P V Indiresan

A solution to black money

P.V.INDIRESAN | Updated on March 13, 2018 Published on October 21, 2011

The RBI could stop issuing high-value notes but permit States (or district banks) to do so, on the condition they are valid only within the region.   -  The Hindu

If the use of high-value currency notes were to be restricted to a region and for not more than three months, it would check both the accumulation and exchange of black money.

The BJP leader Mr L.K. Advani, who is on a yatra of 23 States, has made corruption as well as curbs on black money his primary objectives. Unfortunately, he is handicapped not merely by dissensions within his own party but also by the albatross his party has to bear in the form of the former Karnataka Chief Minister, Mr B. S. Yeddyurappa. As is usual with politicians, some BJP representatives have given the stale excuse that no comments are valid because the former Chief Minister has only been charged but not as yet convicted. That is sophistry; it does not convince.

Black money is the second issue. As far as reports go, Mr Advani does not offer any solution except that those who hold black money should be punished — severely. At the same time, there are reports of his party's Madhya Pradesh government distributing Rs 500 and Rs 1000 notes to journalists to provide favourable reports of the yatra. How can anyone do such a thing once black money is abolished?

In any case, it is more important to stop black money from spreading, rather than attempt to punish those who have it. For one, prosecution may or may not succeed. Two, the BJP stance reminds me of the story of two daughters-in-law who quarrelled so bitterly that one of them decided to build a wall across the courtyard in the middle of the house they shared. When the wall was almost complete, she wanted the mason to insert a peep hole. Her reason was that she wanted to see what the other daughter-in-law was up to even though her own actions should remain concealed! If the yatra is to succeed, BJP should explain how it will curb black money and how it will function without black money – Mr. Yeddyurappa notwithstanding. We need positive solutions rather than negative ones.

DEALING WITH BLACK MONEY

Prof R. Vaidyanathan of Indian Institute of Management (Bangalore) has estimated that the black money in India is worth around Rs. 724,000 crore ($1.4 trillion). These are assets and do not refer to purchases. Even if the professor's figures are exaggerated, the amount of money in India is huge, very huge. That is why there is so much clamour about checking black money.

It has been suggested that black money may be prevented by demonetising Rs 500 and Rs 1000 notes. The Reserve Bank has rejected the suggestion. The reasons are not far to seek: According to The Times of India (October 7, 2011), there are Rs. 9.7 lakh crores worth of notes in circulation, that is, notes in the hands of the public and outside the vaults of the banks. Of these, 80 per cent are in the denomination of Rs 500/1000 notes. With so much money in large notes, it is not surprising that the Reserve Bank does not like the idea of demonetising them.

A second solution is to spread the use of credit cards which make all cash transactions transparent. According to a survey conducted in South Asia and the Middle East by Mastercard, only 14 per cent Indians hold credit cards (compared with 63 per cent in the United Arab Emirates). Seventy-three per cent of them spend less than $35 per month, 25 per cent between $25 and $300 and only 2 per cent spend more than $300 per month. That perhaps accounts for an average of barely $7 (around Rs. 350) per month per person. If these figures are correct, not more than 8 per cent of India's income is spent through credit cards. That is too small a number to check black money.

CURBS ON USE OF CASH

In this connection, we may have a look at an interesting experiment that is underway in Germany. Mr. Christian Gelleri, a high school teacher in the Chiemengau region of Bavaria, induced his students to promote a local currency which he called Chiemengauer. The Chiemengauer is valid only within its region and for three months — but its life can be extended by playing a demurrage of 2 per cent of the banknote value. Non-profit institutions are entitled to purchase 100 Chiemengauer at €97 and resell them at €100, therefore earning €3 to be spent for their own activities.

Among its aims of the Chiemengauer are promotion of cultural, educational and environmental activities by supporting non-profit institutions and stimulation of local economy by restricting circulation within the local area.

The Reserve Bank could stop issuing high value notes but permit State governments (or district banks) to do so on condition they are legally valid only within the region that issues them, and for three months only. The Chiemengauer is an optional currency and therefore demurrage can be imposed to support non-profit institutions. Our country may do the same. Then, customers may make purchases either by cheque, by credit/debit card or with the local high-value notes. As an additional facility, cheques may be guaranteed up to a relatively small limit of, say, Rs 3,000-5,000.

With these provisions in place, no one can accumulate high-value notes and use it as a fund for black money. Local authorities will, almost probably, like the idea. In effect, anyone who wants to have the anonymity of using currency notes will have to incur two penalties – restricted usage, both in space and in time. Will or will not those two penalties curb and restrict the accumulation of black money?

Alternatively, the Reserve Bank may continue to issue high-value notes, but restrict their usage only in time for no more than three months, without, however, making its usage region-specific. Even that may suffice to check the use of high-value notes as a fund to store black money and to check its proliferation.

Will our politicians and our businesses agree?

(The author is a former Director, IIT Madras. >blfeedback@thehindu.co.in and >indiresan@gmail.com)

Published on October 21, 2011
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