Black Money and Demonetization: Debunking myths and apprehensions
email: khyati.khush@gmail.com
The big ticket currency
reforms introduced by Prime Minister Modi to curb circulation of fake currency,
trap the black money and pave-way for a gen-next digital economy. Now, why when
everywhere it is labeled as ‘demonetization’, it is preferred to mention
currency reforms here? It is because the larger picture gets hidden under the
label of demonetization, whereas currency reforms widely define the intention
and direction of current monetary initiatives.
Black Money or Parallel Economy?
At first, it is
important to understand the meaning of ‘parallel economy’, which in commonly is
referred to as black money. Though ‘Parallel economy’ is the wider concept, of
which ‘black money’ is a component. Parallel economy has political, commercial,
legal, industrial, social and ethnic aspects. There are legitimate and
illegitimate sectors under parallel economy, the objectives of both certainly
confront one-another (Sarkar, 2010).
India being a mixed
economy- where public and private sector push economic activities - both
sectors have contributed to the growth story. However, the economic activity of
the informal economy which ofcourse is the backbone of the country, but being
non-monitored goes unaccounted in this growth chart. This ‘unaccounted economy’
forms one of the major components of parallel economy.
Talking about
the estimates of parallel economy, so far there have six reports been given
between 1953-54 to 1987-88 only. Yes, the last one being published in 1992, and
none after that. Taking the scope of parallel economy defined by the widely
acclaimed, NIPFP’s ‘Aspects of Black Economy in India’[1]
(1985), it is learnt that other than incomes generated through illegal
activities like smuggling, black market transactions, bribes, extortion money,
etc, there are unaccounted incomes generated like factor incomes through
underreporting of output/sales in production of goods and services, capital
receipts like in real estate sector through underreporting the value, incomes
generated in export-import through underpricing, overpricing respectively, etc.
is black income (Dutt, Mahajan. 2014), which forms a large part of parallel
economy.
All this
contributes to huge tax-evasion in the country and unaccounted wealth, which
pampers corruption, demonstration effect in consumer market, causes
accumulation of savings in black liquidity, money laundering, and the worse –
terrorism, drug menace, extremism. In 1988, the estimate of such economy was
around 50% of the then GNP (Gupta, 1992). With the multi-dimensional expansion
in economic activities in India, especially after 1991 reforms, this estimate
must have climbed Mt Everest in past two and a half decades.
Where is the catch?
To unearth this
unaccounted wealth, several initiatives have been taken so far – in the
direction of checking tax evasion (particularly, in indirect taxes),
demonetization (1946, 1978, 2016), voluntary income disclosure schemes, issuing
govt bonds for unaccounted money (1981), etc. Taking any one of these measures
in singularity to trap the flow of parallel economy will not yield effective results;
rather a comprehensive policy package will hit the bull’s eye.
Now considering
the series of initiatives taken by the incumbent government to unearth and
restrain parallel economy– (P.S. Read about these initiatives in detail to
understand the impact).
1. Undisclosed
Foreign Income and Assets (Imposition of Tax) Act, 2015
-
To
trap the undisclosed foreign incomes and black wealth stashed abroad.
2 2. Income
Disclosure Scheme
-
Opportunity
to comply norms given to people to disclose their black money.
3. Gold
Monetization Scheme 2015
-
This
primarily aims at reducing gold imports in the country.
-
But
not to make the scheme a black money immunity scheme, tax is levied on deposit
of gold more than 500gms held out of unaccounted income[2].
4. Real
Estate (Regulation and Development) Act, 2016
-
That
pushes formalization and transparency in the real estate dealings, curbing
unaccounted income generation in the market.
5. Benami
Transactions (Prohibition) (Amendment) Act, 2016
-
By
widening the scope of benami transactions, curbing flow of black money.
6. Goods
and Services Tax Act 2016
-
Rationalizing
the indirect tax structure to widely overcome tax evasion.
7. Finally,
Demonetization 2016 and issuing Gareeb Kalyan Bond, besides dynamic and
responsive voluntary income disclosure provisions[3].
In
addition to these direct regulatory initiatives, certain initiatives that
indirectly check the parallel economy are by way of promoting transparency in
financial transactions through DBT, by promoting financial inclusion through
Jan Dhan with JAM trinity, etc.
Demonetization 2016 is
Remonetization
As
per RBI annual report of March 2016, total bank notes in circulation valued to
Rs16.42lac crore, of which 86% was in denomination of Rs500 and Rs1000 bank
notes. After the 8th November 2016 announcement by PM Modi, these
banknotes ceased to be legal tender, and in place new notes of Rs2000 (and
later new Rs 500 banknote) came into circulation from the next day. Section 26
of Reserve Bank of India Act, 1934 (sub-section-2)[4]
provides Union Govt power to declare any notes issued by RBI ceases to be a
legal tender.
1. Hitting
Economic Terror
Indian
Statistical Institute report (2016) – which says 15-20% of every Rs10lakh notes
in circulation in India are fake, and Rs70crore fake currency is infused into
the system every year. The report clearly mentioned that Rs1000 banknote
constitutes 50% of total value of fake notes. The money mainly pumped in by
ISI-Pakistan, flows from Nepal, and Bangladesh too. This (FICN) currency has been funding terrorism in the country[5].
These have been used in economically nurturing extremism along red-corridor
belt in India.
Demonetization
2016 has nabbed the monster of economic terror by its neck. After
demonetization announcement, total score of Maoists surrendering reached around
468 in November 2016, which is highest in a month. Then, after 4-months of
separatists’ nuisance, Kashmir has restored normalcy – no stone pelting,
markets, schools, offices open.
2. Inconveniences
and Opportunists
Replacing
2300 crore banknotes is obviously a big logistic challenge, well accepted by
Indian Banking System. It started with replacing the currency with Rs2000
currency note, and then new Rs500 currency note. Ofcourse, Rs2000 currency note
was pushed in the economy first because it was cost-effective and quick to
replace the huge quantum of currency demonetized. Thousands of technicians are
engaged making 2.18lac country’s ATMs accommodate to dispense the new currency
notes, of which 90% have been recalibrated.
According to the weekly report published by
RBI (November 28, 2016)[6] around
59% of the demonetized currency (worth Rs8.45 lac crore) has been mopped up by
the banks, while only around 14% of scrapped currency has been replaced with
the new, i.e. only Rs2.16 lac crore new currency has been pumped in the
economy. There is a cash crunch in the economy indeed. Banks are running out of
cash, ATMs are also cash-starved. Stock market hurt, factories, mandis, labour-market,
farmers, small businesses, etc have been badly hit.
Meanwhile, there are opportunists that are
trying to take advantage of the situation, which is adversely affecting the
market, and common-people. There are hoarders of essential commodities, gold
stockists - exchanging unaccounted currency for gold, currency stockists –
exchanging unaccounted currency for a %age cut with new currency, etc. Govt has
been taking stringent measures to nab these opportunists, while people have
mistakenly taken the problems created out these as a by-product demonetization.
It is not so. The inconveniences are genuine, but those created by such
unethical acts should be condemned and brought to notice widely for the
government to take action against such activities.
3. Remonetization
It
is said, demonetization is not a solid step to restrain the parallel economy,
as there is no guarantee that the new legal tender pumped in the economy won’t
be counterfeited. However, it must be noted that because this time the volume
of currency demonetized in India is huge, it would widely trap the wealth in
parallel economy. India Ratings and Research estimate say that by demonetizing
the govt has destroyed 12% of the black money[7].
Moreover, the initiative heads towards ‘Remonetization’ – which aims at
reducing the volume of paper currency in the economy and emphasize on digital
economy.
This
is a big ticket currency reform that India is heading towards, which is
strongly based on two basic principles – establishing transparency, and
accountability at each level. There is a wide welcome to the transition from
‘cash economy’ to ‘less-cash economy’. Noted expansion in use of digital
payments like debit/credit cards, e-wallets, unified payment interface (UPI),
banking apps, etc has occurred. Now to firmly establish this remonetization,
the country needs –
- Training and Awareness – to enable common-people use technology, online/mobile banking, or other digital tools/platforms.
- Strong Banking system – safe and secure from cyber attacks and threats.
- Regulations and Security Agencies – to safeguard against frauds on digital platform.
- Digital Tax system and regulated Digital Currency (Cryptocurrency).
Healthy economy after the bitter pill
In
the backdrop of all that is explained above, it can be said that
‘Demonetization 2016’ is that bitter pill which will kill the cancerous
elements of parallel economy. But ofcourse, it isn’t the last nail in the
coffin, as there would be series of reforms required to support the cause at various
levels. Nevertheless, it is important to mention in the end that all the
apprehensions and hoax created around the initiative has to be wisely handled.
The move intends to change the transaction habits of country – the spending
culture in other words. And change always comes with resistance to change,
which is often exaggerated by political beliefs. The short-term inconveniences
overshadow the long-term benefits of policy decisions in this course. Only timely
action against such hoaxes, stringent measures to nab the opportunists
(hoarders, etc), strong laws and regulations and spreading know-how and
awareness around remonetization, is the strong point of action for the entire
state-machinery. Moreover, the responsibility has to be shared by the people,
in their capabilities. This is indeed a fight against corruption, black money
and economic terror. Also, it is an effort to empower the informal sector of
the economy, the marginalized sections of the society and making India a
healthy economy.
[1]
Study conducted under the direction of Dr S. Acharya, and supervision of Dr R.
Chelliah, published in March 1985.
[2]
Read more: http://www.ibtimes.co.in/gold-monetization-scheme-deposits-above-500grams-without-naming-sources-be-taxed-647193
(Accessed 01-12-2016)
[3]
For more related information, refer https://www.icsi.edu/webmodules/IncomeDeclarationScheme_2016_PPT.pdf
(Accessed 01-12-2016)
[4]
Refer: https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIAM_230609.pdf
(Accessed on 02-12-2016)
[5]
Recent evidence in this regards are revelations made by David Headley during
NIA investigation of 26/11 Attacks.
[6]
Refer RBI Press Release: 2016-2017/1349, Available at: https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR13494BB1E774A2CE42F0B89D065E0CF14A70.PDF
(Accessed on 02-12-2016)
Comments
Post a Comment