The high decibel announcement of “ demonetization “ by Prime Minister Modi went all round in India sounding like a prescription of panacea to black money problem terming it as “ beginning of end “ of Black money in India. The cyber brigade of Sanghi started working 24 hours to handle this to project its eminence,while banks are burning mid night oil in tackling this magnitude of reshuffling activity in economy.
We shall first recollect what is the size of Black economy we have in this country . There is no scientific and concrete study done on estimating black money in this country. However, considering various methods prescribed under economics ( which are relevant for now to go into details ) , the black economy is estimated to live with a size above ¼ th our GDP , which roughly translates into close to a figure of Rs. 30 lakh crore. Just to commiserate the kind of loss due to this size, we can feel it better if we realize that this is the amount of budget that can be handled by 25 states like size ofTelangana. In other words, this is almost equal to state and central budget put together. Having said that, we must realize , the demonic size of Black money and proactive aggression , politically and economically, needed to handle such a giant.
Next , as against this back drop, we shall understand what Modi has promised to Indians to climb up to the level of PM. While NarendraModi promised that Rs. 15 lakh can be credited to each individual once he brings back black money into the country, Amit Shah has washed it off saying “ it was just an election jumla “. Now, let us , for a moment, if Modi’s calculation is right , the Black money , to be brought “ back “, is of a size of Rs. 1800 lakh crore, which is like 150% of our GDP. Still, giving a delta figure of ignorance to this overenthusiastic calculations to Modi, we still cannot ignore the size of the gentle man promise he has made to the public.
Therefore, we come to see a giant problem with a giant promise. Does this measure of “ Demonetisation “ take any where close to this ?
We will take first step in dissecting this to understand “ Is Demonitisation , actually, an effective tool in curbing black money ? “. In general, the developing economies do have black money stashed in various forms to the level of 30-40% of their GDP size and black money is a common phenomenon in any capitalist society and there is nothing new or peculiar only to Indian economy. However, are ahrdly any. If you flip through the history of world economics , you hardly find any instance of demonetization by any countryonly to curb black money ( as there are other intended purposes like fake currency, moderating currency vis-à-vis economic activity, administering inflation etc. ). This fact speaks , in layman terms, how effective proposed “Demonetization “ can be as an economic tool. By this time, we would have seen all 190+ countries following foot steps of NarendraModi.
Further, the finest example of its ineffectiveness can be traced in demomentisation mooted by JanataGovt in 1978. Over night, the Govt. then declared demonetization ( 1000, 5000 and 10,000 notes) and, we see, hardly the effect could be felt on the economy in positive direction. RBI did not recommend this method subsequently to curb black money.
We shall see next point – how black money is stashed ? What is shape and form of it ? This question is crucial if we have to make a hypothesis that black money is really kept as “ money “. Unfortunately, there has never been single concrete study in this direction to bring out the shape and form of black money in the country carried out so far. However, we can arrive at a ball park figure of shape of cash of this black money. Below given is the table of data, which is released by IT Department explains us how this black money ( undisclosed income ) was found when raids were conducted.
As one can observe from above table, while black money identified by IT Department is “x” in all these years, the possibility of it lying in cash form is much less than 5%. The data of this is spread over, not in couple of cases, like thousands of instance and hence we can safely consider this as a good probable scenario.
As we have spoken above , if the size of black money is to the tune of Rs. 30 lakh crore, it would not even be lying about at Rs. 1 lakh crore as hard cash. We need to further dissect this number. For this , we shall see how the graph of distribution of black money is skewed. The industrial economy is predominantly played by only handful of large groups like Reliance, Adani, Tata, Birla, Godrej, Mittal, DLF etc. , which are mostly north based and upper caste owned enterprises. We hardly have any instance of any IT raids on these Groups and seizing cash for unaccounted transactions. There are several “ IT Disputes “ going on in these Groups but not a material IT raid, which does not give raise to undisputed belief of the corporate governance ( like how Tata’s supposedly lucid corporate governance is turned out be befoul ). This lets every finance professional admire the dexterity and adroitness of their management team. And these mammoth Groups control nearly 50% of the business, where pinpointing the aberrations in the balance sheet is not a facile exercise till it come out into light by way of disputes in promoters or insider whistle blowing. By factoring into this unpredictability due to far-flung control of these Groups, the black money lying in the form of cash would substantially drop off to even less a significant proportion much below the ball park figure of 5%.
The demonetization seizes almost 85% of cash in value and 25% in volume aggregating to Rs. 14 lakh crore ( per capital currency holding of Rs. 11-12,000 ) , which is like total refurbishment of currency management system in the country. Looking to the above figures and facts and factoring pragmatic circumstances of evading taxes, the amount of cash related to Black money could be in few thousands of crores. We need to appreciate that the Govt. announced “ Income Delcaration Scheme 2016 “ to pardon Black money holders just 2 months before the announcement on demonetization is made. What does this imply ? While this excludes a set of Black money stashers, it also , being another pardon scheme came lately, would be washing off their hands till next scheme comes into light. This scheme has reportedly turned about Rs. 65, 000 crore of black money intowhite. As this has happened just before demonetization, to that extent, the cash becomes pure out of the above discussed estimation. It is hard to believe that this pardon scheme is not accidental to come just in time before the demonetization is announced. Our economy is still has large part as unorganized consisting of trading and small enterprises and these are very vulnerable to weakness in accounting due to their inaccessibility to sophisticated management methods and financial muscle to maneuver and these would be the sufferers of this “ demonetization “.
Now, lets us understand how black money is generated in order to verify why “demonetisstion “ is ineffective. Black money is generated mainly and mainly out of three major types of transactions (i) commodity trading which includes high sea sales – the domestic and international norms to check quality of material and adequacy of pricing is almost impossible to arrest the leakage. These transactions are highly prone to “overinvoicing “ and “underinvoicing “ , especially considering counterfeit documents, shell company shipments, easy financial structured available ; (ii) Non-authentication of Capital deployment – this ensures hiking capital cost of heavy equipment and projects where capital can be flown to a contractor abroad conveniently ; (iii) tax evasion – hushing up financial transactions and evading excise, sales and income tax is another major source of black money. And you see, none of these can be controlled by “demonetisation “.
To sum up, “ demonetization “ would have positive effect especially in arresting fake currency and little on black money excluding big shots and organized black money launderers. The problem is demonic and the promise by Modi is gigantic, and, however, the measure proposed is conciliatory. While the task is mammoth, the step towards it is feeble. While the benefit is a dwarf, the imagination is like a dinosaur. This is just a political pacifying measure to wash off the tears of voter who got disappointed for voting to Modi expecting Rs. 15 lakh into his account and reinstating the confidence of BJP cadre in the midst of all disappointing news everywhere including dealings with Pakistan.
P Victor Vijay Kumar is critic and a Chief Financial Officer of large infrastructure group by profession. The writer can be accessible at his mail ID [email protected] or facebook ID “ P V Vijay Kumar”