White Is the New Black: Decoding Demonetization

White is the new Black: Decoding Demonetization

Introduction

Importance of cash in India economy

The Indian economy is one that is heavily cash dependent. In 2015, 78% of consumer payment in India were made in cash. According to the World Bank data, 65% of Indians do not hold bank accounts. Their earnings as well as spendings are in cash. It’s important to note here, that this cash is not black money. Most people who earn only in cash make so little that they are well below the tax slab. This is likely the poorest strata of the Indian society which consists of farmers, manual labourers, daily wage earners etc. 392 million workers - 82% of India’s workforce work in the unorganized sector falling outside regulations, no job security, no fixed working hours, no pension. 40% of India’s GDP is transacted in cash.

Distribution of currency value

The annual report of Reserve Bank of India (RBI) of 31 March 2016 stated that total bank notes in circulation valued to ₹16.42 trillion (US$240 billion) of which nearly 86% (around ₹14.18 trillion (US$210 billion)) were ₹500 and ₹1,000 banknotes. In terms of volume, the report stated that 24% (around 22.03 billion) of the total 90266 million banknotes were in circulation. There is another currency bill that is widely used- the Rs 100 ($1.50) bill. However, due to the low purchasing power of this bill (Rs 100 can buy you a snack and a pop from a roadside vendor) most people hold their cash in Rs 500 ($7.50) and Rs1000 ($15) currency notes.

What is Black Money

As Wikipedia defines it, “In India, black money refers to funds earned on the black market, on which income and other taxes have not been paid or which is the proceeds of criminal activity such as bribery, kickbacks and corruption”. 

The White and the Black economies are intertwined. The incomes generated are also mixed in primarily in businesses like Real Estate, Manufacturing, Services, etc. The bulk of black money generation originates from Trade misinvoicing route (export under invoicing / import over invoicing – 83.4%), manufacturing and tax evasion.

Professor Arun Kumar, of Jawaharlal Nehru University estimates the size of the black economy to be a staggering Rs 93 lakh crore ($1388 billion) standing at 62% of GDP

Total Black wealth of Indians is estimated at US $4399 Billion. 1% of the Black Wealth is held in cash – Rs 3 lakh crores – $ 44 Billion.

Demonetization of 8th November 2016

8th December 11:00 PM: Notification number S.O.3407(E)

…exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934 (2 of