“Suppose a person doesn’t declare Rs 20 out of his earning of Rs 100, so Rs 20 becomes unaccounted money in his possession upon which he doesn’t have to pay any taxes. Thus we have Rs 20 black money generated. Similarly, if an export of Rs 100 worth is done and only Rs 80 worth export is declared, then we have a case of black money being formed. The person is not stupid enough to keep Rs 20 as cash in his/her home but would like to earn profit on it. To do so, he may invest it in Gold, buy properties or on a major account deposit in Swiss bank which is against the law. In either case, demonetization does him no impact at all.“
Narendra Modi government, almost instantly discontinued the usage of Rs 500 and Rs 1000 denomination currency notes as legal tender effective November, 8 midnight. This step supposed, however not new, to curb the menace of black money, stop counterfeit notes and terror financing won many applauds across the country and was represented as much needed breakthrough in the area.
The justification being meted out to the country is that there will be ‘minor’ inconvenience to the people for 2-3 days. However, as per finance minister Arun Jaietly, the ATMs will be ‘recalibrated’ and that might take another 2-3 weeks since the new currency denominations are not compatible with the existing ATMs. “Why so under-preparation” is another debate.
A much deeper analysis and the proper understanding of the dynamics of black money reveal that this measure has actually nothing to do with black money. We will come to the fake notes circulation and terror financing later, but first let’s understand what this creepy ‘black money’ is?
The common understanding is that black money is about the pile of money in cash forms held in trunks, boxes or buried underground. Leave foreign banks, the cash held in boxes in homes or under the pillow covers do not even constitute 5% of the total. The sizeable amount of black money in India is about ‘black activities’ and that do include the conversion of those stacks into gold, properties and dated shares.
Rarely anyone keeps sizeable amount of cash at home at least in the modern era when there are thousands of opportunities available to escape. Even if somebody has, they will not set out to banks carrying the bundle of Rs 20 Crore, say (that’s not even allowed), but will go with minor chunks and this will continue till the deadline of 30th December. But again, as I said, that accounts to less than 5% of the amount. The rest of the money lies in several forms and a major part lies outside the country’s purview, i.e. Swiss bank and other foreign banks.
When we talk of “black money” it represents a whole set of activities which are either entirely illegal, such as smuggling, or drug-running, or procuring arms for terrorist organizations, or are undertaken in excess of what is legally permitted, or are not declared at all so that taxes are not paid on them. The excess is then transferred across boundaries far from the sight of Indian tax.
Demonetization as a mean to contain the black money has failed in the past. Forget the 1946 scheme, in 1978 – Morarji Desai government discontinued the usage of Rs 1000, 5000 and 10000 denominations as legal tenders, off course to fight black money hoardings and counterfeit notes etc. The step failed and there were evident reasons as outlined above.
There was no inconvenience to the poor and common people then since Rs 1000 denomination used to be a huge amount and most of them hadn’t even seen them let alone possess one. Big denominations were the possessions of big and influenced ones; even then this step did not end the scourge of ‘black money’. The Modi government’s move, while equally ineffective in countering “black money”, has the added flaw of impinging severely on common people that has even led to the deaths according to report.
The additional revenue is gained when the government comes up with the VDS (Voluntary disclosure of Income Scheme) but when the government demonetizes, it hardly gets any revenue and consequently there is no benefit.
Demonetization of the big notes also represents the slide towards the cashless economy and being hinted towards the ‘black activities’ not financed through legal institutions. But the activities being financed through foreign banks accounts will have a hearty laugh over the whole scheme. The cash less India is still a distant dream and as of now this corresponds to the pipe-dream of the elite club and not common man. Eventually, a common man in a bid to transact online will have severe issues when the financial inclusion has still a long way to go and procuring a debit/credit card and the availability of card counters being scanty in remote areas/villages will have a troubled affair. Move towards cashless economy is yet another way where the common people will get squeezed up.
Narendra Modi, in his electoral speeches used to sound harsh only on the black money being accumulated in the Swiss banks and had resolved to ‘bring it back’ and even quantified it by saying that if they come, every Indian can have a share of Rs 15 Lakh each in his/her account. He was not concerned about the undeclared money in cash form being in India that eventually corresponds to very little.
The majority of money which have been deposited in the banks in the last few days(after 8th nov) generally comes from household savings, poor and laborer’s hard earned cash being kept for later use, cash from the savings of housewives kept securely for family occasions and this is simply not fair.
Talking about the fake currency rackets operating in the country and beyond, the notes printed before its scrapping will be destroyed. No new security feature have been enabled in the new Rs 500 and Rs 2000 denomination make it even easier for the perpetrators of such rackets to print new denomination notes and circulate. This is evident from the news – Karnataka reported fake Rs 2000 note in less than 2 days of the government decision. So, demonetization has indeed brought the fake rackets to a grinding halt but momentarily.
What can be more effective to curb black money then?
- Stricter laws to track down property deals happening through cash transaction since some part of stocked money are invested in properties.
- Formulation of policies so as to monitor the gold trade happening within the country and link such transactions with PAN or Aadhar.
- Less than 3% of the population pays income tax currently! Focus more and more on tracking the income data and better tax policies which may ensure that the income doesn’t go undeclared and are taxed.
- Act swiftly on the obvious defaulters as in Panama leaks which may send a strong message to other culprits.
- India is the third largest exporter of Black money. Swiss banks had given the names of some 700 people last year and the government is yet to act.
- Another portion of unaccounted cash is spent in elections by the political parties. All political parties should declare their sources of funding and come under the purview of RTI.
Such a hype this demonetization is becoming of late is not well deserved, but just to content the political ambush of the ruling dispensation. Keeping in mind the elections coming up, a seriousness away from the whole ‘Hindutva agenda’ was much needed and this step has successfully done that.
By Deepak Jha