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
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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.

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