By Anjan Roy
On the first anniversary of demonization, it has been demonised. Politicians and commentators pointed out a litany of woes that afflicted India and its poor from the decision to cancel 85% of circulating currency bills. It has been held guilty by high-minded economists for the subsequent slow down of the India economy – to a mere 5.7% in the last as a culmination of the process of deceleration. It has been found useless as most of the cancelled currency had come back into the system through banks.
There is this last issue – return of the money in circulation is almost full. This single fact has been taken up above all to vindicate that the entire exercise was utterly useless. This had run counter to the government’s earlier claim that a good part of the demonetised currency would not return into the system as their holders would not be able to account for it. That should thus provide a bonanza to the government – getting so much money without doing anything. Before the fruit was in its hands, the government was watering in the mouth about the prospects of a free meal.
None of that happened. Instead it was saddled with this enormous embarrassment. Faced with this public humiliation, the union finance minister, in particular, shifted gear to the moral issue. It was moral to try to capture “black money” and it would continue to make that effort by tracking down the large “converters” of money through the regular banking channels whose names were now available. What would happen now is unknown.
But the mere fact of conversion of the old notes into new ones has proved one thing: there is no black money.
We as a nation are perpetually obsessed with “black money”, just as we are in a sense deeply and essentially apartheid. Why else should the fairness creams sell so briskly and families go for bland fair looking girls over beautiful dark ones. There are the ubiquitous “black tickets” for cinema shows or cricket matches when these are not available across the counters. When people are talking of black money there is very little clarity about what is black about it.
Loosely speaking, black money is what has been stashed away without paying taxes. When you are talking about the informal sector of the Indian economy – which most commentators in the present context agree to be as large as 40% — most of it bypasses the tax net. But then, the larger part of the tax avoidance is legitimate; either these units are too small to come under the tax net or too diverse to pay taxes.
A German diplomat friend of mine, who lived in Friends’ Colony in Delhi, used to relate to me his experience of a pan-shop owner around the corner in his colony, who he once found having a dinner with friends and family in a five-star hotel in the Diplomatic enclave area. He had even recognised the diplomat and invited him to join. So my diplomat friend used to say India is not a poor country. It is rich country with poor people. The pan-shop owner would have at least some “black money” as presumably he did not pay income tax on his plentiful income from selling pan to rich buyers in a tiny Delhi colony.
But then, his “black” earnings would surely have been converted into physical wealth by the time the Modi government thought of demonetisation. Raids might reveal the panwallah’s gold holdings – and this looks escapable, given India’s import of gold day in and day out. You cannot catch the black by cancelling currency but by chasing the glimmer of gold. But then, which government would dare do a family wise accounting of gold hoardings? Just a small duty on gold had created such a ruckus that the government had to back track on it.
This process of conversion of black income into physical assets is relentless. A small furniture shop owner on one of Delhi major routes has a home valued at around Rs10 crore. The shop employs about thirty workers, who are all genuinely poor but exquisitely skilled. They produce beautiful furniture pieces and the common wood turns into objects of art in their hands. So much so, that the pieces were often exported. The supervisor among them gets about Rs24,000 a month in cash and those working on the wood gets varying amounts. Until GST was levied, none such shop had ever spoken of charging a tax on their sale of furniture and the practice was taken to be a normal state.
After GST, the furniture maker was furious. He felt the Modi government was strangulating the small businessmen. He was bringing down employment, as they might have to cut down on their workers. The outrage was complete as the CST and SGST incidence was 28%, which none of the buyers was willing to pay. They had invented short circuiting the tax to survive.
To any “right thinking person” that would appear totally justified. Paying the tax honestly and risking closing down the entire business would have been hara-kiri. Even for the Indian economy as whole, it would have been disastrous.
In a way, black money and the current problem of stubble burning in a handful of north India states are similar. Both generate a lot of smoke and pollute; but then the inherent compulsions are not often seen and therefore remain unaddressed.
Farmers burn stubble to clear the fields for the next crop for which little time would otherwise have been available. But consider if the stubble fetched a high price, it would have been recovered from the fields and sold as fodder.
People do not pay taxes because of economic reasons. The rates are often high. If these were minimal, they would have complied. But then, even if taxes are being avoided by genuinely small businesses – and these are huge in numbers — they are playing a useful economic role. For a government, minding for development, they are better neglected.
Where black economy should be attacked is a limited area. This is big business and government deals. Politicians and bureaucrats earning a premium from their positions of power, asking for money for clearing large projects or bending rules and policies to favour the few, should be relentlessly attacked. That “black wealth” generated and remaining in the hands of a few, has a huge economic cost.
When a government avoids proper auction and grants, say airwaves or mines or clearance, to some companies over more efficient ones, that has an economic cost. When there are organised over or under invoicing of large purchases for remitting unaccounted monies to overseas entities – and these are being revealed through “leaks”—these need to be pursued.
Black is not just cash. It is far beyond. This was the basic fallacy of demonetisation.