It was indeed a bold step by the Prime Minister to demonetize about INR 14.2 trillion, almost 86% currency in circulation to sanitize India from black money. The absence of quick replacement of currency caused chaos in the country. Similar steps were taken by Sri Morarjee Desai in 1978. During that time barely INR 1.8 billion ie 10% of currency in circulation was in larger denomination of currency and the government could succeed in raising revenue of INR 0.2 billion only.
In the absence of adequate banking access, digital connectivity and education, more than 50% transactions are in cash. It will be erroneous to equate these cash transactions with black economy. By doing so, we would be suspecting the entire population of illegal transactions. Shortage of currency, followed by policing action by taxmen will impede GDP growth affecting the public income and jobs. Daily wage earners, small retailers, street vendors, and service providers will be the worst sufferers, thereby wrecking the rural economy. Defaming of entrepreneurs and self- employed people will cause long term damage that India can’t afford.
The percentage of counterfeit notes and money collected from terror funding might be below 0.05% of currency in circulation. There could have been better options instead of demonetization to tackle the problem. Yes, black money might be about INR 2-3 trillion, ie 15-20% of currency in circulation. But it is only a small portion compared to the total volume of black money deployed elsewhere. Moreover, it is likely to regenerate if we didn’t stop its generation through a composite policy. Such policy should not be based on mistrust. Let us admit that majority of the population is honest. If they are violating laws, the genuine reasons must be recognized and addressed. Mass punishment and inspector raj will not provide constructive solutions.
A sizable portion of black money is invested in the expansion of economy, may be with or without laundering. Those who do not invest their wealth in economic activities, hoard it as currency, gold and real estate besides spending in luxury goods and services. After exhausting these avenues, black money is exported to tax havens by the biggies, which is a net loss of GDP. Its cumulative quantum might be USD 250 billion or about INR 17 trillion. Similarly, investment in gold is also a net loss of GDP, since major portion of gold is imported. Its quantum might exceed 25,000 tonnes valued at INR 85 trillion (both black & white), out of which, black money might be 20- 25%. It is likely to grow with the demonetization of currency. There is no single medicine like ‘demonetization’ that can treat all types of black money. Rather its side effects will outstrip the benefits and demotivate the government for taking such bold steps in future. It is high time to re-evaluate, analyze and review the policy. A healthy debate in parliament, media and other forums will be constructive compared to mud-slinging and political blame game. Our media must not provoke such political conflicts. We must remember that India tried single medicine of Lokpal for eradicating corruption but did not succeed; instead distrust on decision makers stalled the economy for 2-3 years.
Black money is an unacceptable disease. For this, we must identify the sources of generation of black money and various ways in which it can be deployed. Thereafter, we must design steps for prevention instead of penalizing the people unfairly post generation. Hence, corrective steps must be tailor- made. Primary sources of generation of black money are tax evasion and corruption. Black money from crime is excluded here for discussion.
As per the report published for 2012-13, income tax payers in India were barely 12.5 million out of which, 11.1 million citizens paid only INR 230 billion. It reveals that major portion of tax is paid by only a handful of people. In other words, income tax law is violated by the majority. At the same time, indirect taxes are paid by every Indian, poor or rich. It means that an average Indian doesn’t object paying consumption tax and manages his spending as per his earning. But he doesn’t prefer paying income tax from his savings. If so, why not convert personal income tax to expenditure tax and merge with GST? By this, entire black money out of tax evasion will come mainstream. If any law is violated by the majority, it is better to change the law instead of making the entire population law violators.
Similarly, the analysis of corporate tax payers will reveal that compliance percentage by SME corporate is relatively low. But they are the major contributors and backbone of the Indian economy. Introduction of slab rate from 10- 25% will boost compliance and revenue, provided the laws are simplified and tax terror is ended. India must boost morale of SME businesses instead of branding them as tax evaders. Trust deficit and defaming are big deterrents to the drivers of the economy.
Corruption in the public offices is a well known source of generating black money. Too many business laws with complex provisions empower administrators, regulators and taxmen to extort harassment bribes. In the recent years, this is gaining prominence over corruption. Public money is shared between bribe giver and taker involved in corruption (other than harassment bribes). Anti-corruption law must be amended to break the nexus between these two by exempting one and punishing the other, as suggested by Sri Kaushik Basu in his article, while he was in the government.
For abating corruption, the government must be downsized by merging departments and outsourcing services. As a part of administrative reforms, public servants must be trained for ‘How to develop India’ instead of the current trend ‘How to rule India’. Laws and regulations must be simple and comply with the sole aim of developmental outcome.
Besides this, India must put into practice bold election reforms. State funding of elections and raising limits of election spending to a practical level will curb the usage of black money. State and central elections may be clubbed by keeping flexible tenure of state governments within 5 (+/-) 2 years. Election of local self government must be replaced by nomination through MPs and MLAs and ruling government. Public representatives must enter parliament or an assembly with high morale. Also, their salaries and perks may be improved so that they are not tempted into corruption.
Prime Minister has rightly quoted that poverty is the biggest enemy for the nation. For eradicating poverty, India must boost GDP to double digits for two decades. This will generate jobs. Other methods are illusive. Hence, India needs to invest almost 40% of GDP. For this, domestic savings must be boosted and channelized in the financial instruments instead of hoarding in gold, cash at home or exporting to tax havens. Private gold (both white and black) can be monetized and black money from tax havens can be brought back through amnesty schemes, as recommended in the books Turn around India and Jan Andolan. These resources can be gainfully used in developing the nation. Let us not overplay past defaults but march ahead with radical and bold reforms.
Friendly laws and corruption free India will pave the way for such an ambitious goal. Let us treat the nation as a joint family. Trust in lieu of mistrust, motivation in lieu of punishment, upgrading morale instead of demoralizing, team spirit in lieu of division will be the right choice for the family head (government) to set right a bad child to a responsible son. For this, we must harness team spirit among all Indians as family members.
* The views provided are author’s own and do not necessarily represent the view of the company.
BY: RP GUPTA, Author, Turn around India & Jan Andolan
Source: Steel 360 Magazine Dec’16 Issue