DeMo Critics Need To Pipe Down: FM’s Deposit Numbers Suggest Big Black Money Catch

Not too many people commented on the biggest set of numbers revealed by Finance Minister Arun Jaitley in his 2016-17 budget: not the fiscal deficit, not the tax collections, but the sheer size of deposits made in several crore accounts post-demonetisation.

If nothing else, the knowledge that so many Indians hoarded so much cash in their homes and offices, much of it probably undisclosed incomes, is itself worth the whole effort.

Barring TN Ninan, who wrote about this huge cache of potential black money in his Business Standard column, few people took note. This is what Jaitley said in his budget speech:

After the demonetisation, the preliminary analysis of data received in respect of deposits made by people in old currency presents a revealing picture. During the period 8 November to 30 December 2016, deposits between Rs 2 lakh and Rs 80 lakh were made in about 1.09 crore accounts with an average deposit size of Rs 5.03 lakh. Deposits of more than Rs 80 lakh were made in 1.48 lakh accounts with average deposit size of Rs 3.31 crores.

How many people do you know of, who keep Rs 5 lakh in cash at home, barring for special occasions like marriages or purchases of homes with a black component?

The average deposits of Rs 5.03 lakh in 1.09 crore accounts adds up to Rs 5.48 lakh crore of suspect cash.

Then take the bigger sum: an average of Rs 3.31 crore in 1.48 lakh accounts. This smells even more like black money. The average amount multiplied by 1,48,000 accounts adds up to Rs 4.89 lakh crore.

Add the two sums – the amounts deposited in the range of Rs 2-80 lakh and the average of Rs 3.31 crore in 1,48,000 accounts - and what you have is a potential windfall disclosure of Rs 10.38 lakh crore.

As against this, the amount of Rs 500 and Rs 1,000 notes outstanding with the public on 8 November was Rs 15.44 lakh crore.

Put another way, two-thirds of the amount of demonetised notes that came back to the banking system may be worth probing. Even assuming only half the amounts are truly suspect, we are talking of black money of over Rs 5 lakh crore.

Some of it may be claimed as sales income deposited in corporate accounts, but in that case we will see a spike in Gross Domestic Product numbers on the corporate side.

We need to change the goalposts to decide if DeMo was worth it. If the old goal post was about deciding what money won’t come in, in order to decide the effectiveness of DeMo, today it makes sense to look at it another way: if nearly Rs 5 lakh crore can be classified as probably suspect, and at least a third of it can come back as taxes, the pain would have been more than worth it.

The human and institutional costs of DeMo no longer look unacceptable, given the potential scale of black money discovered in the deposits surge.