War on black money: Why are some politicians weeping?

There was a Direct Taxes Enquiry Committee, known as Wanchoo Committee, in 1971.  The Interim, and hence the Final Report, recommended demonetisation. Madhav Godbole’s “Unfinished Innings” tells us what happened next. “After detailed consideration, it was decided to undertake a series of steps, including demonetisation, as recommended by the committee... Accordingly, the Finance Minister spoke to the Prime Minister. As he told me on his return from the meeting, the conversation was very brief and very crisp. When YB Chavan told her about the proposal for demonetisation and his view that it should be accepted and implemented forthwith, she asked Chavan only one question:  “Chavanji, are no more elections to be fought by the Congress Party?” Chavan got the message and the recommendation was shelved.” Make no mistake.  Using Humphrey Appleby definitions, the demonetisation of existing Rs 500 and Rs 1,000 notes is potentially both “controversial” and “courageous”. The decision couldn’t have been an easy one.

Certainly, many transactions in India are cash-based, disproportionately so. There are costs, as well as perceived benefits, associated with holding cash. Something like Section 40A(3) of the Income Tax Act recognizes this. But the share of non-cash transactions is increasing and the switch can be incentivised. There is indeed a correlation between use of cash and informal economy (as share of employment or GDP).  Most estimates that float around on the share of black economy in GDP are actually estimates of the size of the informal economy. Any notion of “black” must have an element of illegality associated with it. Money may have been generated through illegitimate activities not permitted—crime, drugs, terrorism, and corruption. Alternatively, generation isn’t illegal, but taxes haven’t been paid on it. Holding cash isn’t culpable. But there is no call to defend black wealth. There is a difference between stock of black wealth and creation of future black income. The present measure is meant to address stock, not new flows. This is one piece, not the entire jigsaw. DEA’s press release on November 8th gave details of measures taken to curb future generation of black income.

In 1978, Rs 1,000, Rs 5,000 and Rs 10,000 notes were demonetised. At that time, the total number of high denomination notes was Rs 146 crores. Of this, Rs 125 crores was actually surrendered, that is, 85 per cent. We simply don’t know what happened to the remaining Rs 21 crores. Somewhat speculatively, 15 per cent may have been black. Has adequate attention been paid to the inconvenience of 85 per cent who hold cash that isn’t black? RBI’s FAQs on November 8th provided details of the transition process. One does need higher denomination notes (Rs 2,000). Inflation apart, cost of printing and life of higher denomination notes are superior. There won’t be a time-lag in getting new Rs 500 and Rs 2,000 notes. ATM adjustments will take longer. There is a long enough window. Unless one panics and is impatient during the first week, that 85 per cent of citizens, poor included, shouldn’t suffer serious inconvenience. Why should our hearts bleed for that 15 per cent, not to speak of counterfeit notes? There has already been a window under Income Declaration Scheme (IDS) for converting black to white, after penalties. In a way, IDS is voluntary, albeit forced. If one includes voluntary and involuntary disclosure, through IDS and outside it, we have a figure of 1.25 lakh crores.

To go back to the two types of black: When generation isn’t illegal, but taxes haven’t been paid, that segment may have already been partly brought in. That leaves, crime, drugs, terrorism, corruption and election links. If that cash becomes trash, why are some politicians weeping?

The author is an economist and member, NITI Aayog.