Where is the Black Money?

Image Source: Rediff

The fifty days of deadline of demonetisation of our monetized economy is coming to an end.  The economy being not yet significantly remonetised and situation does not show any sign of change, the scheme of demonetization appears to be domed.  The pain appears to be set to continue for a long time.  With no wind fall of black money in sight from demonetization, what was positioned as a war and surgical strike on black money has been reduced to mere change of notes of higher denomination.  We seem to have returned back to where we began.  That is why the question that asks, ‘where is the black money?’ is profoundly relevant. The way things unfolded up in the last fifty days only shows that the change of notes brought lots of problems for the people.  But this has not stopped the process of generation of  black money in any way. The new notes of Rs 2000 have become the new medium of accumulation of unaccounted money. The fact that several bankers and fraudsters are being caught with a huge amount of cash only shows that under the very nose of demonetisation, black money is generated in the form of new notes. This is why we will have to ask what did demonetisation with its high profile secrecy achieve? It has certainly not plugged the sources of generation of black money. What it has  really achieved seems to have impeded  some transactions that convert black money into black wealth. But this also will last for a short time. Once sufficient unaccountable cash is available, these transactions will also gain pace. May  be they are already happening under cover. Only the ordinary people are facing the cash crunch and bags full of new pink notes are being found with a select ones among whom a few  may be were unlucky enough to be caught.  Therefore, what was portrayed as a war on black money seems to have become an embarrassing fiasco.  

May be we will have to understand the very process of generation of black money in order to  make sense of what went wrong with the war on the same. Black money is unaccountable cash that is accumulated by evading legitimate taxes of our country.  How do some people generate black money in our country?  Notes of all demonization that come from the RBI are white. How this white money becomes black? This means all notes are not black in themselves.  What we call fake currency is one that is black at source. We do not need demonetisation to check its growth. We need to attach scanners to the counting machines that would hunt down the duplicate or fake serial numbers imprinted on the fake notes  and report them to the RBI.   In fact, no legitimate note is black at source. All legitimate notes become black in its use. Hence, it is in the manner of use of these notes where we have to  look for the sources of generation of black money. This means, we have to look at those transactions that escape our tax network and generate  unaccountable cash. This cash that escapes legitimate taxes is black money. Thus for instance, if a person  A  goes with Rs 100 to a shop and transacts it to buy a commodity and the shop keeper  B does not give  the person A a bill and also does not report his own income and revenue to the income tax authorities, than this Rs. 100 may become black .  If Rs 100 becomes part of the total income that crosses the income tax threshold on the income of an individual person, then that Rs. 100 will become black income.  Since the shop keeper B makes thousand of such transactions, it is likely that the transaction of Rs. 100 that the person A did may become part of  B’s black Money. Now simply by changing notes, we cannot address this process of white money becoming black. This is why what is called war on black money was at the most a war on cash.      

What we needed is to address the manner of using cash. Besides, the process of cash becoming black in the manner of its use, there is a reverse process by which black money becoming white. One channel is the decoration of black money  opened by  the Government from time to time.   There is also an automatic way by which black money that is hidden as cash becomes white.  This happens when the Govern prints more cash. Every year our Government prints 10 to 12 % new notes of the higher denomination.  The coming of new notes adds to the volume to the notes that are already in circulation. As a result, the value of the circulating notes is deflated. This means the notes that are kept hidden lose their value and that value which is lost becomes white. This means the value of black money diminishes even the currency  that is hidden away remain same . As we all know that the black money stays outside the official banking system.  Hence, it does not have interest to back the loss of its value.  The value that is lost  as a result of  addition of new notes by the RBI cannot be recovered. This is one way though slowly, that the black money becomes white.  Besides, this usual process, the black money becomes white when it moves to people whose total incomes are below the taxable thresholds. This means when black money reaches these people by way of payments for their services, gifts, donations etc., it becomes white as they are outside tax bracket of our country.  Therefore, it is  the nature of transaction   that transforms legitimate cash into black money.  It is here, that the generation of black money has to be arrested. Hence what has become mere change of notes is no solution to the generation of black money. Hence, unaccountable money that is generated by evasion of GST, Vat, corruption etc., will continue with the new notes. Therefore, all that our Government did want search for a black cat in a dark room where it does not exist. Besides, the collateral damage, that the so called war on black money has not precedence in our country and is painfully dressed in a garb of nationalism.  

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