy would lose Rs 2 lakh crore worth of money in circulation.

But wait, times have changed. In 1978, notes of high-denomination – Rs 1,000, Rs 5,000 and Rs 10,000 – were just a min-iscule proportion (2%) of the total currency in circulation.

Cut to 2016, notes of the two denominations that are no longer legal tender, Rs 500 and Rs 1,000, are used in daily transactions and their possession is widespread.

Rs 500 and Rs 1000 notes now form 86% of the total currency in circulation – whose total value is Rs 14 lakh crore.

Read: Banks open, hundreds form queues to exchange Rs 500, Rs 1000 notes

In contrast with 1978, when only banks and the super rich held banknotes of Rs 1000, Rs 5000 and Rs 10000, today Rs 500 and Rs 1000 notes are in everybody’s wallet.

Money down the drain?
Any deposit above ₹2.5 lakh will be under scrutiny. If the cash deposited in ₹500 and ₹1000 banknotes doesn’t match your income, the taxman may take away 90% of that money. This may trigger destruction of illicit wealth held in now-withdrawn notes

₹500 and ₹1000 notes form 86% of the total currency in circulation by value, amounting to ₹14 lakh crore. Here is what we stand to lose, if the following shares of the total high-denomination currency are destroyed:

If 10% of the withdrawn banknotes are destroyed, the amount will be

This amount is 1% of India’s GDP, which is estimated at ₹135.76 lakh crore for 2015-16

The stated objective of the demonetisation of currency by the Modi government has been described as a ‘surgical strike on black money’. But given that tax authorities will keep a hawkish watch on the money being taken for deposits and exchange, much of the illicit wealth in the form of Rs 500 and Rs 1000 notes could be destroyed.

Sample this: Banks will monitor all deposits of Rs 2.5 lakh and above. In case of a mismatch between declared income and deposits, the taxman will take 90% of the money in taxes and penalty.

This may force many people to destroy wads of cash they hold illegally.

If the corresponding faction of high-denomination currency eventually destroyed due to the government’s move is 1% of the total value, it would amount to Rs 14,850 crore.

Read: Banks open, Rs 500, Rs 1000 notes banned: The big change in 17 points

At 2%, it would be Rs 29,700 crore, at 3% it would Rs 44,500 crore, at 5% it would be Rs 70000 crore and at 10%, Rs 1.4 lakh crore. This is 1% of India’s GDP, which is estimated at current prices at Rs 135.76 lakh crore for 2015-16.

It remains to be seen where the score will settle finally.

But the Rs 20 crore in black money pushed out of circulation in 1978 was just a fraction of the estimated black money in the economy. A study released months later said six commodities including steel and cement had generated Rs 840 crore of black money during the preceding decade.

No wonder then, then finance minister HM Patel made just a fleeting reference to the demonetisation scheme when he rose in Parliament to present his Budget proposals just six weeks later.