Demonitisation End State Prediction

Everybody loves predictions. Be it your daily horoscope in the tabloid, the weekly horoscope in the Sunday newspaper, or the once-in-a-lifetime Demonetization initiative, we tend to eagerly gulp down everything that is predicted.

Joining the prediction party, Here I am predicting the result of the ongoing Demonetization initiative.

To set the background, the Government of India announced a massive demonetization initiative on 9th Nov 2016. The then valid Rs 500 and Rs 1000 currency notes were made illegal overnight. The janata was mandated to either deposit or exchange the currency notes till 30 Dec 2016. The exchange facility was withdrawn later (since the GOI feared massive money laundering).

On the date of the announcement, this invalidated currency amounted to Rupees 14.86 Lakh Crore.

As it is usual with such mega decisions, a slew of court cases ensued, most of which were shot down by the Supreme Court. The Attorney General Mukul Rohatgi, representing the GOI, submitted before the Supreme Court that the GOI expects Rs 11 Lakh Crore to be deposited into the banking system by 30 Dec 2016. The rest was expected to be considered as black money which wouldn't flow into the bank system.

How wrong was the gentleman ! And the GOI !!

On 7th Dec 2016, a cool 23 days before the end date of the demonetization exercise, an awesome Rs 11.5 Lakh Crore has flown through the banking system (Most of it is deposited in the banks).This has taken the GOI's calculation for a toss.

The big question which remains now is - How much money from the now illegal tender will flow through the banking system?

Well, the current state of the Demonetization exercise is as below.

The amounts of deposits have progressively increased, much to the surprise of the GOI.

Of late, I have been intrigued by graphs and economics. I surprisingly realized that real world behavior mimics the statistical models. The authors of the superb book-series Freakonomics professed one important point - there is no better experiment than a real world experiment. And Demonetization has been a bold experience !

I expect the country and the economy to behave as below till 30 Dec 2016 (the end date of demonetization).

Given the current trend, I expect approximately Rs 14.16 Lakh Crore to have flown through the banking system till 30 Dec 2016. This will mean that people have deposited almost 95% of the now illegal tender.

Adding to it, the RBI has given a window till 31 March 2016 to exchange old Rs 500 and Rs 1000 currency notes in select RBI offices. This would further increase the amount which would have been deposited or exchanged.

If this indeed happens, the GOI, the IT department and other Government agencies will have to do serious hard work to go through all the accounts which saw deposits after the demonetization and identify possible black money. 

Lets watch the country closely over the next 3 weeks. Visit this blog again on 31 Dec 2016 !