This was doubtless an extraordinary admission. It speaks pretty poorly of India's banking system that there cannot even be a rough estimation of this amount, since all exchanges were stopped on December 25, 2016, giving the banks more than 6 months to count the cash.
I believe that the expected shortfall in currency returns did not materialise. On the contrary, I believe more money than the expected 15.5 lakh crores has come back into the system. It implies that far from demonetisation having struck a blow against black money holders and counterfeiters, the system has been cheated, and it has been cheated in more than one way.
1. Black money has been effectively turned white using demonetisation, since virtually all the deposits made have been under the no-questions-asked limit of 2.5 lakhs per bank account. A lot of private deals between black money holders and ordinary account holders must have been struck to enable this laundering, and the government is none the wiser. Minus a commission to the account holders, the original owners will eventually get back all their money. The whitewashed money will therefore largely return to the black economy, and the taxman will remain empty-handed.
2. Counterfeit currency in 500 and 1000 rupee denominations has been successfully exchanged for genuine currency in smaller denominations. Think about it. If the money that returned is more than what the RBI had put into circulation, it only means a large number of counterfeit notes have also been submitted and exchanged for genuine notes in smaller denominations. Demonetisation has unwittingly devalued the currency. By how much is anyone's guess. The RBI surely knows but is not telling.
3. Not only has the government not got its bonanza from the RBI in the form of the expected extinguished debt of 2.5 lakh crores (and hence no funds to spend on its pet initiatives), it is now in greater debt because of the demonetisation exercise. The increased deficit, as any economist will tell you, will add to inflationary pressures.
5. Paradoxically for a move that caused such widespread suffering, demonetisation boosted Modi's personal popularity. He was seen to have struck a blow for the common man against corruption, and the people were willing to suffer to see his efforts successful. The word "masterstroke" was often used, along with the phrase "He has delivered!" Modi seemed like a clever and decisive leader who had outwitted the enemies of the country and placed India on a path to growth and prosperity. Now everything has been turned upside-down. Modi no longer looks clever. He looks like a fool. The crooks have taken him for a ride.
This is politically explosive stuff. If it becomes common knowledge, Modi will be politically weakened, perhaps so badly that he may lose the 2019 election.
And that is why I believe RBI Governor Urjit Patel is trying to dissemble, obfuscate and delay his way out of the mess he has been forced into. His political masters have forced him into this sorry situation.