“Corruption and black money tend to be accepted as part of life. This type of thinking has afflicted our politics, our administration and our society like an infestation of termites. None of our public institutions is free from these termites.” This is an excerpt from the PM’s address on November 8, 2016, announcing the de-monetisation of ₹500 and ₹1000 bank notes.

Unfortunately, though, if the de-monetisation move is any indication, it seems that cleansing the economy would only remain a fond hope. It does not even remotely attack the fountainhead of unaccounted money creation in the body politic. The elephant in the room is the government itself.

Black money fountainhead “Minister divested of lucrative PWD portfolio”. “State leader gets back lucrative PWD portfolio following patch-up”.

These were recent headlines about the political developments and happenings in one of India’s largest States.

At the Central level too, it is not unusual to find that one of the key determinants of political standing is how big a Ministry one is allotted and how big is its financial outlay. When outlays are cut, there is usually a hue and cry. (To be sure, there are some genuine grievances also – for example when outlays for the social sector are cut). By and large, outlays are a key determinant of wealth and power and politicians are loath to see them cut.

These headlines and the proclivities of politicians at the central level are the clearest pointers to where the fountainhead of black money creation is.

What is lucrative about the PWD portfolio? For whom is it lucrative? Why are central financial outlays considered almost sacrosanct?

It may not be necessary to further explain the what, why, how and whom of the lucrative nature of governmental outlays. Indeed, a look at the numbers involved here should be self-explanatory.

The combined annual outlays of the central and all state governments are close to ₹45,00,000 crore. Assuming that revenue expenditures – both at central and state level are not “lucrative” (a big assumption) — we can exclude nearly 85 per cent. Therefore, the balance capital expenditures of 15 per cent of 45,00,000 crore is “lucrative” — that is, nearly ₹7,00,000 crore of annual government spending of a capital nature.

If the headlines stated above are taken at face value, this ₹7,00,000 crore per annum is the source of lucre. And, of course, it is a key source of black money in the body politic and its further circulation and use in the system.

Even if we assume that the lucre generated by the ₹7 lakh crore of government spending (in just the last financial year, please note) has all been hoarded in the form of ₹500 and ₹1000 notes – and therefore will become worthless pieces of paper after the de-monetisation – what about the future? Will the one-time de-monetisation curtail the creation of black money in the future? Or, will the government have to go in for repeated and periodical de-monetisation?

In other words, is the recent de-monetisation a headline grabbing move only or will it have a longer lasting impact? If it is the former, should we not attempt a policy move that can cut at the root of black money creation for all time to come? What institutional changes must we implement to cut at the root of black money creation?

Financing of government It is quite obvious from the nature of the problem described here – and the mechanism of how black money can be generated in an economy – that de-monetisation is just a one-off move. It does not even scratch the surface of the termite.

Indian governments have implemented a no-holds barred increase in their overall expenditures for as long as one can remember.

But, the problem is not actually in the level of expenditures. That is completely the discretion of the popularly elected government. It is in how such expenditures are financed.

The single biggest institutional and administrative change we need is wholesale rectification of the system of financing government – both central and state. We need to move away decisively from a primitive economic state where the central bank of the country is a glorified printing press (financing arm) of government. This is metamorphic institutional reform.

Governments should completely finance themselves in the markets. They will then be subject to the rigours of the markets. Market discipline is the most powerful weapon that can moderate expenditure growth and by extension, black money creation.

To be sure, unrestrained government spending is not the only source of black money. Over-invoicing of imports / under-invoicing of exports are also key sources. But the cleansing, if started at the fountainhead, would have an immeasurable demonstration and spill-over effect.

The writer is a Chennai-based financial consultant

Also read:Demonetisation will serve India well

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