Balance Sheet of the Demonetization

Now as the deadline of 50 days is over, through this new write up, an effort has been made to highlight the gains and losses(both monetary and non monetary) on the so called surgical strike of Government on black money, as well as reasons of not getting desired results & some suggestions to take some effective steps if Govt is indeed serious to curb this menace of black money from our economy .
CMA Rakesh Bhalla
Past chairman NIRC of ICAI (CMA)*

Balance Sheet of the Demonetization- After suspension of more than 80% of the Nation’s total Currency took place

You may recall my previous article titled as “Demonetisation- a Misguided Missile fired in Hastewhich was well appreciated as well as criticised by various intellectuals at famous professional Website “”Tax Guru””. However I am happy to see so much response on the same.

Now as the deadline of 50 days is over, through this new write up, an effort has been made to highlight the gains and losses(both monetary and non monetary) on the so called surgical strike of Government on black money, as well as reasons  of not getting desired results & some suggestions to take some effective steps if Govt is indeed serious to curb this menace of black money from our economy .

  Monetary Benefits  
To RBI/Govt. – Liability of RBI reduced to the extent money not received Rs. Crores Rs. Crores Source
Total currency in circulation 17,54,000 Business Standard dated


Out of this, currency attributing to 500 & 1000 rupee notes 15,44,000 ET & India Express dated 13th Dec. 2016

Returned to banks (upto 30th Dec, Rs. 14.97 lacs crores as reported on ndtv.com, however we have reduced it to Rs. 14.50 lacs crores considering RBIs statement that these figures would need to be reconciled with the physical cash balances to eliminate accounting errors/possible double counts etc.(figures will be updated after RBI announcement)

14,50,000* Ndtv.com (Rs.14.97 Lacs Crores) dated 5th Jan 2017and PTI (Rs.14.5 Lacs crores) dated 5th Jan, 2017 and TOI (Rs. 14Lacs Crores) dated 28th Dec, 2016
Balance not returned/ benefit to RBI   94,000

Money recovered through raids etc, assuming that this is all black money and will be confiscated by the Govt.

-Money recovered in old currency

– New currency –majorly 2000 notes













Indian Express

Dated 21st December 2016


Some of the money deposited may be proved as black after scrutiny–approx.

This figure cannot be accurately estimated as it is a long time process of scrutiny/assessment go in years.

10000 10000
Total Benefits   107271  

Cost of demonetisation

Printing & logistics 16800 Source- CMIE  through Economic Times


Indian Express dated 14.12.2016


Overhead and operational cost of banks in terms of recalibration & other expenses 35100
Immediate short term business loss

Long term effect may be more

Household -on account of wages lost 15000
Total cost 128400
Net Monetary Loss 21129*#


*This figure may further increase as people have the option to deposit 500 & 1000 Notes with RBI till 31st March 2017.

Various non monetary effects which may have adverse financial implications have not been taken into account, while calculating above.

# This is 0.5 % of GDP/Indian Economy & 4.8 % of Total Currency Demonetized. So we can say that this is totally insignificant outcome of such a big decision.

Non monetary effects



Expectation / Benefits Reality / Losses Source
Liquidity of banks will improve Decrease in lending rate resulting into cheaper loans to public including corporate Borrowing rate will also reduce which will affect the common man. Specifically the pensioners& small depositors, however to some extent interest rates have been protected by announcing a scheme for senior citizens for depositing money for 10 years @ 8% (though present rate is 8.5%).
In case interest rates drastically reduced, bank deposits will decrease. Banks in this case may not be the gainers.
The Times of India dated 31-12-2016
Fake currency Immediately out of system. -No information is available with anybody i.e. how much fake currency was in circulation.

-No additional security feature in new currency of 2000 note.

-Duplicate currency already started flowing.


Dated 22-11-2016

Hindustan Times dated 01-12-2016

Non cash transactions Will facilitate transparency. Hidden/ extra cost included in digital transactions from 1-2.5% which will ultimately benefit the digital service providers like Paytm, Reliance Jio, varies Banks  etc. It is difficult to understand why Government is becoming Brand Ambassador of these companies. In practise
Death Toll Was not expected at all. Opposition/Media have claimed that 150 people have died because of demonetisation. Even if 50% of this is true, this will be a big loss to the public. Economic Times dated 08th December 2016
Loss of Jobs Will give a boom to employment sector in long run Loss of jobs due to business halt and other adverse effects has already started, Hindustan Times dated 06-12-2016
Loss in GDP growth Minor short term loss 1-2% estimated by various economists. Assuming on conservative side if loss is @1% than this is permanent loss of Rs. 1,30,000 crores which is irreparable. Economic Times dated 25th November 2016
Big Loss to Agriculture Sector Was not expected -Great hit to rural agrarian economy due to shortage of cash to purchase seeds, fertilisers and pesticides needed for plantation of rabi crops.

-Even farmers were forced to sell the vegetables at throwaway prices& even perishable vegetables thrown out at roadsides.

First Post dated      18-11-2016& other various media reports.
Small Business men Support to the existing business Halt in small businesses like textile sector, bidi business men and many more. Some of them have closed their business and others are badly affected. Indian Express dated 21st Nov. 2016 & many other news
Delay in GST Will provide support to the tax reform Implementation of GST delayed by at least 2 months i.e.  from April to June 2017 due to Demonetization. Live Mint

Dated 02nd January 2017

Loss of working hours of Parliament Nothing was expected Almost complete winter session of Parliament has been wasted without any significant / regular proceedings which has resulted into 97 hours loss in LokSabha& 90 hoursloss in RajyaSabha. This cost of lost hours is from taxpayers money without any significant outcome. DNA India dated 16th December 2016
Common Man Hassles Temporary hassles for 50 days leading to greater benefits –  Lengthy queues, and hours of common people wasted

–  About 800,000 truck drivers were affected with scarcity of cash, with around 400,000 trucks stranded at major highways across India were reported.

–  Daily wage earners to bear the brunt



DNA dated 14-11-2016

a.  Big fishes remained out of the net




b.  Terrorism and Smuggling activities

Will be spending sleepless nights






Will be curbed to a greater extent

The big fishes who were holding major junk of black are escaped as they easily converted their old currency into new one due to loopholes kept open.

Since more than 95 % of the cash black money has already been converted/ returned, so its evident that even black money lying with terrorists and smugglers was converted into new one due to loopholes kept open.

Chaos nationwide Not much expected Some  violence was reported in New Delhi, people attacked bank premises and ATMs. Though general public largely supported move expecting it will help wiping out black money Indian Express dated


Direct Taxes Collections will improve Collections after Demonization as on date yet to be known

 NET Result- IT’S more of A FAILURE than GAIN

Since, 90% of the banned currency received back so defeated the very  purpose of Demonetization decision.

Reasons for the Failure –

1) Information leaked prior to announcement-As, discussed in my previous article, this information is already leaked, result of which was major black money hoarders including political partiesalready converted or deposited money into banks.

2) More Time given for conversion of old notes instead one week was enough (50 days by Banks + additional 90 days by RBI ) – This has resulted into so many ways found to convert black money & 95 % of the money in circulation already deposited in Banks.

3) Govt/ RBI was not prepared which is evident from the following –

-Circulars issued by RBI– 74 circulars have been issued by RBI in 50 days since demonetisation to stop the black money. Details of circulars issued already given in Indian Express. Loss already happened before issuance of these circulars is irreparable.

Sufficient cash not available

4) Various avenues were kept wide open to convert black money –

If Government was serious than these avenues should have been closed before announcing such an important decision.

  • Deposits upto Rs. 2.5 lacs in normal bank accounts & upto Rs. 50000/- in Jandhan accounts allowed without any scrutiny
  • Identity cards loophole – upto first 10 days, one ID card was allowed to be used in ‘n’ number of branches
  • Deposit of black money by showing it Agriculture & other exempted incomes.
  • Deposits at Religious places like Temple, Gurudwara etc.
  • Deposits in the accounts of political parties as they do not come under RTI or Income Tax
  • Increase in purchase of Gold in Tons & other costly items for cash both before & after the decision
  • Up to more than one month old currency was allowed to use at varies places such as Petrol pumps, hospitals ,govt dues , air / railways tickets may more . Many of these were used to convert old currency instead of genuine use.

5) Opposition parties were not taken into confidence for taking such a big decision – Lack of support from Opposition parties

Measures to be taken for overcoming this failure :

1) Political parties should be taken under the purview of Income Tax & RTI.

It is said that “Charity begins at home”, for making people realise,first of all major political parties including Congress &BJP itself has to preach the move of getting into cashless &white  transactions and start receiving & paying cheque payment with an undertaking from donor that he is giving this donation from his tax paid white money.

But unfortunately it is not evident at all Exemption of Political parties reaffirmed/continued even they were allowed to deposit old currency notes without any limit& questioning though for common man limit was fixed( refer news in Indian Express dated 17th Dec 2016 )

2) Big Religious centres should be taken under Income Tax & RTI purview.

3) Stringent anti-corruption law should be made to take action against corrupt people and implementation mechanism should be made strong.

4) Large scale agricultural income should be brought under the scanner of Government/Taxation System, specifically, the zimindars who are declaring huge agricultural income and also disproportionate to the productivity of land etc. However, small and medium farmers should surely be left out.

Contrary to this Govt has issued draft Anti-corruption amendment bill 2016 protecting Alleged Corrupt Govt employees including from peon to Secretary i.e.police to take “previous approval” of competent authority ie Central Govtbefore conducting any enquiry or investigation against a public servant . Taking permission from Central Govt against its own employees (specifically Senior ) will never be easy and it will be leaked to those employees before action taken they will easily escape.

Similarly the government has provided another opportunity for people with black money to come clean at a total cost of 50%  .The 50% levy is broken up into 30% tax, a 33% surcharge or cess on that tax and a 10% penalty (Pradhan MantriGaribKalyanYojna 2016)

This is indeed an encouragement to Black money hoarders and discouragement to honest tax payers.

5) Salary of Government employees should be matched with the corporate sectors employees and at the same time efficiency should also be ensured

6) Digitization – People should encourage to use non cash transactions by motivation not by force.

7) Circulation of fake currency to be stopped. Security features should be more (Plastic money can be the option).

8) Tax rates to be decreased – Both Direct & Indirect so as to widen the tax base.

9) Stringent measures to be taken to stop cash purchase of property & other costly items – Like new act should be passed that gives power to Government to acquire the new purchased property within one year after paying say 50% of the extra registry price.

10) All transactions to be included under GST including property tax.

11) Simple norms for tax compliances should be introduced.

12) Social security should be strengthened.


From the above discussion, our estimate that this decision is “A Misguided Missile fired in Haste” is proving to be true but thanks to the public that inspite of hardships and losses they have largely supported the decision.

Hopefully intention may be good but should have been taken very carefully with full preparations as such a huge decision is taken once in a century. It is a Brahamastra which is very rarely used or used in emergency but this time it has been released without any preparation or used in haste.

We hope that this is not a case of “Repeated History” (Refer old story of Mohammad Tughlaq, we read in the childhood).

Jai Hind

(Author can be reached at nancybhalla@yahoo.com)

*Member ZAC Chandigarh, Service Tax, Govt. of India, Member RAC Chandigarh, Central Excise & Customs, Member Indirect Tax committee SIAM , Member, ASSOCHAM Indirect Taxes Committee, Chief General Manager Finance- SML Isuzu Ltd. Winner Achiever  Award 2015 By ICAI (CMA)

Categories: Fema / RBI

View Comments (20)

  • The writer has tried to analyze and presented one side view. As per his report 17.54LCr was the notes under circulation. Of this 15.44LCr were in Rs500 and Rs1000 and in circulation. This is the catch. Circulation among whom? Govt wanted to know only this. Govt wanted all that printed currency to come back fully accounted for. Govt did not know who had how much of this cash. Now Govt came to know. That is enough for the Govt to plan any future things

    Now Let us analyze: We are 125crore people, of that about 30crore are below 18 and have no income, another 15 crore are those who are above 18 and below 60, but have nothing or earn nothing, another 5 crore are old people have nothing and depend on others, another 30crore zero balance JDY a/c holders. Balance population is : 125-30-15-5-30=45crores. In this about 40 crores are people govt / working and earn less than 2,50,000/- and pay no taxes and may have max 10k of these notes as cash. That is 40Cr x10K =4LCr. Therefore the balance (45-40)=5Cr people have 15.44-4.00=11.44 cr cash (these notes)!!. Of these only 1cr file returns and have declared that they have taxable income and say they have each 1L as cash. That will give 1L Cr. Balance amount is 11.44-1=10.44 L Cr cash is held by 4 cr people. That means these 4 crore people, each has (10.44/4=) 2.61 lakh as cash and did not file returns- this is the question, why these people keep that cash and what they do with that. For this question (from IT dept.) say 1 cr people will be able to give some reasons, and may get out, but others cannot. That means 2.61LCr is accounted, balance is 10.44-2.61=7.83Lcr has come back into bank accounts without reasons for its source!!. Now Pay 50% for this as tax plus panelty, and 25% to PM’s Garib Kalyan deposit. That means Govt will get 1.95LCr as deposit to which Govt need not pay any interest for 4 years. And the windfall is the 50% tax which will be =7.83x0.50=3.9LCr and recovered tax. This will be the minimum result after 4-6 months, when full calculations are done by IT dept & banks. It is benefits and benefits to the nation and nothing else.

  • Very well analysed article. The tax recoveries on amount deposited may go up sharply and IT dept may be given targets so that the demonitization is proved to be a success.

  • Detailed article with well analysed inputs. But after reading it i would like to ask one simple question; why is it so that we always look at things with a negative approach? We talked about monetary losses. Why aren't we interested in qualitative reforms? In the entire article, i believe one point is left out i.e. "Transparency in system". If a salaried person has willfully accepted the tax paying mechanisms with his or her hard earned money then why not the contribution of rest of the sections of people. I think now the time has come that we all should broad our horizon to cater to all levels of living outlook.

  • The articles is well said and all monetary and
    non monetary has shown well the corruption can be reduced but it cannot be demolish at all The main reason is out intutions which creates all these problem so Pahle Apne aap ko saf karo and man me ye dal do ke me corruption nai karunga and yahi seekh dusro ko do tabhi mitega warna kabhi nai ye sab to politics ha r kuch nai in sab se ye thoda
    kam to hoga lekin Khatam nai hoga kabhi

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