Can demonetisation tackle the menace of black economy ?


By Saumen Chattopadhyay 

In the wake of the demonetization, it is an imperative that we distinguish between the two concepts, black money and black economy. Black money is a stock concept measured at a particular point of time like, bank deposits, or, supply of money measured as on 31st March. Black economy thrives on black income generation. Black incomes are generated mainly by the self-employed and the business. Salaried are paid after taxes are deducted at source. Black incomes are generated mainly with the purpose of evading taxes on profits. Black profits are generated either by under-reporting output and/or prices, therefore, revenue and/or artificially escalating costs so that reported profit (on which taxes are paid) is lower than the actual profit. Demonetisation, therefore, is unlikely to have a major dent on the black income generation but will be able to unearth black incomes held in the form of cash which may be actually a fraction of total black incomes earned in the past as black investments can assume various forms. A significant part of black incomes generated in the past have already been invested in land, gold or other forms of assets. A part of it also leaks out of the economy and is held in the tax havens. Transfer pricing which is notional shifting of profit constitutes 2/3rd of capital flight in the world. This practice has also come under the surveillance of our government.

Fighting corruption is therefore not similar to fighting black income generation. Therefore, corruption as commonly understood as the abuse of public office is to be distinguished from the illegal tax evasion resorted to by the self-employed and the business, mainly in the services sector. No less menace is the black income generation as indicated by its very size which is argued to be 50% of GDP consisting of black income generation in line with the GDP concept. Bribes are transfers and are not included in the estimation of GDP. Bribes or illegal transfers are associated with corruption mainly which would be far less than the size of the black economy.

Sooner or later, this one time measure will gradually cease to matter and the economy will settle at a new equilibrium with the new currency notes. The Indians have been master ingenious and have the potential circumvent any challenge posed to their ways of living, legal and illegal. This confusion continues to remain in the minds of the policy makers, even the experts and the people as the government gives the impression of fighting corruption while the black income generation can continue as the propertied class remains largely immune to demonetization. The illegal economy which is mainly cash based will face problems in sustaining the illegal activities in the short run for sure. In 1978, the high denomination notes of Rs 1000 and Rs 5000 were demonetized. There were only Rs 165 crore worth of these high value currency notes in circulation (Kumar, Arun (2002): The Black Economy in India). Black income generation continues unabated, however.

( The author is a professor at Zakir Husain Centre for Educational Studies School of Social Sciences, Jawaharlal Nehru University, New Delhi) 


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