94. DEMONETISATION: MODI MISSES A CHANCE

94.DEMONETISATION:
MODI MISSES A CHANCE

Prime Minister Modi's step in demonetising the Rs.500 and Rs.1000 notes is  bold . But as a measure to curb black money, it may not have much impact in the long run. It will hit ordinary citizens  hard in many unexpected  ways.

Instant Success

The PM has been sincerely pursuing the aim of curbing black money since he assumed office. But the decision to demonetise these denominations at this moment seems to have been prompted by one supreme consideration: the realisation that fake Indian currency of these denominations printed in Pakistan was funding the extremists, whose activities were rising in Kashmir.The fake Rs.500 notes had increased by 46%, and Rs.1000 notes by over 100% in the last 5 years. Modi's measure has hit this surgically. This in itself is a great achievement.

Modi govt has not sufficiently highlighted this fact.

Now, the real problem

But black money is a different, and more difficult, matter.

First, officialdom does not have a proper idea of black money, or its extent. 

Properly speaking , money is not black or white. But the transactions which it finances can be termed black [ illegal, unethical, anti-national,-like smuggling, drugs, arms, underground, etc] or white [normal commercial transactions.] Broadly, we may say that money which is derived from illegal activity ( eg bribe) or for which tax has not been paid is black. However obtained, money does not stay put as black but gets into the main flow and integrates with the economy fully. My boss may  pay me salary out of income concealed from tax, but in my hands it is legitimate and it goes on its further course to finance many more transactions. Will you dub all this as black money because the initial money was black? Then where will you draw the line? How will you mark the note as black?

Black money in the world

Black or unaccounted money is a reality in all economies; only the extent varies. But it is not an animal easy to seize or tame. We know it by what it does, but we cannot catch it at any point.

From: Power Learning Hub

Black money always bad?

Economists will say parrot-like that black money is bad for the economy (as if economists are good!) But in a country like India where the informal sector contributes 47% to GDP, and 80% to employment, the black money actually provides liquidity to the system, which does not depend on the wretched banking system which does not help the petty traders, or the small and medium enterprise.

High denominations facilitate black transactions

There is no doubt that the presence of high denomination currency notes facilitates transactions with unaccounted money. But it does not mean that the money is always kept in the form of hard currency, or for long. It is converted into other forms: may be real estate, jewellery, expensive art, lavish lifestyle, fabulous home decoration or furnishing, etc.

People are encouraged to resort to banking, on line transaction, net banking,card payments etc to reduce the use of cash. But even in such societies, black money exists.

Black transactions will not go, just because some denominations go! But they will be increasingly difficult if higher denominations go.

The presence and availability of tax havens and secret banking services ensures that black money can now be taken out of the country and put in safe havens. And there is international guidance and expertise in the matter.

High taxation creates black money!

One inducement to evade tax is the brutal rates of taxation. This is an invitation to intelligent accountants and managers to simply outwit the system. It is therefore no surprise that England which has a high rate of tax  also reports large number of black money holders abroad! See this report for England:

In 2010 a new top rate of 50 percent was introduced on income over £150,000. A predictable result of this was for people to disguise their income and revenue to the Exchequer to go down.^[11] In the 2012 budget this rate was cut to 45 percent for 2013–14, which was followed by an increase in the tax paid by additional tax rate payers from £38 billion to £46 billion. Chancellor George Osborne said that the lower, more competitive tax rate had caused the increase.[Wikipedia]

It has thus been found that a lower tax, and steady system with honest administration will actually increase revenues!

When Indira Gandhi held the finance portfolio, the maximum income tax rate was 93%! Will any sane person resist the temptation to show the devil its place? 

Avoiding Tax: national pastime!

In India, the tendency to avoid or evade tax is widespread at all levels. The petty electronic shopkeeper will oblige you by not giving a bill, so that you save the tax! So many traders do not pay sales tax.All the money so saved is black money technically. Do you suppose all this money is stored in high denomination notes, all the time?

Think of all the doctors, lawyers, teachers conducting coaching classes in batches, persons often with political connections running schools and colleges, etc all earning huge incomes but not paying taxes! Earning such unaccounted money is a national enterprise.

Ingenius ways!

There are ingenius methods to generate black money or convert black into white. Two instances I observed in Gujarat. In the 70s most textile mills had their own showrooms in Ahmedabad. But I found that even in the showrooms certain types of cloth would be stamped "Seconds", or would be sold in pieces. I came to know that it was the way to avoid tax at higher rates, and also to beat the corrupt tax administration.

Then in Surat I saw another phenomenon. There were some nice AC movie theatres, some better than the ones in Bombay. But they were mostly showing old Hindi movies. I was curious. Were these Surtis so fond of old movies, really? I attend two/ three theatres and found the audience so thin- hardly more than 100 or so! Then why were they running those movies? Knowledgeable friends educated me: the theatres would declare the show "houseful", pay the entertainment tax and lo, the rest of the unaccounted money becomes white!

But what politicians do beats everyone. Here, Congress Party is our guru and devta, priest and patron, model and mentor. Indira Gandhi was the High Priestess and Chief Goddess. She toppled state govts through money power- the money she paid to some MLAs to topple Hitendra Desai govt in Gujarat was actually brought to the House and dumped on the desk of the Speaker! Indira Gandhi said corruption was a "universal phenomenon". Who could argue against it? So, Indira introduced Globalisation long ago!

There had been corrupt elements in the Congress before Indira- even Gandhiji complained of it in 1939, saying it was ruining the country. But it had been like an underground gutter. Indira brought it to the surface, made it a wide open nullah like it ran through parts of New Delhi, became an adept dealing with it, and made it fashionable. It became mainline. It has remained so ever since.

In Tamil Nadu. Karunanidhi as CM set up a record in corruption, attracting the Sarkaria Commission ( but only to suit Indira Gandhi).and its adverse comments. Now we have several editions of Karunanidhi in other states, with perhaps not enough Sarkarias! 

Problems for the common man?

That all opposition parties are criticising this move shows how their interests are vitally affected ! The difficulties people face now for currency notes are purely temporary,due to the surprise nature of the move; and as good citizens we do not mind it all; but for the politicians it is a big blow and I rejoice in it!

The common man will be hit hard if the black money holders switch to precious metals and real estate in a big way, thus sending up the demand and prices. Then the only hedge available to him against inflation, and the only long term source of financial security will be compromised.

Perennial streams of black money

Two categories of people generate black money in unceasing streams: politicians and businessmen-industrialists. And all of them have found ways to keep the money abroad. No govt or agency is even able to estimate how much it would be, though every  one says it is enormous, astronomical.

In February 2012, the director of India's Central Bureau of Investigation said that Indians have US$500 billion of illegal funds in foreign tax havens, more than any other country.^[4][5] In March 2012, the government of India clarified in its parliament that the CBI director's statement on $500 billion of illegal money was an estimate based on a statement made to India's Supreme Court in July 2011

The point is, with so much held abroad, what would demonetisation achieve in India?

Why Rs.2000 denomination ?

Some people would surely be left with these old notes rendered useless now. But  their appetite and  capacity for making more in new notes will be left in tact, and even sharpened! The Indian political and economic system is not going to change because of demonetisation! Our bureaucracy is not going to change! These are enough to make black money comeback! Modi has unwittingly facilitated that by introducing a new higher denomination in Rs.2000!

This indeed defies logic. The ideal way to stop the parallel economy and generation of black money is to ensure that  business transactions are made to leave a record or footprint, which cash transactions do not. Payment by cheque, on line settlement, card payments, etc would facilitate that. But this is not achieved by merely exhorting the people. We must provide facilitating instruments and avenues, and limit or frustrate opportunities for cash payment. The absence of high denomination notes will surely frustrate cash transactions, except the essential ones. Modi could have stopped with demonetisation of the two denominations. That would have compelled the people to realise the difficulty of settling high value transactions in cash and indirectly compelled them to take to other means. By providing a new higher denomination, Modi has frustrated his own long term goal and opened up opportunity for fresh bout of black money.

The problem for the common man is the non availability of smaller denomination notes for day to day transactions. The two demonetised denominations constituted 86% of the value of currency in circulation, and it will be some time- months- before some ease is felt. It is not easy to replace this volume with smaller notes. But the introduction of Rs.2000 denomination will only add to the problem: while ATMs and banks may merrily dispense them, people will run from pillar to post to have them exchanged into smaller denominations for simple day to day transactions, which even banks may not have. We faced problems even with the ATMs dispensing mainly Rs.1000  and Rs.500 notes; the difficulty is bound to be more with the higher denomination, for the common man.

In the UK, the highest denomination bank note is 50 pound sterling.

In the US, the highest denomination is $100.

In Germany, the highest denomination is DM 200. [Higher denominations are rarely used.]

Why then should India have such a note in Rs.2000 denomination, if the govt is serious about discouraging the use of cash for high value transactions? 

Given the govt's record and commitment in containing inflation, with the Rupee falling continuously in value, may be Rs.500 denomination is necessary ( which is less than 100 rupees of thirty years ago). But why Rs.2000? It is surely an unsound step. Modi has missed a real chance to introduce a long term effective reform.

Our officialdom seems to grow in bulk, complexity, stupidity and decay, and not in wisdom.

Good intentions gone awry due to faulty implementation.

I am really sorry for Modi.

Note:
Since money by itself is not black,  those who hold unaccounted money in the form of high denomination currency do enjoy some natural protection in the system; to put it the other way, any one having high denomination notes now has to prove that it is not black money! To this extent, the honest citizen is harassed. But then, it is so with any step to control extremism too! Now, each one has an identity tag with a number, like prisoners alone used to have in olden days, and even  travel  within the country is not pleasant or possible without it! Yet, how many do complain?This is the price we pay for our freedom!