Queues of pain for tiny gain on black money?

NEW DELHI: The aam aadmi putting up with the widespread distress and economic loss caused by declaring invalid all Rs 500 and Rs 1,000 currency notes sees a positive side to the move — it will unearth and stamp out black money. This is one of the stated objectives in the government’s notification of November. There is also the target of finishing off fake currency, which harms the economy and is used by terrorists.

With 12 cash-starved days gone, questions are emerging on whether these objectives will be met. And if not, is all this pain for nothing?

Although there are no exact figures, estimates for black money range from 20-66% of the GDP. That is, anywhere between Rs 27 lakh crore and Rs 90 lakh crore.

So, is all this going to be unearthed by the present demonetisation?

No, it can’t — because not all of this is in cash. According to various past government reports, black money exists in the form of different kinds of assets like benami properties, bullion, shares etc. Then there is one component stashed away in foreign tax havens. Only a fraction of the total black money is hoarded as cash.

There are no estimates for what share of black money exists as illegal cash hoards, says R Ramakumar, dean at Mumbai’s Tata Institute of Social Sciences. “Another part of the illegal earnings is seamlessly transferred as capital invested in productive activities,” he explained.

A committee on ‘Measures to Tackle Black Money in India and Abroad’, set up by the finance ministry in 2012 and headed by the chairman of Central Board of Direct Taxes (CBDT) had said that “demonetisation may not be a solution for tackling black money in the economy, which is largely held in the form of benami properties, bullion and jewellery etc.”

So, estimates for illegal cash range from 3% to 5% of the total black economy. Taking the higher 5% figure, black money in cash would be somewhere between Rs 1.4 lakh crore and Rs 4.5 lakh crore. Arun Kumar, a former JNU professor and an expert on black economy, has a different calculation. “Assuming the velocity of circulation to be no different than in the white economy, you could say that cash component is 38% of the total currency (Rs 16.5 lakh crore). So, around Rs 6.5 lakh crore is in cash form,” he said.

Recent reports said officials were expecting around Rs 3 lakh crore to remain unreturned to banks by December 30. This is what would be the cash component of black money. All this computation goes to show only one thing — a very large share, in fact the bulk of black money, is not going to be caught in the present drive.

The other smaller, but perhaps equally important objective was to wipe out fake currency, especially because it was linked to terror funding. A recent study by the Indian Statistical Institute, Kolkata, carried out under the supervision of the National Investigation Agency with the help of top government economic and intelligence bodies concluded that the total fake currency in circulation in India was Rs 400 crore. This figure was confirmed by minister of state for finance Arjun Meghwal in the Rajya Sabha in August last year.

So, fake notes worth Rs 400 crore will definitely become unusable as a result of demonetisation. But that will last only till the counterfeiters don’t print fresh fake currency based on the new notes. Then the whole cycle may start again. In short, the ongoing disruption of daily life across the country is highly unlikely to finish the scourge of either black money or terror funding. Maybe all this pain was in vain.

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