How much black money will govt be able to purge?

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

If that story was to repeat today, the economy would lose `2lakh crore worth of money in circulation.

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

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

Inflation has eroded the real value of money to the extent that you need almost ten times more money in 2016 to buy the same product than you did in 1978.

So the ratio of the highdenomination money that would not find its way into the banking system would be much smaller.

But it still would be a large amount because `500 and `1,000 currency notes account for about 86%, by value, of the notes in circulation.

If the corresponding faction of high-denomination currency that is eventually destroyed due to the Modi government’s move is 1%, it would amount to `14,850 crore. At 2%, it would be `29,700 lakh crore, at 3% it would `44,500 crore and so on and forth.

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

But the `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 value of currency notes in circulation in March 2016

47.8% `500

0.3%

`2&5 1.9%

`10 value of coins in circulation in March 2016 3.2% <`1 20.6% `1

0.6% `20 27.1% `2

38.6% `1,000 1.2% `50 32.1% `5

9.6% `100 17% `10

INFLATION HAS ERODED THE VALUE OF MONEY. NOW YOU NEED ALMOST TEN TIMES MORE MONEY IN 2016 TO BUY THE SAME PRODUCT THAN YOU DID IN 1978

steel and cement had generated `840 crore of black money during the preceding decade.

No wonder 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.