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With just over a fortnight to go before the deposits for demonetisation of high-value currencies ends on 30 December, it is clear, unlike what was argued on 8 November, that most of the estimated money will be back in the banking system. As of now, an estimated Rs11.5 trillion of the estimated Rs14 trillion odd in circulation has been deposited.

This leads to either of three conclusions:

One, very counter-intuitive, there is no black money (or income on which due tax has not been paid) in the economy and it was all a figment of the imagination.

Second, those holding black money have very successfully worked the system to protect their holdings.

Third, which is doing the rounds sotto voce, is that the math of currency notes supposed to be in circulation may not have been right.

Since the first can be ruled out and the last is a mere conjecture at this stage, it is obvious that we are looking at a very large-scale and skilful laundering exercise.

Daily revelations on corrupt and greedy bank officials abusing the trust reposed on them by laundering black money, the recent arrest of a politician with Rs4 lakh plus in new currencies and the spurt in deposits in Jan Dhan (no-frill accounts for the poor) is enough anecdotal evidence to suggest the worst.

The daily flip-flops on policy/rules on deposits/withdrawal only reaffirm our worst fears of a desperate administration trying to keep up with the bad guys—who clearly have been a step ahead all the time.

Since one of the three objectives of the initiative was to target black money, critics are right in arguing that the government is off target. But this is a case of missing the woods for the trees. The successful laundering of black money is a revelation on not just the consummate skills of criminals but also on how endemic corruption is—something that is crippling India.

The fungibility of black money reveals that over seven decades, the parallel economy has so spectacularly permeated life around us that it has got completely intertwined with the formal economy. This is frightening—a Hydra, the multi-headed serpent from Greek mythology, which can strike at will.

This is more than a wake-up call. It is no longer about being pro or anti-Narendra Modi. Instead, it is about India against corruption (a slogan that not so long ago had resonated across the country). This audacity of corruption—that despite such a dragnet being put out there, the parallel economy has so efficiently laundered its wealth—has to be dealt with immediately; demonetisation has to be followed up with other moves to contain this pandemic.

Given that only a fraction—some say less than 10%—of the country lives by these means, it is obvious that every act of corruption is an opportunity loss for nine out of 10 Indians. Status quo only benefits the elite and works against the bottom of the pyramid, where every opportunity lost/gained is the difference between staying in poverty or escaping it. This is the political economy of the fight against corruption: the fight to create a level playing field.

Indeed, it is not that there won’t be any benefits accruing from the demonetisation initiative. If the government follows through with its threats to crack down on the laundering, it has definitely raised the cost of corruption (just like the surgical strike raised the cost of promoting cross-border terrorism to Pakistan). For this very reason, retail corruption (of the likes that we encounter in our daily lives in the form of demand for bribes) is likely to decline.

Wholesale corruption on the other hand is likely to be incentivized as the stakes go up—which invariably appeals to human greed. But the thing is that it is very unlikely, given the manner in which the government blindsided the country, the corrupt will hoard their ill-gotten wealth in cash and instead as the laundering suggests retain them in bank accounts—which by definition leaves it vulnerable to scrutiny and therefore a lesser evil.

But the fact is that for now, the collateral gains for the economy, envisaged initially under demonetisation, have become central to the mission, while the core objectives have been diluted. To be sure, accelerating the transition to a digital economy is not a bad Plan B though.

Politically though, the message of a class war (especially by making small denominations, held mostly by the poor, popular) and the scale of demonetisation will continue to resonate across the country—exactly why the opposition is striving so hard to deny Modi his harvest of political goodwill.

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.

His Twitter handle is @capitalcalculus. Comments are welcome at anil.p@livemint.com

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