Mugundan wrote:Jay says the pain is fully worth it even if the govt gets only 0.5 lakh crore back (or even none at all) since he is of the opinion that the money that gets back into the system is accounted for and is in the banks.
Will this not mean that all the black money (cash) has been converted into white (bank deposits)? Was this then an exercise to help black money hoarders to convert illegitimate wealth into white, as had been alleged by some of the opposition parties, AAP in particular?
The answer would seem to be a yes, and that shouldn't be taken as a bad thing, in my opinion.
This is the crux of the question, on which I am just not seeing a good analysis by anybody. Our press quotes some of these economics experts like Amartya Sen and Pranab Bardhan, whose core expertise is not at all in such financial economics details (but in things like development economics - a totally different thing). The experts of their ilk make lazy comments, no better than the laymen's, to criticize the government. I am not seeing economists or other experts who directly study such topics comment much so far. I would love to hear, for instance, Raghurm Rajan talk about it, but he has been famously silent about the issue... As somebody who was pushed out by the Government, I would have expected him to say something in opposition to it, but his silence makes me feel that he may actually think that this was probably worth it, at least to some extent, and does not want to say something against what he feels.
But, getting back to the question from you, Mugu, let us assume that ALL of the black money in cash form gets back to bank and becomes white now. Let us also assume the "lazy comment" from a lot of people, even so-called economics experts - that the black money hoarders would have found ways to convert their money into property, gold and foreign accounts within 3 weeks. Not a single intelligent reporter or expert has given details on how this could have been done, so let us assume that such learned intelligent people in India simply don't know what the crooks know. Let's say the crooks to have executed it perfectly within three weeks on (let us say) about 2 to 4 lakh crore (trillion) Indian rupees, the amount that people seem to feel must have been the black money in cash form in India. In other words, let us assume that the crooks really used the government decision to convert their black into white without paying any penalty.
Next month, let us say I want to buy a 1 crore of land property in Kerala. Though I have never bought land there, I do know that almost anybody who sold land was getting at least 30% or whatever in black money which was moving to their purchase of some land later. By next month, I don't think any normal people can amass enough new currency to give as money, and could only sell land, asking for money that is in the bank. How does somebody sell property without showing the actual price of the property and paying tax on it? Are we saying that somehow some 2 to 4 lakh crore worth of gold will be used in such transactions or something? Is there enough gold to move around as black money in property transactions now? I think nobody can amass huge black money stacks with new currency any time soon (other than a rare case with bank officer involvement, in criminal theft). people just don't have new currency and it is only being dispersed in very small chunks around the country for quite a period from now on). How can black money be used in property transactions now? In any event, won't there be much more tax payments from now on on the money that is now accounted for (when GST etc comes in)? So, if we take steps for better enforcement in taxation from now on, and prevent a rebuilding of new currency black money stacks, isn't there massive payoff from that? (read - these steps were NOT possible unless all the currency were accounted for).
So, wasn't this an absolutely necessary first step to take, if were ever to do better enforcement of tax laws? Raghuram Rajan said in August when asked about demonetization in general, that he felt better enforcement is more effective. Absolutely, but whow do we ever do that unless the currency is all accounted for, in banks? So what is this bullcrap that a few of these "experts" say that demonetization is not the way but enforcement is? Unless I am missing something, quite a lot of 'experts" have been either missing the point altogether, or being downright disingenuous to criticize the government for criticism's sake.
Like I said earlier, if hoarders spread whatever black money stacks they had into others' bank accounts, that is a terrific thing in my opinion because I know they are not getting all of it back. No way. By and large, people won't do that (even the illiterate poor people would sense some risk) unless they see some benefits in helping out. A minimum average commission of 10% will effectively get back into the economy, in my opinion, like money that got taxed and sent back out by the government to people's bank accounts. I have no doubt that this will happen, as people will use the money for some urgent things for themselves and then say "I will return it later, but I really needed it now for my kid's school" or whatever. Indians know that game very well, and the original owner can't do much about it. In opinion, again, unless I am missing something, this has a huge wealth redistribution and economic stimulus effect. But I just don't see a single analyst out there talking about it. So far, the only real mechanism for saving liquid black money wealth (cash, that is) I have seen reported, is using others' accounts. Sorry, a lot of people aren't going to get a lot of that wealth back. Indians who helped move money around aren't dumb and will take a good chunk of it before giving it back. This is terrific, if you ask me!
Then there is the bribe angle. If nobody has black money currency stacks with them (they won't, for at least a year two, and probably for 3-4 years) how do they do big-time bribes for the immediate future? Do people think that all the black money hoarders who converted it to unaccounted gold will start paying bribes in gold? That wouldn't work with political party bribes because they can't use gold to pay party workers. There will be a very serious drag in bribe payments for a while, that will seriously reduce the ability of people to build their stacks back. There just isn't enough currency bills in the system, and won't be there for months.
The point is -- 86% of currency money went away and came back accounted for, even if no black money was identified in the end. So, from now on, it will be so much more difficult to generate black money. 40 years ago, had this been tried (and we did), there were no electronic accounts even in banks, and nobody changed their behavior. Perhaps only 10 or 20% of Indians had bank accounts then anyway, 60% or more have accounts now after Jan Dhan. It is electronic accounts. The black money built back up within a year or two in 1978. Now it is not that easy at all, now. It will take 5 or ten times longer now and quite probably will never really build up, as the reasons for that will largely disappear pretty soon.
So, this HAD to be done if we were to get anywhere in setting the nation straight. I don't care a hoot if the black money hoarders pay penalty or end up managing to convert all the black into white. The curse of black money will be MUCH less from now on. People will still take risks on not getting tax-audited, but some will start to pay for doing that, and many others will stop. That's how it works in all countries. I had never believed that Indians are innately more corrupt or anything. If the system lets them be corrupt, and actually forces them to be corrupt out of no choice, they will be corrupt like everybody else will be. Let us clean the system and put some law of the land into our country. The knee-jerk reaction that there is pain (which there is), and this "hey, look Modi let black money people convert it to white, ha ha ha" is completely missing the point.
This was the most significant step that we took to make India a law-abiding country since independence, period. It had to be taken,m and it took some intestinal fortitude by Modi to try this. That is what I feel now, unless I am missing something (I always say that when it comes to financial economics
Can there be a guarantee that black money would not be generated after this exercise? (Presuming that no black money has been unearthed and all money has come back into the banking system, let’s believe for a moment). What prevents people from creating fresh black money, income and black wealth? If someone goes around looking for a house/flat and is told it would cost Rs 1.5 crore if all transactions have to be white and Rs 1.25 crore if part of it could be in black (cash), what can happen? Can that buyer be expected to say “I am an honest citizen, I pay my taxes, I will give only in cheque”? (People have done that pre-Nov 8, 2016 as well but that is a different story since such exceptions could have been around one per cent or even less).
The person who receives cash for any big deal can continue to circulate that cash in similar deals with similar set of people and before long we will realize that the black money component is back to where it was.
Your questions were exactly what I had in mind too, as I said above, but your conclusion that it will build back up, isn't correct. I just don't see how, at least for the next year or two, any seller can say, "it would cost Rs 1.5 crore if it's all white and Rs 1.25 crore if part of it could be in black (cash)". Any seller would know that there is no point in saying it. The buyer will NOT have any black cash, and can possibly only give gold or something. Nobody HAS black money cash as of now; end of story! None. Nada. Zilch. That is a fact. From now on, what is the incentive for anybody to keep cash bundles. Any transaction will be in white for a while, and knowing that any reasonable transaction in white has a bank record, what is the incentive to hold black money except for those who simply want to take a risk with a tax audit. One can keep taking some cash out from ATMs or in small withdrawals and keep it to build it. But why should they?
Of course, tax cheats are there everywhere in the world, and that depends on the tax audit enforcement. I don't know if Tax-adit probability in India is substantially lower than at other places (I don't think so). There will be black money generation in India too, but that would be somewhat similar to what many other countries have. Actually, India doesn't have prohibitively high tax rates, and we tax less than many developed countries. So, I don't expect a much higher tax cheating probability in India, eventually. Tax auditors being corrupt etc, will continue for a while. But even he has the same lesser incentive to accept black money bribes (again, how much gold can move around?)... People's behavior takes time to change though, so I would expect it to take some time for the system to get cleaned. Maybe a decade or two. But this had to be done, to start it.