The surprise demonetisation of high value denomination currency may lead to likely destruction of banknotes worth over Rs 3,35,000 crore while new notes worth Rs 1,34,000 crore may be added to the banking system, a leading think tank said on Friday.
"This step by the government is a death blow to the cash component of black money in India," Imagindia Institute President Robinder Sachdev said.
"Over $50 billion (Rs 3,35,000 crore) of illegitimate cash will be destroyed, and over $20 billion (Rs 1,34,000 crore) of legitimate cash will enter banking channels to become legal," Sachdev said.
The move comes in the wake of the voluntary Income Disclosure Scheme (IDS) that ended on September 30 and reportedly netted $19 billion (Rs 1,27,490 crore), according to the Washington Post.
It means that India's war on domestic black money will bring in approximately $40 billion (Rs 2,68,400 crore) into the formal banking system of the country by December 31, think tank Imagindia Institute said.
According to Reserve Bank of India (RBI), the total value of the outstanding currency in circulation in the Indian economy as on October 28 stood at Rs 17.77 lakh crore, or about $265 billion.
RBI data also shows that as on March 31, currency notes of Rs 500 and Rs 1,000 comprised 86 per cent of the total currency value in circulation.
"Not all currency notes in circulation are illegally acquired cash. Our model to assess the impact of this step by the Indian government accounts for 70 per cent of cash in currency notes of Rs 500 and Rs 1,000 as legitimate, and 30 per cent as illegitimate cash stowed away in bags and hiding places," it said.
This strike on the black economy will, at the same time, eliminate fake currency and cripple terror financing, significantly strengthening India's financial and banking infrastructure, as well as bring almost all of India into the formal banking system.
However, Imagindia also added that the current cash in circulation or hide-outs is a minor proportion of the black money that has been generated in India.
"It can easily be agreed that 20 per cent of India's GDP is unreported, and in the black economy... In the past ten years, from 2006 to 2015, India's accumulated GDP was $20,134 billion," according to World Bank data.
"At 20 per cent of illegal money, it means that $4,027 billion have been created as black money in India in past ten years," Sachdev said.
Majority of black money generated in past ten years was converted into legal bank deposits, land and property, gold, diamonds, silver, art, and other such items.
In addition, portions of it were sent abroad to safe havens and investments, or circled back as legal investments in Indian companies, he added.
"Through this war on cash economy, the government will be able to destroy only $50 billion out of the $4,027 billion that was generated.
"However, this is the maximum that can be done at this stage... nevertheless, it is a body-blow to the future of black money in India," he said.
