Demonetization has many stated objectives, and one of them is unearthing black money stashed away in cash. I am not claiming that demonetization achieved this objective, or that its net impact on the economy is positive – I don’t have enough information to conclude one way or the other. But I do think that the claim that it failed because 99% of notes returned to reserve bank is fallacious. This is because such a claim ignores the scrutiny of cash deposited during this period. Without taking into account the effectiveness of this scrutiny and the results it yield, assessing the success of demonetization in unearthing black money is not just impossible, but even misleading.
According to a note by finance ministry, 15.28 lakh crores of the 15.44 lakh crore worth banned currency has been deposited in the window provided by the government. This is the basis of the 99% figure. The same note also talks about 18 lakh accounts were identified in which the deposits were not in line with their tax profile, and another 5 lakh accounts identified through further analytics. This part is conveniently being ignored by commentators who want to present a skewed narrative. But for anyone with genuine curiosity, these figures offer insights for a more comprehensive analysis.
What the government should have additionally, and ideally, specified in this note is the value of deposits to these accounts that are under scrutiny. This would have told us what is the real percentage of the wealth stored in revoked currency that may reasonably be suspected to be black money. Further, once the entire process of scrutiny is completed, which may take two or three years, the Government will do well to publish data on how much of this actually turned out to be black money and how many were false positive alerts.
In the absence of such data, all we conclusively say is that the value under scrutiny is at least way more than the 2.89 lakh crore which is the worth of deposits into accounts for which the IT department has received responses. Given that the number of responses is only 9.27 lakh, which is less than half the number of accounts under scrutiny. Even this 2.89 lakh crores constitutes 18.7 percent of the value of demonetized currency, so we can safely assume that over 20% of the currency that returned to RBI is under scrutiny. This may be better or worse than this 20% not even returning to the system, depending on the actual results of the scrutiny.
Thus, in my opinion, to meaningfully assess the success of demonetization operation in combating the menace of black money, we would need to pay more attention to these details that are now being overlooked by many analysts. To enable such an analysis, I hope the Government will make public this data, once the entire exercise is completed within a reasonable time period. If the results indicate that large caches of black money have been unearthed in this process, I wonder if the Government would want to time the release of this data so as to derive maximum mileage out of it for the next important election!