The Hindu Business Line : Taking value out of black money

Demonetising high value notes and a well-devised plan of exchange can address the stock and flow problems of black money. Simultaneously, it should also be made an offence for any trader or service provider to refuse to accept cheques/credit cards, says R. VISWANATHAN, and suggests a note-exchange plan too.

The scourge of black money is so widespread in the Indian economy that even experts seem to have given up trying to contain it, let alone eliminate the menace. A vast majority of the population — even otherwise honest persons — either collaborates in the generation of, or benefits from, black money.

A solution to this problem demands understanding how black money is generated. It can arise out of genuine trade transactions or from bribery/corruption. At the simplest level, when we buy stuff from a trader for which he is liable to pay sales tax or VAT, the trader is tempted to evade the tax by not issuing a receipt for the amount paid; or, after giving the receipt, does not keep a copy of it for his records.

The trader thus generates black, or unaccounted, money in which the buyer is an unwitting accomplice.

This practice is almost so universal as to have found acceptance among all sections. At a higher level, a sizeable portion of trade in immovable property consists of "white and black" portions.

The black portion is not accounted for and the related government levies — stamp duty, registration charges and capital gains tax — are all avoided or their impact reduced.

The above examples are genuine trade transactions, but there are many illegitimate deals that involve black money. These are bribes to politicians and officials, as much of the government as of the private sector, by the general public and service providers and sellers of goods. Such illegal rewards are demanded and given even when the receiving official is doing his duty, for which the government/employer pays asalary.

AMNESTY SCHEMES

From time to time, the Union Government offers "amnesty schemes" to flush out black money. These schemes can at best address the "stock" problem, that is, the amount already hoarded.

Even here, the effect is partial as all those involved in this business know, that they can continue to hoard black money, because: a) the penalty for collection of such ill-gotten wealth is extremely mild as to be non-existent, and b) in any case, an amnesty scheme will surely be floated again every few years.

Any assault on the black money problem has to address two issues: The "stock" and "flow" problems. The stock is the accumulated hoard and the flow is the continuous generation from time to time.

TWO-PRONGED ACTION

The elimination of black money appears next to impossible. But then, it is possible to well contain the menace if a two-pronged action is initiated: a) severe penalty for errant behaviour, and b) sufficient disincentives to make it difficult to collect black money.

Such income and wealth are handled in cash and rarely, if ever, through banking channels. While imposition of penalty is in the hands of politicians and government officials who are themselves often beneficiaries of black money, a simple expedient can be made to divert the funds through banking channels. When the money goes through banks, detection is easy and, more important, honest people will not usually get involved in shady transactions.

Usually, large sums are exchanged through high denomination notes of Rs 500 and above. A telling statistic is that money in circulation had more than doubled during the five years from March 2001 to March 2006. As per Reserve Bank of India's Annual Reports, the amount of "Currency with the Public" increased from Rs 2,09,562 crore in March 2001 to Rs 4,13,166 crore in March 2006.

In all the five annual reports relating to this period, RBI states that the increase in demand for currency is related to "agricultural activity" or "rural demand for cash transactions". Facts indicate that there is hardly any correlation between agricultural activity and currency demand as the table shows:

Even accounting for inflation, the correlation is not apparent. But, then, currency is needed for activities other than agriculture, such as manufacture, and services.

It is, however, a moot issue as to why public should gobble vast amounts of currency during the period when there has been a mushrooming of credit cards and greater acceptance of cheques for payments.

It is quite likely the increase in currency went substantially to the black sector.

Another dimension is that the increase in currency should have been largely in notes of Rs 500 and above. These are in great demand in second tier cities also, where bank managers are reportedly offered incentives to give these to the black money beneficiaries for them to hoard conveniently.

`DEMONETISATION'

To remedy the situation, one measure that can be adopted is to "demonetise" — cancel and stop issuing higher value notes. If this is resorted to both the stock and flow problems of black money can be largely addressed.

Thus, on a particular day, the government could announce that these notes will be demonetised. The following two days can be declared holidays for banks, for them to take out the stock in their vaults and hand over to the RBI.

After the two days, people can be allowed to exchange such notes for a maximum amount of Rs 10,000 per individual for the next two days in banks. To ensure against double payments to the same person, those giving the notes can be affixed with indelible ink (as the one used in elections).

And, if anyone has still some high denomination notes left with him, unless the source can be satisfactorily explained to the revenue authorities, the excess amount should be exchanged for a lower amount, say, 40 per cent of the value, the balance going to the government. This will have the same effect as amnesty schemes.

Along with this measure, a few cases in each major city should be registered against errant government officials and corrupt politicians and swift action taken in fast-track courts.

To effectively curb the flow problem, it should be made an offence if any trader or service provider, including government and public sector organisations, refuses to accept cheques/credit cards (without extra service charge) for payments in excess of, say, Rs 1,000. (This should apply also to the railways and airlines which already accept credit cards.)

For those sceptical of the measure suggested above, one can only quote the example followed in the US. Till 1969, notes of denomination higher than $100 were in circulation in the US; these included notes of dollars 500, 1,000, 5,000, 10,000 and 100,000. President Richard Nixon ordered the withdrawal of all notes above the denomination of $100 in 1969 to "make life harder for the mafia".

If Nixon, Watergate and all, could take such a measure, can not the Prime Minister, Dr Manmohan Singh, initiate a similar measure to contain the hydra-headed black money monster and make life harder for criminals and dishonest politicians/officials?

(The author is a former Deputy Managing Director, SBI.)