size of the black economy in India

Some estimates of the size of the black economy & black money in circulation.

Demonetisaion in India-- -myth and reality

by--Sukumar Mukhopadhyay

The amount of tears that the rich have shed for the suffering of the poor for their difficulty in standing in queues in banks will easily make a vast ocean.

I went about with a friend asking many people, those in the queues in banks ,and others in the market for their opinion on it . They all agreed there was inconvenience but they supported it. For they know that it will not hurt them. It will hurt only the rich will quietly take 10 0r 40 or 90 lakh rupees of cash extra along with a cheque while selling house on the ground that the buying side was insisting on it. It is all bogus claim. Is is pure and simple greed on their part. Demonetisation will hurt the doctors and lawyers and real estate agents and corrupt people in general who simply take the cash and not give a receipt. Black money shines in our society. And some of the shining writers have got black money.

While the suffering public has supported demonetisation , some of the economists have expressed reservation .Raghuraman Rajan has said, good fiscal policy is better. He has not said why demonetisation is not advisable or why both cannot be done. Similarly Kaushik Basu has said that demonetisation is not good but he did not say why. Prabhat Patnaik has said ,"....government which has embarked on an undeclared “Emergency”: it is as fatuous as it is against the people".Arun Kumar, a writer of a book on black money has sent a note to me but is not available for comments. His note has a lot of data but is inconclusive,as best. On the other hand very many economists have supported it. So it is better to go into each issue on its merit.

An estimate of black money -

Black Economy and Black Money are different. The second is the part of the first. The total value of 500 and 1000 rupee notes is 14 lakh crore of rupees .There is no estimate of black economy which consists of land,real estate,jewellery and cash. Only the cash portion is black money. If there is any illegal activity(like under invoicing or building with under declared value of materials) going on, generating black money will be the end product. There is black economy estimate given by chief economic adviser of SBI which is 45 Lakh Crores. He has estimated on the basis of SBI Research and RBI. Dr.Arun Kumar who has written a book about black money has written in his note to me that it is double the amount but he has not given any calculation. He has said that the black money will be a small percentage of the black economy. If you take it as 10 lakh crores then it is comparable to what chief economic adviser has said that the unaccounted black money is one fifth of 45 lakh crores. That comes to 9 lakh crores. So both the estimates of SBI and Arun Kumar agree practically to 9 to 10 lakh crores. So we can reasonably proceed on an amount of 10 lakh crores as black money. Total amount of money in circulation in 500 and 1000 rupees notes is 14 lakh crores. It has been estimated by Chief Economic Advisor of SBI that 4.5 lakh crore ruees will not come back to the system. There is another calculation discussed below.

How much black money will be useless paper--Really how much money can be retrieved--

 Can clever people get round it --- Manish Sabharwal has written that in Mumbai betting pool says that between 20% and 40% of the black money in circulation will not be deposited by December. Two crore lakh rupees will be become useless paper. If this is in Mumbai, then the all India figure will match with 4.5 lakh crore given in the abobe paragraph. The argument of Arun Kumar and Prbhat Patnaik that clever people will get around their demonitization is not correct with this calculation. Earlier in 1978 there was no limit but this time there is a limit of two and half lakh above which government will ask how they got the money, So people will be afraid to enter into any risk . Arun Kumar`s idea that Jan Dhana Yojana accounts will be used is only a pessimistic imagination. So this time the black money that will become useless will be much more than expected or what was in 1978. Already several bags of big denomination money have been found abandoned in Calcatta near Tolly Golf Course and in Bangalore near Banaswadi fire brigade.

Fake Money

- An estimated amount of 400 crores of fake money will be eliminated. Manish Sabharwal chairman Teamlease Services has said that to people born in Kashmir such as him, it is obvious that much of valley terrorism is fueled by money not printed in India.

Black economy will get a jolt--

Middle class beneficiary-I checked up from property agents and house owenrs that property price has fallen and the black money equivalent has vanished. One property owner near my house put up board for rent changing his mind for sale due the latest action of Modi. Now middle class people will find it easier to buy property. Mispricing of real estate had earlier stood on the way to entrepreneurship, global competitiveness and job creation.

Bold policy-

It is a bold policy because it will ruin the black money held by not only all other political parties but also those held by BJP itself. There is a vague hint given by some writers that BJP already looked after it's stock of black money. The only estimate that somebody has given is that 3Crores have been deposited by BJP functionaries in advance. As if 3 crores is the only amount that a party has!

Flow vs stock---

True ,it will destroy the stock and not the flow but it will take long time to create the flow given that the government is also taking steps to stop the flow by GST and several other schemes simultaneously.

Hawala -Arun Kumar says hawala will increase. It will not. For hawala operators will not accept demonetised notes.

Recession --Some economic activity which depended on payment by black money may slowdown but soon they will resume momentum with white money.

Gold--

Assumption that people will buy more gold is wrong as the gold or ornament merchants will not accept old 500 and 1000 notes.

Fall in GDP--

That will not take place.At the macro-economic level whatever is the level of black money coming to banks by December end and into the RBI by March end, and in consideration of what has not come and what cash was issued earlier , RBI will arrive at a calculation of change in liabilities and quantify mismatched assets and liabilities in its balance sheet . It will then return some government bonds it holds thus enabling government to enable spending and in turn restoring the GDP to normal.

Rs 65,250 crore already unearthed-

-Under the Income declaration scheme--One famous economist has said that it could be also the effect of ongoing effort of income tax officers . Nevertheless even if that is true, the unearthing of this much of black money is significant.

Growth----Developed economies have less black money

Developed economies have less black money. An international chart has been prepared by Arun Kumar in his book. This chart is a collection of several studies by international experts. It shows that highly developed countries have less black money than less developed countries. So it follows that less black money is a step towards a more sustainable development.

Ease of doing business will improve with less black money.

Lack of banking preparedness---

Those who complain about less banking preparedness should know that such a secret policy could not be introduced with previous preparation. I have handled three of sudden policy changes in my official life. First, on 6.6.66 devaluation of currency was done. We in the Custom Houses assembled and decided to visit where ever clearance could take place in the night like from oil installations. Also all documents were revised next morning. Second , during Emergency suddenly announcement was made that Customs could preventively detain smugglers under amended MISA . So we worked night and day and prepared dossiers and detained a large number of top and other smugglers.Thirdly, when in 1978 Sikkim became part of India, we immediately moved our customs machinery there . Again in 1980 this happened for central excise. For secret introduction of policy, there cannot be any advance preparation.

Multiple-rated GST--will it create black money?-

-Not significantly. Very little. It will obstruct ease of doing business and increase corruption but black money generation will not be substantial.

Black mentality--The whole black mentality will suffer a jolt. Nobody believes now that you could have a all- white transaction. Really it was still possible. Several people have done it but they are the exceptional persons. People often too easily succumb to temptations and downright greed and then blame the system. Now with this move to severely damage the kingdom of black money, more people will look for all- white deal.

Conclusion---It is a fundamental reform in India. After decades of rhetoric ,some real action has been taken. Demonetisation along with all other policies such as , Jan Dhan Yojana , Aadhar, mobile banking,Bharat bill payment , GST , the Income Declaration Scheme to declare black money, and also next scheme to act against Benami property , will ensure a real impact on black money.

The kingdom of black money will shake at its root.

 

Good idea. In this context, I will tell my experience. I asked many small shops owners and fruits and vegetables vendors whether they are facing any difficulty . Everybody said no problem. One woman selling vegetables takes the  loan from us.  This time she was prepared to give Rs 10 notes or coin in place of five , hundred rupees notes. Whoever has kept Rs 5  coin  and  Rs 10 coins  for giving to poor or as Dakshina  started using  these coins to meet day-to-day  requirements. So common man is not suffering. The majority of Hindu families keeps Rs.5  and  Rs 10 coins. So there is no crisis as projected by the opposition parties 

Tcg

MR. MODI’S DEMONITIZATION MOVE REFLECTS HIS COMMITMENT TO THE CAUSE

To the surprise of the country men, Indian Prime Minister Narendra Modi announced the demonetization of Rs.500/- and Rs.1000/- high value currency notes , all of a sudden.

The anxiety that was caused :

This unexpected move created considerable confusion and anxiety amongst the people immediately, as they have never undergone such experience in the past. Immediately after the announcement at 8 p.m. in the evening,   crowd started queuing  before 0.2 million ATMs all over India. However, the  ATMs had to be closed as the old currency had to be removed before replacing  with the new ones. Further, the ATMS have to be calibrated to meet the requirement of new notes.

As  the banks were closed the next day, and the ATMS too remained closed , there was panic all around. Some people even  started suspecting  whether all their money would be lost.

Mr.Modi explained to the people through television media that demonetization was necessary to   wipe away the black money and fake currency  circulating in the country and eliminate the corruption once for all.

Many people really thought that this exercise would be completed in 3 to 4 days and normalcy  would return  thereafter. But , the normalcy  have not yet returned even after 8 days, though the situation has been gradually improving.  

Mr. Modi and his Finance Minister and officials have been reassuring the country men repeatedly that situation would become normal soon and have  appealed to the people to put up with the discomfitures for few days for the sake of ensuring corruption free India.

Overall reaction of common man favourable :

Common men, inspite of some reservations as to why they were made to suffer when they are not the black money holders, seem to have reacted more favourably , appreciating the need for eliminating black money and punish the corrupt persons.

As a matter of fact, people belonging to lower and middle  income group ,who have been suffering enormously due to prevalence of corruption at all levels of government machinery and even in educational institutions and hospitals have been  hoping that Mr.Modi would  put down the generation of black money and ensure elimination of corruption with great force.  Mr.Modi’s demonetization campaign and his explanation about  the need  for it have largely received positive response from the people.

Vicious campaign of the vested interests:

However,  the opposition political parties who  seem to have developed pledged hatred towards Mr. Modi , called his demonetization  strategy as  ill conceived, lacking in clarity and forward planning and termed it as costly exercise that India cannot afford. 

With 20 percent of the  money in circulation in the country being black money and  most of such black money  being with politicians and business houses and traders ,it is  no surprise to see the manner in which  the  opposition parties  have denounced Mr. Modi’s demonetization drive.

While the government announced several restrictive measures to ensure that the black money would not be converted into white ,the black money holders have tried to circumvent the regulatory measures of the government in a variety of ways, which had forced the government to impose even more restrictions.  Though such restrictions were aimed at  black money holders, common men too have suffered in the process.

Exploiting the situation, attempts are being made to

to kill the initiatives of  the government by  whipping public anger against the move by clever propaganda, by the vested interests, which seem to have been considerably supported by the print and television media.  Day after day, debates have been taking place and photographs of the people standing in queue have been publicized with mischievous headlines and sidelines.

Understanding the mood of the people, opposition parties and vested interests have been saying that they support  the move to eliminate black money  but not the strategy adopted by Modi government that  have resulted in sufferings to the people. Obviously, their aim is to weaken the resolve of the Modi government to putdown black money , as the politicians and the business houses and traders would be the worst affected.

Some media  and politicians have been irresponsibly stating that  civic unrest would take place in India and law and order would become unmanageable  due to the so called public anger of the people.

Mr. Modi’s resolve will take him through :

As Mr Modi has now taken a decision to fight against the black money holders and cannot look back, Modi government  is now facing a great  challenge.  The government  cannot afford to allow a situation  to develop, where the demonetization drive would end half way or fail to yield the type of positive results that are targeted. 

The opposition politicians and the black money holders are likely to become increasingly aggressive and use variety of methods through media to spread an impression amongst the people that Modi government has failed.

As Mr.Modi is now taking an aggressive stand, fear is now haunting the black money holders that he would not spare them and the law would take it’s course soon.

Inspite of such stress , Mr. Modi appears to be determined to take the fight against black money to the logical end at any cost. While meeting the need to implement  his strategies competently with well designed process, Mr.Modi has to take the people along with him   even as the opposition parties and vested interests would strive their level best to derail the demonetization drive.

Mr. Modi is bound to succeed in his efforts as the cause is genuine and people want his efforts to eliminate black  money and corruption succeed. While the demonetization drive reflects Mr. Modi’s commitment to the cause, his strength of character  and determination will take him through.