Note Ban: Bitter Pill for Cancerous Elements of Parallel Economy

Demonetisation is a bitter pill that will cure India’s economy of cancer of black money, writes Khyati Srivastava.

The big ticket currency reforms introduced by Prime Minister Modi aims to curb circulation of fake currency, trap the black money and pave way for a gen-next digital economy. Why is it preferable to mention currency reforms here instead of the generic term, ‘demonetisation’? It is because the larger picture remains hidden under the label of demonetisation, whereas currency reforms widely define the intention and direction of current monetary initiatives.

Estimating the Amount of Black Money

At first, it is important to understand the meaning of ‘parallel economy’ which is commonly referred to as black money. ‘Parallel economy’ is a wide concept, with ‘black money’ being a component having political, commercial, legal, industrial, social and ethnic implications. There are legitimate and illegitimate sectors under parallel economy, the objectives of both certainly confront one another (Sarkar, 2010).

India being a mixed economy- where public and private sector push economic activities - both sectors have contributed to the growth story. However, the economic activity of the informal economy which of course is the backbone of the country, but being nonmonitored goes unaccounted in this growth chart. This ‘unaccounted economy’ forms one of the major components of parallel economy.

Talking about the estimates of parallel economy, so far there have been six reports submitted between 1953-54 to 1987-88 only. Yes, the last one being published in 1992, and none after that. Taking the scope of parallel economy defined by the widely acclaimed, NIPFP’s ‘Aspects of Black Economy in India’ (1985), it is learnt that other than incomes generated through illegal activities like smuggling, black market transactions, bribes, extortion money, etc, there are unaccounted incomes generated like factory incomes through underreporting of output/sales in production of goods and services, capital receipts like in real estate sector through underreporting the value, incomes generated in export-import through underpricing, overpricing respectively, etc. is black income (Dutt, Mahajan. 2014), which forms a large part of parallel economy.

All this contributes to huge tax evasion in the country and unaccounted wealth, which pampers corruption, demonstration effect in consumer market, causes accumulation of savings in black liquidity, money laundering, and the worse – terrorism, drug menace, extremism. In 1988, the estimate of such economy was around 50 percent of the then GNP (Gupta, 1992). With the multidimensional expansion in economic activities in India, especially after the 1991 reforms, this estimate must have climbed up by leaps and bounds in the past two-and-a-half decades.

Also Read: PM Modi, Gloating Over Black Money Stash Isn’t Helping Economy

Tracking Unaccounted Wealth

To unearth this unaccounted wealth, several initiatives have been taken so far – in the direction of checking tax evasion (particularly, in indirect taxes), demonetisation (1946, 1978, 2016), voluntary income disclosure schemes, issuing govt bonds for unaccounted money (1981), etc.

Taking any one of these measures in singularity to trap the flow of parallel economy will not yield effective results; rather a comprehensive policy package will hit the bull’s eye. Now considering the series of initiatives taken by the incumbent government to unearth and restrain parallel economy– (P.S. Read about these initiatives in detail to understand the impact).

1. Undisclosed Foreign Income and Assets (Imposition of Tax) Act, 2015 - To trap the undisclosed foreign incomes and black wealth stashed abroad.

2. Income Disclosure Scheme - Opportunity to comply norms given to people to disclose their black money.

3. Gold Monetisation Scheme 2015 - This primarily aims at reducing gold imports in the country. But not to make the scheme a black money immunity scheme, tax is levied on deposit of gold more than 500 gms held out of unaccounted income .

4. Real Estate (Regulation and Development) Act, 2016 - That pushes formalisation and transparency in the real estate dealings, curbing unaccounted income generation in the market.

5. Benami Transactions (Prohibition) (Amendment) Act, 2016 - By widening the scope of benami transactions, curbing flow of black money.

6. Goods and Services Tax Act 2016 - Rationalising the indirect tax structure to widely overcome tax evasion.

7. Finally, Demonetisation 2016 and issuing Gareeb Kalyan Bond, besides dynamic and responsive voluntary income disclosure provisions. In addition to these direct regulatory initiatives, certain initiatives that indirectly check the parallel economy are by way of promoting transparency in financial transactions through DBT, by promoting financial inclusion through Jan Dhan with JAM trinity, etc.

Also Read: Note Ban at Mid-Term: PM Modi Changes the Script at Interval

The Positives of Demonetisation

As per the RBI annual report of March 2016, total banknotes in circulation were valued at Rs 16.42 lakh crore, of which 86 percent was in denomination of Rs 500 and Rs 1,000 banknotes. After the 8 November announcement by PM Modi, these banknotes ceased to be legal tender, and new notes of Rs 2,000 (and later new Rs 500 banknote) came into circulation from the next day.

Section 26 of the Reserve Bank of India Act, 1934 (sub-section-2)4 gives the Union government the power to declare that any note issued by RBI ceases to be a legal tender.

1. Hitting Economic Terror (Indian Statistical Institute report (2016)) – which says that 15-20 percent of every Rs 10 lakh notes in circulation in India are fake, and Rs 70 crore fake currency is infused into the system every year. The report clearly mentioned that Rs 1,000 banknote constitutes 50 percent of the total value of fake notes. The money mainly pumped in by the ISI, flows from Nepal, and Bangladesh too. This (FICN) currency has been funding terrorism in the country . These have been used in nurturing extremism economically, along the red-corridor belt in India. Demonetisation has nabbed the monster of economic terror by its neck. After the demonetisation announcement, total score of Maoists surrendering reached around 468 in November 2016, which is the highest in a month. Then, after 4-months of separatists’ nuisance, normalcy was restored in Kashmir – no stone pelting, markets, schools, offices reopened.

2. Inconvenience and Opportunists: Replacing 2300 crore banknotes is obviously a big logistic challenge, well accepted by the Indian Banking System. It started with replacing the currency with Rs 2,000 currency note, and then new Rs 500 currency note. Of course, Rs 2,000 currency note was pushed in the economy first because it was cost-effective and quick to replace the huge quantum of currency demonetised. Thousands of technicians are engaged in making 2.18 lakh ATMs start dispensing the new currency notes, of which 90 percent have been recalibrated. According to the weekly report published by RBI (28 November, 2016) around 59 percent of the demonetised currency (worth Rs 8.45 lakh crore) has been mopped up by the banks, while only around 14 percent of scrapped currency has been replaced with the new, i.e. only Rs 2.16 lakh crore new currency has been pumped into the economy.

Also Read: Fundamental Rights Violated in Note Ban, but Will SC Take on Modi?

There is a cash crunch in the economy indeed. Banks are running out of cash, ATMs are also cash starved. Stock market, factories, mandis, labour market, farmers, small businesses, etc have been badly hit. Meanwhile, there are opportunists who are trying to take an advantage of the situation, which is adversely affecting the market, and common people. There are hoarders of essential commodities, gold stockists - exchanging unaccounted currency for gold, currency stockists – exchanging unaccounted currency at a certain percent cut with new currency, etc. The government has been taking stringent measures to nab these opportunists, while people have misunderstood these problems as a by-product of demonetisation. It is not so. The inconvenience is genuine, but those created by such unethical acts should be condemned and brought to the notice of the government to take action against such elements.

3. Remonetisation: It is said, demonetisation is not a solid step to restrain the parallel economy, as there is no guarantee that the new legal tender pumped in the economy won’t be counterfeited.

However, it must be noted that because this time the volume of currency demonetised in India is huge, it would widely trap the wealth in parallel economy. India Ratings and Research estimate say that by demonetising the govt has destroyed 12 percent of the black money. Moreover, the initiative heads towards ‘Remonetisation’ – which aims at reducing the volume of paper currency in the economy and emphasises on digital economy. This is a big ticket currency reform strongly based on two basic principles – establishing transparency, and accountability at each level.

The transition from ‘cash economy’ to ‘less-cash economy’ is being welcomed. Noted expansion in use of digital payments like debit/credit cards, e-wallets, unified payment interface (UPI), banking apps, etc has occurred. Now to firmly establish this remonetisation, the country needs – 1. Training and Awareness – to enable the common man to use technology, online/mobile banking, or other digital tools/platforms. 2. Strong Banking system – safe and secure from cyber attacks and threats. 3. Regulations and Security Agencies – to safeguard against frauds on digital platform. 4. Digital Tax system and regulated Digital Currency (Cryptocurrency).

Also Read: ‘Extinguished Cash’ Now Meaningless to Judge Modi’s Demonetisation

Health of the Economy After the Bitter Pill

In the backdrop of all that is explained above, it can be said that ‘Demonetisation 2016’ is that bitter pill which will kill the cancerous elements of parallel economy. But of course, it isn’t the last nail in the coffin, as there would be a series of reforms required to support the cause at various levels. Nevertheless, it is important to mention in the end that all the apprehensions and hoax created around the initiative has to be wisely handled.

The move intends to change the transaction habits of the country – the spending culture in other words. And change always comes with resistance to change, which is often exaggerated by political beliefs. The short-term inconveniences overshadow the long-term benefits of policy decisions in this course. Only timely action against such hoaxes, stringent measures to nab the opportunists (hoarders, etc), strong laws and regulations and spreading know-how and awareness around remonetisation, is the strong point of action for the entire state machinery.

Moreover, the responsibility has to be shared by the people, in their capabilities. This is indeed a fight against corruption, black money and economic terror. Also, it is an effort to empower the informal sector of the economy, the marginalised sections of the society and making India a healthy economy.

(The writer is Research Associate at Public Policy Research Centre, New Delhi and can be reached @tweetkhyati. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

Also Read: Note Ban: Rs 200, NOT Rs 2,000 Notes Would’ve Ensured Cash Flow

References:

1. Sarkar, 2010:
http://indianstrategicknowledgeonline.com/web/black%20economy.pdf
2. NIPFP, Study on Black Economy, 1985
http://www.nipfp.org.in/media/pdf/books/BK_14/Aspects%20Of%20The%20Black%20Economy%20In%20India.pdf
3. Dutt, Mahajan. 2014: 'Indian Economy' (68th Edition), Chapter-24,p.417-435.
4. Gupta, 1992: 'Black Income in India', Sage Publications.