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Daily Editorials – The Great Cash Clean up

editorials


Context-The Prime Minister has announced that Rs 500 and Rs 1,000 notes cease to be legal tenders. Pulling out 85% of the currency in circulation.  Saying this decision was taken to break the grip of corruption and black money.


What is black money


 

It is the income which is illegally obtained from activities like crime, drug trade, terrorism, and corruption which are illegal under the law and not declared for  tax purposes even though it is obtained by legal means.

Indian black money is over 30 lakh crore or 20% of the GDP.


How does it help curb black money –


  • Positive move against counterfeit(fake) currency , it will help in determining the exact money in circulation.
  • The sudden announcement will directly affect black money hoarded and will possibly give two alternatives — either deposit the money after identifying themselves to banks or exchange the money by November 24, 2016.
  • According to basic calculations, with a daily limit of Rs 4,000 a day, a maximum of Rs 60,000 can be exchanged by a person, in 15 days from November 10 to November 24. From November 24 onwards, the exchange process will be eased for convenience, meaning the exchange limit will be increased. However, there is no limit on deposits.
  • It will have deflationary impact in general and more specifically on real estate prices and make homes affordable and is indirectly a boon to honest taxpayers
  • People and families having no bank account will now have to create bank accounts to deposit money, making financial inclusion
  • Instances of cash-for-vote prevalent in Indian elections — in the form of bundles of cash in delegitimize denominations — may not work anymore.

Issues


  • There are around 2300 crore notes of denomination 500 and 1000 in circulation , which would need a lot of amount (over 12000 crores) to replace.
  • Many people in rural areas, illiterate peoples , old people and small vendors with 500 and 1000 denomination notes are finding themselves stuck with the need to reveal their saved money to someone else as they don’t know the way the bank works or don’t have accounts.
  • People having hordes of cash , will seek help from friends and relatives or could hire agents to get the money exchanged for them .
  • Most of the black money of indians is stacked abroad and comes back to india in various forms like FDI , investment in indian stock market as participatory notes.The current move does little to curb the black money stacked in this form.
  • If higher denomination of the note was a problem , then how is introducing rupee of value 2000 better, definitely for a short time it is a setback for those who indulge in counterfeiting .

Effect of black money on Indian economy-


 


  • Parallel economy in which unaccounted money circulates referring as black economy is an outcome of the menace of black money
  • Increase in disparity between incomes of people , with some paying taxes , others not paying taxes , some getting illegal money via bribe, extortion , drug trafficking.
  • Black money causes increase in inflation , greater extent black money hoarded in the coffers of tax evaders and black marketers encourages exuberant spending, which in turn creates excessive demand and price hiking.
  • Nerve root of corruption is in the process of elections in a democracy, like our country where the politicians take funds from big businessmen and industrialists. After capturing power these political leaders/ministers then are under pressure to provide favours to the fund givers.
  • Black money ensues in transferring illegal funds from India to foreign countries through underground channels. Hence channeling funds into other countries.
  • Black money helps in funding terrorism in our country , where huge amounts stacked are used to buy arms , pay agents etc.

Other steps taken by government to curb black money-



  • Income Declaration scheme – An opportunity to persons who had not paid full taxes in the past to come forward and declare their domestic undisclosed income and assets.
  • Amendment in Prevention of Money Laundering Act.
  • Supreme Court’s constitution of a SIT to look into Black Money issue, under chairmanship of Justice M. B. Shah.
  • Amendment in FEMA act.
  • Unified Payment System and digital India in general.
  • India revised its double taxation avoidance agreement with countries like Mauritius, Singapore from which large amount of FDI comes into India.

Positives till now-



  • A total of 64,274 citizens have declared income tax under the Income Declaration Scheme and the amount that they have disclosed is Rs 65,250 crore.
  • The move of demonetizing the currency notes will help in bringing out the money in circulation
  • Large number of bank accounts have been opened under jan dhan yojana .

 

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  • Chacha Chaudhari

    Whoever has written this has done one heck of a job..Brillaint clarity and awesome range of coverage.

    Grand salute!

  • Dreamz Unlimited

    Base erosion profit shifting to be checked, financial action task force, double tax avoidance agreements, bilateral investment treaties to be amended, interpol help, big data analysis by Natgrid, wealth tax may be introduced, round tripping to be checked, sebi’s recent step on p notes can be added 🙂

  • ILP- KUNA3885 (thevagabond85)

    Other steps :
    RBI’s vision document/push for less-cash economy. Licence to 11 payment banks.
    Pan card usage for above threshold (1L, I guess) transaction ..gold/real estate.
    Tax reforms for better collection -skilling personnel, GST etc.

    Requirement :
    Increased bilateral/multilateral fora e.g. G20 , widening scope of RTI , strengthening institutions e.g. ECI, tax reforms.