Monday, November 14, 2016

Real reform lies elsewhere

A person’s wealth could be much more than his annual income. Similarly a nation’s wealth is much more than it’s annual income or GDP. And black wealth (acquired through black money) is multiple times the black money in cash. Cash supply in the system is at 12% of GDP (not national wealth). In the previous blog post, we have seen that the money to become scrap could be around 10% of cash supply. That means only 1% of GDP which is in the form of black money in cash is going to be destroyed. Well, that is very little achievement. So I feel banning of Rs.500 and 1,000 currencies is more of a tax reform rather than a blow on black money.

All the black money will not remain in cash. All the cash in higher denomination is not black money either. Let us evaluate the first sentence – all of black money will not remain in cash. It is because those acquired it will spend it. They go shopping, they travel and that money comes back to circulation. But the majority of that money ends up with three things: Gold, Real Estate and Private Finance. Be it a corrupt official in a key position or a mining baron, they would convert their black money into real assets over a period of time. Else real estate prices would not have become unreal. And a portion of that money gets into private finance business too. It is black money in the hands of lenders but what about borrowers? Think of a vegetable vendor, who borrows to run his or her micro-enterprise. While I am not sure about the legality, it is not immoral to borrow to earn a living. After all, money does not have a color to classify but it is who holds it matter. So those who lent money in the denominations of Rs.500 and 1,000 bills will escape from the recent action. Their money will be promptly repaid with new currency bills over a period of time. Now what is the color of that money?  So banning the currency notes cannot deliver a serious blow to black money. Then, what can be done? Here are my thoughts:

o   Limit Gold buying and selling to a determined quantity per person per year and make the ID proof (PAN/Aadhar) mandatory to track the transactions. This will help reduce Gold import and fix our trade deficit while it acts as a check on alternate money. Super rich will be annoyed but anyway their eyes are already red. Anyone willing to buy more than the fixed quantity should be made to declare their income source and ensure relevant taxes are paid.
o   Reduce the gap between guidance value and the market value during property registration. Introduce TDS for capital gains making the transaction through banks mandatory. This would be a real check against the interests of black money.
o   Kill the private finance industry by deepening the banking reach and by providing short term capital for small vendors. Though it is easier said than done, it is a necessary step to stop the black money coming back into circulation.

All these ideas are about stopping the black money coming back to circulation but how about killing it at the source? How about firing the corrupt officials in mass, cancelling the licenses of illegal entities and making more checks before PSU banks lend to the likes of Vijay Mallya? For sure, real reform does not lie in banning high denomination currencies. There are ample opportunities elsewhere. Hope and wish they would come into action sooner than later.

The corrupt machinery has been caught off-guard now and I hope that tightening continues to trigger a reversal of black money mechanism. We need not be sympathetic towards those who are losing out their wealth now. We have already paid a price for it in the form of inflation. Tables are turning, thanks to courageous Prime Minister. Let us make India great.