How to deal with black money? In the hot pursuit of black-money holders, some people seem to have lost their sense of direction and have advocated the demonetisation of 100-rupee notes. However, this remedy will be worse than the disease itself. First of all the real culprits have got away; they have converted their 100-rupee notes into notes of smaller denomination, viz., Rs 20, Rs 10, Rs 5. Also, as stated earlier, they have bought land and housing property, gold and jewellery, art treasures etc., and also dispersed their holdings in small bank accounts in the names of members of their families, apart from paying for various goods, services, rents etc., in cash. By all means, track down black money, if you can, to its source, although it does become a wild-goose chase.
But, demonetisation of 100-rupee notes is a wild hit at the bull’s eye: it will not hurt the guilty ones but a lot of innocent people. Not all 100-rupee notes are black money. Many are held in small numbers by middle-class people. In fact, statistically speaking, although the people of these classes have only a few 100-rupee notes each, the number of the people multiplied by the average holding of each will probably add up to a figure far bigger than the holdings of the richer holders, who are comparatively fewer and many of whom have already got rid of them.
Actually, demonetisation is no terror to those politicians, officials and big business men, who have had enough notice to take the necessary precautions. It is the dumb goats which will be caught: the black sheep have jumped the fence long ago! Moreover, the other side of the medal of black money is corruption, which seems to prevail at all levels, from top to bottom. In the event of demonetisation, the Devil will take care of his own, and many may escape the rigours of demonetisation. Administratively, it will involve enormous and fruitless work for the Reserve Bank of India of investigating claims of hundreds of thousands of people all over the country, for which it may have to open thousands of temporary offices in many cities, towns and even villages. Also, inevitably, there can be much corruption in the process.
Apart from this, the effects of demonetisation on the economic system as a whole may prove quite disastrous. Black money accumulation is unethical and needs to be strongly condemned. However, currently whether we like it or not, black money is used for financing many (even normal) business transactions partly or wholly. If it is suddenly withdrawn, much of the business—even regular business—will come to a grinding halt. Also, demonetisation could shake the public confidence in the nation’s currency, with serious repercussions on its international value as well. This confidence factor becomes particularly important in view of the fact that nearly half of the rupee currency is in terms of 100-rupee notes.
Does black money cause inflation? This is a major misconception which seems to have coloured the thinking of those who have been advocating demonetisation. Far from causing inflation, black money is actually an anti-inflationary factor, as its velocity of circulation is much lower than that of white money. Where it is locked up in safes or in safe deposit lockers, its velocity of circulation is actually zero; where it is used for illicit transactions, it can be somewhat higher. In a sense, it has been a blessing. So far as inflation is concerned, a large part of the currency expansion brought about by deficit financing has not circulated freely but gone underground! If all black money became white overnight, prices would indeed rocket sky-high, and indeed that would be some Inflation!
The real solution for black money
The real solution for the evil of black money lies not in lopping off its branches (by demonetisation etc.) but in attacking it at its roots. In other words, we must identify the causes and then try to remove them or at least to mitigate them. First of all, the Government should reduce the level of taxation all round. In spite of the fact that the Wanchoo Committee made this as a major recommendation, the Government has set it aside in the mistaken belief that by reducing the tax rates, less revenue would be collected. This, however, is a fallacy and an optical illusion. The experience of France, which I quoted earlier, gives the lie directly to it. Not only the income tax rates should be reduced, but the lower limit of Rs. 5,000 for exemption should be raised to Rs 7,500 or even Rs 10 000, in view of the fall in the value of the rupee and the fact that at this level the poor taxpayer has less incentive to avoid taxation,
As regards the Wealth Tax, it should be abolished altogether, as it involves double taxation and is a potent cause of black money and corruption.
The third suggestion I would like to make is that the entire system of licensing and controls, which has resulted in the creation of the “Permit Raj”, should be drastically overhauled and gradually done away with. The more the controls, the greater is the black money and corruption potential. Even the foreign exchange control should be abolished. In the first place, this control was never very essential, as India had been receiving large chunks of foreign exchange under the various Aid programmes and Loans, which were quite adequate for the five-year plans.
Secondly, because of the exchange control, large quantities of foreign exchange have been held abroad by Indians in number accounts etc., which would have normally been repatriated to India, if the owners of the funds had a reasonable guarantee that they would get their exchange requirements from the Government whenever necessary. This would have provided for a great relief in our foreign exchange market and could have even strengthened our currency in the international market. Not only this, but the Government would have had at its disposal large amounts of foreign exchange also.
Whether the Rupee should be a free currency and be based upon floating rates is a separate question, which cannot be considered here. It was unfortunate that the Government in its hurry to grab every possible pound and dollar in its anxiety and obsession for Planning did not consider the possible effects of exchange control on the Rupee and indirectly on the functioning of the planned economy itself. Similarly, instead of import and export controls, which were no doubt partially responsible for the exchange control, the Government could have (a) raised the import duties on various items to a sufficiently high level, and (b) in suitable cases, put an embargo on imports of certain types. As it is, the system of controls has encouraged smuggling on a vast scale, and in the process, the Government has lost much of its foreign exchange as well!
The fourth measure I would suggest is that the Government should issue a notification asking holders of black money to hand it over and accept 90% of its value in white money from Government, up to a fixed date, say 1st April 1974: after that, any further surrender of black money should be allowed against 75% of its value, up to say, 1st July 1974. And, after that date, the Government should confiscate any undeclared black money, wherever it is found, as also property etc. purchased with black money. Such rigorous measures alone will be necessary to eradicate the evil of black money, but they will be of no use, unless the Government’s administrative machinery is strict and incorruptible, which means a reform of the corrupt, which must start at the top everywhere and end up at lower levels. In this connection. I may refer to the successful measures recently adopted along these lines by President Morcos in the Philippines.
The fifth group of measures in this connection will be those relating to the Government’s plan and non-plan expenditures. There is no doubt that a large part of the money spent by the Government both at the Centre and in the States through the Five-Year Plans and through the normal non-plan budgets, has not only inflated the money supply beyond the limits of necessity and thus caused a steep rise in prices, but also enabled unscrupulous politicians, officials and even ministers to feather their own nests in the process. On the whole, the Government should now go slow on the Five-Year Plans. For one thing, the Plans have not been at all successful in achieving their target rates of economic growth. Many developing countries which had no five-year plans of any kind have been able to achieve much higher growth rates than India with her plans. For another thing, the system of planning adopted by the Government has tied up into knots all industrial and commercial activity throughout the country.
Therefore, I am inclined to the view that there will be no great calamity if we now gradually wind up the entire system of Planning and replace it with a system in which the Government concentrates on its main nation-building functions, viz., the provision of an infra-structure for a free national development, consisting of increased transport facilities, technical education, population control, aerial navigation, tele-communications, various public utilities etc. I feel that the country has by now after 20 years of planning somehow reached the “take-off stage” of industrial development, and if private enterprise, as well as the public sector industries, are given complete freedom to grow and function, economic development will not only take care of itself but achieve a rate of growth far better than the Government planners have been able to achieve.
This essay is part of a series from the Indian Liberals archive, a project of the Centre for Civil Society. This essay is excerpted from a journal published by the Forum of Free Enterprise, based on a speech delivered by Prof BP Adarkar in September 1973. The original version can be accessed here.