Understanding the Black Economy and Black Money in India: An Enquiry Into Causes, Consequences and Remedies; book review

By: | Published: March 19, 2017 4:16 AM

An attempt to explain what constitutes black money and if demonetisation helped to check it

The author does not believe that the arguments of low salary of the executive or high inflation, tax rates and regulation cause people to cheat by taking bribes.

Black money is the most widely spoken about subject in the country following the demonetisation move by the Narendra Modi government. This is understandable, considering that it has generated extreme views. Those who support it say that it had to be done and was an experiment worth trying out. Those against this move feel that not only was it an unmitigated failure, but was done without proper reasoning.

Arun Kumar, who leans on the latter, goes into the depths of the concept in this book to explain what constitutes black money and the measures that could be taken to control it, besides giving his take on the November experiment.
The author makes his own calculations on the size of the black economy, which is estimated to be 62% of the GDP; and works back to show how much money has been lost by the government in the form of tax collections since the Seventies, which could have been used to ameliorate poverty and improve the standard of living of the people. India would have been much higher in the order of wealthy nations, as the per capita income would be R7 lakh, or $11,000, instead of the abysmal number we see today.

There are three sets of people as per Kumar who are responsible for the creation of this economy. These are politicians (they are always a part of this definition by any author), businessmen and the executive. The executive is interesting, as the author defines this segment as comprising bureaucrats, police and the judiciary. Unless all three are appropriately put in place, it will not be possible to really reduce the incidence of black money.

He admits the argument that black money is a spending that aids growth, but argues that it holds only to an extent and gets lost beyond a point. Also, he agrees that when we calculate GDP, there are several imputations made for the informal sector that could subsume the black economy. But these numbers get understated because of the ‘triad’, which ensures that the black economy is robust.

The author does not believe that the arguments of low salary of the executive or high inflation, tax rates and regulation cause people to cheat by taking bribes. He gives a common example of housing in Delhi, where all parties are involved in permitting breaking of a law relating to the size of houses, as they are hand-in-glove, starting from the public sweeper to the courts that ensure that the owner gets what he wants. To top it all, we have criminals who join the fray and could be a part of the executive just as easily as politicians and businessmen. This ‘triad’ is of great benefit to all its constituents, as businessmen are able to influence policymaking and protect their ill-gotten wealth with the connivance of the executive. The other two need the businessman to invest and launder their funds. His take is that every politician has at least one businessman who provides such services.

Quite importantly, Kumar is critical of the demonetisation programme of the government and strongly argues that it was founded on spurious assumptions. Let us look at some of them. Almost all the demonetised currency was not black. Only 22% people have access to the Internet and can’t do Internet banking. Only 17% have access to smartphones and can’t do mobile transactions. The big fish were able to convert their funds thanks to the ‘triad’ links and hence only the smaller ones got caught, which is miniscule. Demonetising high-value notes and replacing them with denomination of R2,000 was absurd and should have been thought through. And last, it will only be some time before the counterfeit currency will come back. Unless we catch the counterfeiters, we can’t stop new ones from being printed.

What could be the way out for stopping such proliferation? The author is against amnesties for two reasons. First, they do not work and the record of the recent disclosure scheme is quite pathetic, given the size of this economy. The second is that it shows the government as being very weak that it admits it can’t catch the people and offers them a reprieve, hoping to flush out such funds.

Now what can work is having an effective RTI, which covers everyone and excludes nobody, with information being available on demand rather than having cumbersome processes that make access difficult. Further, when one is aware of wrongdoings, there is need to take action rather than keep things moving in abeyance, so that memory forgets, like the Lokpal Bill that has so far not led to the appointment of a Lokpal. This has to be combined with autonomy to institutions such as CVC, CBI, ED, RAW, etc, where the appointments should not be made by the government. This is important, as they have become tools for the government in power to cover up their own follies and put others in the dock.

In the medium-to-long-term, the tax policy has to be reviewed and changed, such as setoffs for corporates, which, he believes, are due to the ‘triad’ connection, where politicians protect the interests of corporates. Old laws need to go: haven’t we been talking of this for over three decades now? Reforms in the executive have been mooted. But the challenge is really as to how do we get this done, considering that this has been on the table for a long time now. The same holds for reforms in the corporate world and the role of the board of directors. Several measures have been taken, but at the end of the day, there is really no change in the way in which the ‘triad’ works. Here, one senses some despair with the author, as he writes on these subjects with a lot of passion.

The release of this book is timely, because it comes from an expert in the area of black money. While there is a lot of theory explained with possible solutions, it does buttress what has been in the minds of most people that the demonetisation exercise has not quite worked the way it was expected, mainly because it was based on questionable hypotheses and was clearly not thought through properly. Kumar takes the stance that this has damaged the economy, which may not be a general feeling, though one may have to just wait for some time to figure out where the truth lies. There are at best only mixed signals available today on the course of the economy following this grand plan. The rest, time only will tell.

Madan Sabnavis is chief economist, CARE Ratings

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