An employee of Muthoot Finance Ltd., one of India’s leading providers of gold-based loans, counts Indian one hundred rupee banknotes in a branch in New Delhi, India (Photographer: Anindito Mukherjee/Bloomberg)  

Black Money Estimate Shot as India Said to Claim 82% of Cash

(Bloomberg) -- Indians have validated 82 percent of bank notes rendered worthless by Prime Minister Narendra Modi’s surprise move last month, according to people with knowledge of the matter, undermining the government’s estimate of unaccounted wealth in the economy.

About 12.6 trillion rupees ($185 billion) had been deposited into bank accounts as of Dec. 3, the people said, asking not to be identified citing rules for speaking with the media. The government had estimated that about 5 trillion rupees of the 15.3 trillion rupees sucked out by Modi’s move would stay undeclared, implying that this was cash stashed away to evade taxes, known locally as black money.

Lack of a meaningful cancellation could be a double blow for Modi as the measure was being used as a political and economic gauge of the success of his Nov. 8 move. One of Modi’s biggest campaign pledges was to expose black money in Asia’s No. 3 economy, and economists were viewing the cash as a potential windfall for the government.

"Some of the windfall that the government was hoping for from the cancellation of notes will be dented," said Anjali Verma, chief economist at PhillipCapital Ltd. "That means the fiscal stimulus that was being expected might also take some hit. That is not good news at a time when direct consumption, private investment is not expected to pick up."

Private indicators published over the past week signal that the $2 trillion economy will be hurt by the cash clampdown. Economists have also slashed India’s growth forecast for October-December, imperiling the nation’s status as the world’s fastest-growing big economy.

Parliament has also remained deadlocked, with opposition parties demanding a debate and vote on the measure, which would censure the government. The lower house has been active for only 13 percent of the time allotted for the month-long session that started Nov. 16, and the upper house for 22 percent, according to data from PRS Legislative Research.

‘Defeats the Theory of Black Money’

Finance Ministry spokesman D.S. Malik wasn’t available for comment. The rupee ended little changed at 68.22 a dollar in Mumbai on Monday, the benchmark stock index rose 0.5 percent and the yield on the 10-year sovereign bond fell to 6.22 percent from 6.24 percent.

"Markets are not too worried at the moment," said Chakri Lokapriya, Mumbai-based managing director at TCG Advisory Services, which manages about $3 billion. "But if 12-13 trillion rupees comes back into the system it defeats the whole theory of black money."

In such a situation where the gains of demonetization aren’t apparent, individuals will more closely analyze the pain. A slump in demand due to the cash shortages will hurt company revenues and government tax collections, widening the budget deficit and ultimately weakening the rupee, Lokapriya said.