Demonetization not enough; 7 ways India can curb generation of black money

Demonetization of high value 500 and 1000 rupee notes (86% of total money in circulation in value terms) is a bold and praiseworthy move by Modi government to curb India’s black economy. However, it has two limitations: it attacks only part of the black money held in cash. It’s ineffective when it comes to gold, another popular tool for investing unaccounted and illegal income. Secondly, it attacks only the stocks of black money.

Demonetization will not be enough to curb generation of black income. Introduction of 2000 notes in fact, will make it easier for holding and moving black money. If demonetization is not followed up with concrete steps to curb generation of black income, it will undermine the good work done by the government, and the sacrifices made by common people because of sheer logistical mismanagement by bureaucratic machinery in replacing old notes by new notes. Here are 6 steps India can adopt to curb generation of black income.

1. Cleaning the real estate sector which is the mother of black economy in India should be the first step. It’s a common knowledge that most real estate companies insist on taking a part of payment in cash which they need for bribing politicians (who need cash for fighting elections) and officials for regulatory approvals and permissions. Once a property is sold with part of payment in cash, its resale will always involve some cash components. Otherwise, its buyer will face increased capital gains liability. Hence the buyer insists on part of the payment in cash and circle goes on and on.

High capital gains tax again induce a seller of property to insist on part of the payment in cash even if he (or she) might not have paid any cash during his (her) purchase, and subsequent buyers have not much say in this. To deal with the rampant use of cash/black money in real estate deals, the following three steps may help:

• Implementation of real estate regulator act in letter and spirit along with a time bound single window/online regulatory approval mechanism will make real estate sector transparent and cut on the use of cash. Modi government needs to take state government on board (especially those ruled by BJP) to see that provisions of the real estate regulator act are not diluted. Amendments in the UP Apartment Act were reported to dilute several provisions of real estate regulator act.
• Periodic revision of circle or ready reckoner property registration rates in line with market rates will minimize (though not end as properties of one location differ in capital value because of exact location/floor/landscape) the involvement of cash in real estate.
• Modi govt. should consider either removing long term capital gains tax altogether or at least making it 10% along with provision for heavy penalty for tax evasion. That will discourage people to avoid capital gains tax and at the same time do away the need for dealing in cash at least for new properties. Revenue department collected a net of Rs. 8000 crore in 2013-14 from long term capital gains tax which was 1.2% of total direct tax collection at Rs. 600,000 crores. Thus, revenue consideration should not deter the government on this.

2. An important reason for rampant corruption and generation of black money is the discretionary powers of politicians, municipal/government officials and enforcement agencies especially police which are often bought and sold for money. Corruption is main source of black income that its gainers would want to hide…and the major reason of corruption is discretionary power of people in power that requires serious curtailment. That no doubt is the toughest nut to crack for any government, but it would involve among others, the implementation of the recommendations of 2nd Administrative Reforms Commission, and police reforms as suggested by Supreme Court. Modi government's proposed amendments to shield government officials from prosecution, though well-intentioned is a bad idea.

3. Poor contract enforcement (India's global ranking is 172 out of 190 countries) means you need netas, bhais and others to get your money back. That generates illegal /black money that need to be invested in gold, real estate or tax heavens. 

Because of poor state of contract enforcement in the country, bidders for tenders often increase their bid prices for bidding contracts for fear making losses if the payment is delayed or sanctioning authorities need to be bribed. Eventually many of such bidders lose contracts as they are not the lowest bidders and those L1 who actually gets the contract is not often the most honest among all bidders.

Introduction of online auctioning/tendering is a good move that will address this problem. Yet, the need for a comprehensive public procurement legislation remains. Setting up of specialized courts for adjudicating commercial disputes will be good. Passage of The Arbitration and Conciliation (Amendment) Act 2015 is a good step in the right direction. 

4. Reduction in income tax rates as high taxes induce/incentivise/encourage tax evasion by people as suggested by Laffer Curve.

5. Implementation of Goods & Services Tax (GST) as planned from 1st April 2017 will improve tax compliance and put a check on tax avoidance.

6. Laws which are entirely based on traditional notion of morality (i.e. the idea about what's wrong or right) such as ban on prohibition and prostitution provides scope for making illegal money by individuals, businesses and enforcement agencies. Scrapping them will help contain generation of illegal or black money. 

7. Gradual elimination of high denomination notes such as 1000 and 2000 will help to make it difficult for hoarding and moving black money. Moreover, this is the easiest to implement.

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A modified version of this post has been published in Nikkei Asian Review from Nikkei-Financial Times Group: Demonetization will not wipe out India's black money

Please share your ideas and thoughts on how to curb corruption and black money. Humans should differ because we're all unique in our own ways and hence, are expected to think differently. It doesn't matter even if you have a different viewpoint.

Please feel free to criticize my ideas but please give your reasons for the same. That will help me improve my knowledge and understanding. If we're not connected, it's time to get to know each other. 

Image Credit: https://lawisgreek.com/lig_news_bulletin/anti-corruption-act-1988-amendment-proposed/ Image credit 2: https://chiefdonaldtrump.com/trust-politicians-corrupt/

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