1. What is eating away Indian economy more than black money and why demonetisation is not the solution

What is eating away Indian economy more than black money and why demonetisation is not the solution

Wealth is an accumulation of income over a period of time. Money is only a part of that accumulated wealth. Wealth can be any asset you own, money is the cash in your wallet and banks.

By: | Updated: November 17, 2016 6:17 PM
denmonetisation, denmonetisation news, latest news on denmonetisation, money launder, money laundering, money laundering at rural areas, money laundering case after demonetisation, corruption after demonetisation, financial express, demonetisation process, black income, black money, corruption, black money circulation, black income generation To actually stop corruption, the government needs to stop the black income generation, the continuous flow of black money. (IE)

Wealth is an accumulation of income over a period of time. Money is only a part of that accumulated wealth. Wealth can be any asset you own, money is the cash in your wallet and banks. When Prime Minister Narendra Modi announced the scrapping of Rs 500 and Rs 1000 notes overnight, in a fight against black money, fake currencies and terrorism, the move got applauded widely. But it also increased the daily struggle of a common man who was dependent on cash for day-to-day activities. So much was the panic, that the PM himself urged the nation to go through this inconvenience for 50 days so that India comes out as a better nation. Now, that is an incredible sentiment and as reported by many, the public decided to roll with the sacrifice for the country. However, the real question that arises here is that how effective is the demonetisation scheme and how it may save India from the grasp of corruption.

One aspect that we can all agree on is that it would certainly make the black money stashed under mattresses and behind walls, useless. It is safe to say that the Indian government took the decision, assuming that most of the black money was parked in cash in these havens. However, neither did it take into account the black money stashed abroad or was in the form of foreign currency, nor the simple fact that demonetisation would merely make the current stash of black money stored in Indian currency futile, but not the flow of it. Black money is, to say in layman terms, not a finished product. It cannot be killed. It is an ongoing process. This process, as we have so regularly ignored, is known as the black income. To actually stop corruption, the government needs to stop the black income generation, the continuous flow of black money. It has to be understood that black wealth is the product of accumulated black income. And black money is only a minor part of that black wealth. Black income is a continuous circle. It doesn’t rest anywhere. One can take the example of real estate business. One can buy a property, and sell it later, and the income keeps flowing through the networks. You may earn the money on the sale, but the property keeps on circulating and so does the wealth.

Black income generation cannot be stopped by demonetisation as most of it doesn’t involve actual cash transactions. It can be done through account books. One can buy a property for Rs 1 lakh and write it down as Rs 1.5 lakh, hence making Rs 50,000 in black money. It is easy. To quote renowned economist Arun Kumar, “you understate revenue and overstate costs”. Besides that data released by the Reserve Bank of India shows that as of 2016, more than 80% of the black money is in circulation in the form of Rs 500 and Rs 1000 notes, an approximate amount of Rs 13 lakh crore. In an interview with Caravan, Arun Kumar says that of that Rs 13 lakh crore, at least half of it would be in businesses, like petrol pumps, airports etc. Which means only 5-6 lakh crore is stored in houses behind walls and mattresses among other places. On assuming that the top 3% of the Indian population owns a majority of that wealth, it would amount to Rs 1.5 lakh person. Hence by demonetisation, the amount of hard cash that would be squeezed out would only be around Rs 2-3 lakh crore.

Besides, demonetisation has other side effects. It might be able to squeeze out a certain amount of accumulated wealth in the country, but in the long run, would make it harder to track the black wealth and its flow. It would be safe to assume that after the sudden announcement by the Prime Minister, the fear of another demonetisation scheme would play on the minds of people. Instead of stashing cash, they might move on to investing in real estate and bigger violations of the account books. Demonetisation was a commendable effort by the government but it doesn’t see the larger picture i.e, stopping the generation and flow of black income.

  1. T
    Tanish jain
    Jan 5, 2017 at 5:42 pm
    Mode ji pranam . Think about middel cl people nd poor people not only rich people like ambani tata birla
  2. T
    Tanish jain
    Jan 5, 2017 at 5:40 pm
    Modi ji think about middel cl nd poor people not think about rice people like ambani tata birla
  3. G
    Nov 19, 2016 at 9:39 pm
    I am in support of most of your points but the decision of demonetisation is being downpla. Let us try to see what benefits it would bring :-Firstly it would enable citizen of this country to be able to declare what there true income are,as we all know there are huge number of people who takes away the benefit of social welfare schemes such as BPL,IRDP.now it would reach only to original BPL families. Secondly,till now people in India believed that tax evasion and under invoicing is there birthright and living a criminal life is actually good for them.Also anybody who demands bill was looked downupon like he is doing some kind of crime.this move will bring everybody money in the banking system. Thirdly,I think you can't have such a large financial survey where everybody would seriously disclose true information to the authorities. Fourthly,everybody is crying of banami property well now we will have true information about person's money transactions and his actual ability to buy.fifth point would be that temporarily consumption would be hit and luxury as well as real estate would take a hit,but by next year consumption would actually restore moreover over consumption due to black money only make life worst for other people,as the manufacture doesn't get the idea what is the actual purchasing capacity of general public.sixth point is Political system would become much leaner and cleaner which is by every mean better than previous one,what need to be done is another thing I will take whatever we get right now not some post dated check.seventh point is it very good time for banking literacy this would enable government to make direct benefit to citizen without any pilferage and this would enable 100%coverage of citizen in banking system which could save poor people from people who extort them with heavy interest rates.
  4. A
    Nov 17, 2016 at 11:55 pm
    The very upcoming flash news from the government will be regarding the Bainami Sampatti (Black wealth in the form of Tangible ets held), which will again wipe out the black wealth from economy.Considering these steps by government it would be absurd to create black wealth in near future.I beleive it is the right step taken by the government.
  5. A
    arunava chatterjee
    Nov 18, 2016 at 10:42 am
    This is a commendable and very sensible article from Financial Express. One advantage it will give to govt. is to refinance the ailing banks reeling with NPAs. The banks will be flush with funds and can give loans at lower interest rates to the corporate defaulters under various restructuring schemes favourable to them !!
  6. A
    Nov 17, 2016 at 2:58 pm
    The effect was for 1) empowering banks in lieu of Basel norms2) curbing terrorism ad naxalites3) curbing large amount of fake currency 4) issuing 2k notes is profitable for the central bank and in return its dividend to government will help fiscal deficit cut. It worked. Can the common man understand this. No. so bjp sold them a perfect story.
  7. A
    Amit kumar
    Nov 17, 2016 at 3:19 pm
    It is not actually demonetization but replacement of wealth. The govt is of notion that whoever keeps money with them at house is a defaulter. There is no panic among big industrialists, traders so who has black money common people. Real stash of black money is invested in real estate, gold, foreign investments overseas. Sadly govt has made all wrong umptions and common people is paying for it
  8. R
    Raj Kumar
    Nov 18, 2016 at 6:46 am
    Such a narrowly thought article. It lacks real data and only based on umptions. How can reputed paper like TFE let this publish?
  9. R
    Rajneesh Sharma
    Nov 21, 2016 at 5:40 pm
    Anyone saying it is good or bad is naive. No such policy decision can be absolutely right or wrong. It will do good and it will do bad. How much of what will happen only time will tell. Since no one, including the best economists have an iota of understanding of how such a move will have on black money, on economy and on industrial growth. I suggest to all concerned that lets wait and watch...since if you think you can predict the outcome, you shouldn't be commenting on this blog...you are the next Nobel laureate in Economics....Adios!
  10. R
    Nov 17, 2016 at 1:30 pm
    How can demonitization be commendable when it is not going to stop black money generation? Its time to call a spade a spade. The black money was never a target but anyone who is not in the hindutva brigade. Hardly any Gujarati trader has been affected and so are the rich or not so rich belonging to this brigade. Its a demonstration of power to show what can be done to anyone in our country. If so many can be put into deep trouble in just one shot a lot more misery can be thrown onto people who do not give in to their dictates. From self respecting people even if it were to survive day to day by sheer dint and hard work, almost overnight the people have to beg even to lay hands on what rightly belongs to them. The government has truly demonstrated on what it can do to the nation's citizens and will not hesitate to put people to misery as and when it wants.
  11. G
    George Mathew
    Nov 17, 2016 at 2:04 pm
    Who ever told demonitization was for stopping black money, it is just one of the tools to reduce black money and not to stop it..and for your information, black money will always be generated and has been generated through the centuries and in almost all countries where taxation laws are applicable
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