Column: Why does black money matter?

By: |
November 03, 2014 4:40 AM

The economic impact of the foreign hoards being brought back will be minimal.

Before the General election this year, there was a hue and cry rustled up by Anna Hazare and Baba Ramdev about the stashing of black money abroad. BJP politicians joined in. It was said there were thousands of hidden foreign bank accounts. Almost any economic problem of the nation was solvable if only we got the money back.

The idea of the ‘drain’, of a loot which is taken abroad, has a lot of romantic political appeal. Nationalists wanted to ‘prove’ that only due to foreign rule and its taking money out was India poor. But the drain was at no time in excess of about 5% of the national income. You could twist and turn to make it 10 %. No one asked how much of the amount was unrequited transfer, i.e., theft. If ‘stores’ were not bought in UK, they would have to be bought in Germany or France. The ‘loot’ then would be only the price differential paid due to imperial monopoly.

Both the communist Left and the nationalist Right parade the loot as the sole reason why India is not a land flowing with milk and honey. The root cause of poverty of any nation, as Adam Smith pointed out long ago, is not the retention or loss of the treasure of gold and silver but the productivity of its labour. Indian productivity, especially in agriculture, was (and remains) pathetic across all tenurial systems. Because the population was very large, lots of small surpluses added up to wealth of the elite, which inspired the legend the riches of Golconda. Poverty predated British rule and the departure of the British did not end the poverty overnight. The internal drain to the elite far exceeded the foreign one.

But the drain myth is powerful. It blames our poverty on someone else. Now, it is the black money-owners who have stashed the loot abroad. But is the problem the export of the loot or its existence? After all, the black money at home must far exceed the stash abroad. Our entire electoral politics thrives on black money. Politicians have openly said this. Kiran Kumar Reddy, the last Chief Minister of undivided Andhra Pradesh, said as much. Why do people make such a fuss about corruption, he asked. After all, the money re-enters politics at election time. Outside politics, real estate, wedding parties, alcohol sales, gold and jewellery trade are also all booming, thanks to black money.

Yet the fiasco of the foreign money is educative. There are fewer than 700 such foreign accounts. In the worldwide drive against tax evasion, other countries have found many more such accounts and no fuss has been made. Even if these six-hundred-odd names are revealed, they are only guilty of tax evasion and violating foreign exchange regulations. These are both civil crimes. The government can claw back only the unpaid tax portion and perhaps add a fine. Thus, the total ‘drain’ would be a fraction, perhaps a third at most of the money revealed. Has anyone any estimate of how much would that be ?

Illegal actions have to be punished. Tax evasion is illegal. That said, the economic impact of the foreign hoards being brought back (if that is possible) will be minimal. The task of eliminating domestic black money is so daunting no government will try it. Indeed, one should warn against any precipitate action. There should be a serious estimate not just of the size of the stock of black money but also its circulation and its effect on the economy before someone starts getting rid of it. It could otherwise cause a major economic disruption.

The problem of domestic black money is not that it lies idle or that it is barren. It circulates and powers the economy. It may do so in consumption channels rather than investments but it is not wasted. The question to ask then is how do we get this money to flow in all directions in response to market incentives rather than flow in furtive channels ?

The issue is income tax. Even for law abiding citizens the harassment of income tax officers is legendary. The answer is to abolish the income tax as it is at present. Even on sound economic principles you should tax consumption not income. It would be perfectly equitable to replace income tax by a heavy luxury tax. Now that fuel subsidy has been abolished why not put a 100 % tax on petrol consumption ? It will relieve the pollution in Delhi at a stroke. All those hoardings advertising fabulous new gated colonies invite a 150 % tax . Then, there are gold and jewellery. There is a black bonanza out there to harvest. The distortion is not the evasion; it is the tax itself and the way it is administered.

The author is a prominent economist and Labour peer.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Tax Relief: GST cut for Covid-19 test kits, drugs; no waiver for vaccines as vaccination is free in govt sector
2Delhi govt asks Centre to remove GST on medical equipment
3Govt asks ministries to target 20% reduction in controllable expenditure