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Will demonetisation stop black money's role in Indian economy?
Dr. S. Jeevananda Reddy, Convenor, Forum for a Sustainable Environment, wondered that whether demonetisation stop black money role in Indian economy?
In a letter to the Prime Minister Narendra Modi, he refuted this act like a doctor starts treating a patient without diagnosing the disease. He felt that demonetization of higher denomination notes (Rs. 500 & Rs. 1000) by still high denomination notes (Rs. 2000) will not really help controlling the role of Black Money in Indian Economy and subverting activities or reduce the role of black money in the coming elections, but it only help the ruling clan to overplay the opposition in the coming elections.

He deplored that practical issues are missing in the whole of this exercise. According to him, this in turn has affected the common people of the country (around 85%) who lost their earnings for days that runs in to thousands of crores. The very same groups are going to be affected by lowering the interest rates as speculated in media.

Already, he recalled that Narendra Modi's regime has lowered the interest rates by nearly 2% that severely affected the income of the group under escalating prices in the market, which benefited the rich industrialists. The present demonetization will severely affect the common man and senior citizens, people with severe health problems. To serve emergency needs these people keep large sum of money in the house. For such money, he expressed concern as there is no way to exchange now!!!

Referring to a Times of India report that "Baby dies as parents had no new money on hand in Vizag to meet the medical bill," he said this is the state of affair all over India without proper planning. In this regard, he presented two cases of practical issues: 1. Real Estate transactions: With the large gap between market values and registration values, large sum of black money changes hands. In fact even white money turns in to black in this process. At a budget discussion meeting of AP government in 2003, I proposed (I was one of the invitees) to bring down registration fee from 13.5% to 5-6% and raise the land value to market value - the principal secretary asked me to give in writing, which I did. This suggestion was implemented in 2005. This resulted into rise in registration values in Banjara Hills and Jubilee Hills zone of Hyderabad city from 5 to 6 thousands to 38 thousands. That means black money role reduced by 32 to 33 thousands per square yard;

2. Subsidy: I noticed around 30% of the subsidy in agriculture inputs [as well PDS kerosene (this helping adulteration of fuel and thus increasing air pollution) and gas] turning in to black. I proposed to the Prime Minister of India to introduce a system of direct cash payment to farmers instead of industry [proposals sent to PM -- two IIM professors proposed subsidy to be given to industry as was the practice & MPs proposed to give it to retailers but it was turned down by the government]. The results are seen already. These two systems haven't affected the common people but on the contrary reduced the generation of black money and helped the government in terms of saving of subsidy component, he said.

Stating that TV channels poured in several types of speculations on the government's proposal, he wondered that unfortunately, even before the announcement of demonetization, the new notes Rs. 2000 reached its destinations. That means, NDA government planned long back. He felt that this might have helped the ruling clan to convert their black money to white long time back through several means - this is corroborated by huge bank deposits.

In fact, the government should have supplied Rs. 100 & Rs. 200 notes along with Rs. 500 notes instead of Rs. 2000 notes which created problems to people in the market payments. According to him, the basic question one should pose is: are there any CMs, Ministers, Bureaucrats in Q's to change the old notes with new or collect cash for their day to day personal needs?

Also, the two most important modes of operation appear to be in real estate ventures and investment in industry. These are most prominently seen in Andhra Pradesh with the new capital at Amaravati and industries over different parts of AP. At the same time those who kept their black money outside India, he said that this is not going to affect them as it is mostly in foreign currency entered through hawala path or through other means. He felt the present actions are not going to stop black money role in Indian economy without taking action on the systems that generates black money.

For example, he presented few such areas: 1. Purchase of elected representatives by political parties from other parties; 2. Funds to political parties, particularly regional parties; 3. Percentages paid to CMs/Ministers/bureaucrats for all projects like irrigation, mining, etc 4. Bribes in government departments/services 5. Black money role in real estate with large gap between market value and registration values; 6. Misuse of funds in projects like rejuvenation of Ganga, Smart Cities, etc; 7. Malpractices existing in the exports/imports of food grains, etc; 8. Malpractices existing in railways goods transport, etc; 9. Corruption in judiciary, investigating agencies, etc.

Dr. Reddy asserted that without plugging all such loopholes that generate black money, demonetisation of Rs. 500 & Rs. 1000 notes is not going to solve the black money role in Indian economy.

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Great article. My comments: Lowering of taxes and direct transfers mentioned are two great ideas that will prevent further generation of black money. In contrast, the current exercise will address that which is already in the system in the form of higher end currency. It will also lead to identifying such tax evaders which may, in turn, lead to assessment of unaccounted wealth in other forms. It would be a dis-service to compliant tax payers if evaders allowed to go scot free. Also, no method can be a comprehensive magic wand to clean the system. Therefore, the benefits that each effort will bring cannot be discounted for the reason that it did not do many other things, instead of giving credit to what it can do. All the rush seen is for exchange of notes by depositors not wanting to get the money to be accounted. I think it is ok that this set of people are pushed towards depositing the money in their account. By contracting cash circulation, the Gov't is clearly creating the inconveniences to push people to do non-cash transactions. This will help broad base the tax paying segment resulting in higher revenues, which, in turn, will help Govt lower taxes. Also, any structural change will push public to embrace technological advances in payment systems which otherwise will take time. Take the case of hiring of local transportation. Service providers like Ola and Uber have radically altered the landscape. Not only have customers benefited but also normal drivers who have learnt to use the technology to make a living. Similar changes are at the doorstep but not getting adopted because of reluctance to account income. This malaise is widespread that without such a jolt, a movement in the positive direction of compliance will be difficult to achieve.
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