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Saturday, December 17, 2016
Shadow economy, black money and currency demonetization
In India, along with our real legal economic structure, there exists a shadow economy of black money. This parallel economy has become significantly large and damaging national development in a big way. Monetary system of country is regulated by RBI and watched by various agencies and departments of government. Government makes assessment of economic activities in country from time to time, it helps them in making better policy decisions, estimate tax revenues and understand health of the national economy.
Accounting of money circulated in economy through banking system and books of accounts is not that difficult because of technology today. However, accounting of black money, which is a considerable portion of our Economy, is out of question as public or even private disclosure by its stakeholders is impossible. Estimates say it has grown as big as 40 per cent of real economy in size.
Black money is the amount of money in the economy for which tax has not been paid to the government in order to avoid taxation or to hide the source of income. The black money is in the form of currency notes, precious metals, real-estate etc. In most of cases the source of such income is illegal such as bribe, drugs, human trafficking, fake notes, illegal mining, various crimes etc. But, a good percentage of black money also comes from unaccounted avenues (of legal source) but aimed at avoiding tax payments such real-estate builders, retailers, doctors, professionals, etc.
With time, the accumulation and flow of this black money in economy has grown enough to be called a parallel economy in country. Cash currency in this illegal system acts like blood in body. Corruption, benami transactions, hawala, money laundering, unaccounted cash transactions, swiss banks deposits, election expenses, dowry etc. have developed a symbiotic mutualistic relationship with black money and growing together.
As in India, more than 80 percent of cash are in the form of 500 and 1000 notes and around 20-25 percent of it is in the form of black money kept as wealth. The surprise decision of government to declare 500 and 1000 notes a non legal tender and making it a piece of paper from immediate effect has snatched away scope of money laundering or conversion into other currency notes, gold, property etc. The stockpile of unaccounted cash at hands became somewhat useless as government has fixed various quantitative limits in exchange process for common public.
Now all these existing 500 and 1000 notes will have to go through banking system. And in this way the wealth of individuals and the nation will get accounted for various uses including tax assessment, at the same time a huge sum of black money in the form of 500 and 1000 notes will get flushed out of the system as well. Sudden loss of old currency notes will cause severe damage to this parallel economy. Even black money deposits in foreign banks will become stressed asset as hawala and other instruments of transactions will become weak.
Currency replacement is only beginning of crusade against this mammoth. Government will have to become far more vigilant toward money laundering and black money transactions in order to achieve goal of making this country corruption free.
Deputy Governor of RBI, mentioned that the number of 500 notes in economy is around 16.5 billion while 1000 notes are around 7.5 billion. Replacement of such a huge amount of notes in one of the largest economies of world is not an easy task. But this time people, banks, government/s are on same page today to make it a success.
This big decision has not been taken in arbitrary manner but with due diligence. Think tanks have been advocating for such steps from long time. This was right time to make it happen because of existing Jandhan Yojana accounts, payment banks, lakhs of ATMS, thousands of bank branches, aadhar cards, seamless governance and great political will.
Nobody was expecting such a bold and beautiful move, we have witnessed various crusades from Jantar-Mantar against black money but for first time it originated from PMO.