Effects of demonetisation of 1000 & 500 rupee currency notes

One of the foremost gains of the demonetisation of high value Indian currency notes in the 1000 and 500 denomination would be the change in direction of governance of the country. It would result in moving governance from non-transparency to transparency. It is not directed so much against those perceived to be dishonest as against the system rendered decadent by those functioning dishonest and destroying the democratic framework of the country. India can display no more tolerance for black money, corruption, shadow economy or parallel governmental framework set up by the captains of polity and economy together in the country. We need to delve deeper in to the problem before us.

The Indian GDP and growth rate simply doubles if the economy and the shadow economy are added up. It means a lot for the nation and the people of India. It directly leads to instant drop in the rate of individual and corporate tax rate substantially. Lower rates would motivate people to pay tax happily and incentivize better tax law compliance. Taxation should be such that people feel good in earning more and creating wealth for themselves and the country, as against the current adversarial mentality towards high income earners and wealth creators. One reason for tax evasion is this attitude of the tax law makers and implementers. It coverts perfectly “white” money into “black” money. Let the white money remain white in an ethical tax system.

The ethical taxation system generates enough investible funds from within the country. This natural resource is not available to every country. Size of a country happens to be that natural resource and India is uniquely endowed with this resource. If taxation in India promotes honest and healthy growth in incomes, it deserves all support from every quarter. If the “poor’ beneficiaries of the Jan Dhan Yojana could deposit an amount of rupees 35000 crores or so from their meager savings, the corpus of funds generated by the honest income earners outside the tax net would be 100 times more than that.

Before proceeding further, it would be necessary to understand the correct meaning of black money. It can neatly be divided into two major sections; (1) money earned legitimately but is outside the tax net; and (2) proceeds of bribery, crime, smuggling, drugs, terrorism, ransom and every other corrupt means. The two classes of black money impact the economy and governance in different ways and deserve a bit of illustration.

It is proudly said that the Indian economy has the resilience to withstand the effects of meltdown in other economies and that it can absorb almost every kind of shock rather painlessly. The reason for it is the contribution of the unregulated sector of the economy. More than 80% workforce is employed in the unorganized sector of the economy. It provides wages to the workers and incomes to the operators. These incomes can’t be called black money even as they are outside the tax net. Reasonable tax slabs can spread the net over the producers and service providers in this sector. The demonetisation of the 1000/500 rupee notes is going to hurt many more in this sector than in the organized sector of production and services. As this sector contributes to the GDP and growth rate substantially, it can contribute to transparency in the system, help reduce the shadow economy and disable the parallel government structure built to trap them in a web of punitive laws from permission to run the businesses to tax laws of several kinds.

Coercive action of the state agencies facilitates extortion of bribes from them. Bribe is nothing but legitimate tax money shared by the corrupt officials and the earner illegitimately, depriving the exchequer of its revenue from businesses engaged in production and services. This leakage of revenue creates shortfall in the income over expenditure for the government, which increases the tax rates to reduce the gap and deficit financing. It drives even the honest income earner to evade taxes. All kinds of accounting practices are resorted to for non-compliance of the tax laws and professional help from Chartered Accountants is obtained on payment of fees. Even if the amount of fees so paid to the CAs and other professionals were to be paid into the government kitty, it would lead to substantial increase in the revenue of the government, which may not increase taxes, if not actually reducing them.

The share of the unorganized sector presently clubbed with the other black money (corruption) needs to be de-linked and linked to the real economy in national interest. Presently it is unwittingly providing a cover to the other black money. Once de-linked from black money, it will expose the black money of the proceeds of bribe, crime, drugs, smuggling and terror. It will not only contribute to the economy’s health but also help in better internal and external security of the country.

That leaves the real shadow economy to be tackled. There is the need to end the menace of this black money which is called the shadow economy. It thrives on the eco-system of the parallel government and promotes crime. It impacts democracy, public morals and law & order in all respects. It has crossed all limits by pushing FICN (Fake Indian Currency Notes) in circulation. Notes in the denomination of 1000 and 500 rupee are printed in Pakistan and circulated through syndicates operating from Dubai or Nepal or other places. Demonetisation has broken the back of these syndicates, which have been financing terror activities against India and other western countries. The proceeds of corruption and crime do not contribute to any economy; they rather cripple it. They deserve to be smashed completely.

There is another aspect of the black economy. Indian currency is freely exchangeable in many countries including Dubai and London. It is unlawful but smugglers use this money and Hawala (non-banking) channels for buying arms and contraband articles. Now their operations have been crippled without notice.

It should by now have been clear that there are merits to a part of the black money, which need to be channeled to the economy proper in the interests of everyone including the handlers of that black money. There are a number of reasons for this economy opting to remain outside the tax net even though its contribution to the GDP stands officially acknowledged in production, distribution and export data. To bring them into the mainstream, a few reforms would be necessary. Government will have to show boldness in listing all the issues discouraging the sector from joining the main economy.  Some laws will need to be made business friendly to  end the practice of painting money black by stubbornly holding on to the laws which have failed to work so far and shall never be successful. The only alternative to reforms is to close down these businesses and make millions of workers jobless and their families starve. What use are labor laws which simply don’t work either for the tiny businesses or their workers?  When strikes take place or a holiday is declared, it is the worker’s family which goes without food. There is no regular employment in the unorganized sector, which may mean a workman might get just about 150 days of work a year rather than full year. The employer may not be able to afford to pay minimum wages. Both need work but can’t comply with all the legal requirements. Both agree to work at reduced wages. The law makes the employer vulnerable to the exploits of the corrupt or coercive state agents, which creates a workable eco system unofficially. What should have been provided officially by way of reforms to the law has been left to the whims of the individuals and it kills transparency, destroys institutions and brings into operation a parallel government which generates black money and thrives on the strength of a shadow economy.

Labor laws or welfare schemes can’t be uniform for all units -large, medium, small, tiny, cottage and self-employment sectors. One has to acknowledge the diversity of the scales of production, market and incomes. It is all very easy for the politicians and bureaucrats to produce impressive liberal rules and regulations without considering their workability on ground. These rules don’t create opportunities and projects for income generation or employment. It needs to be noted that in the unorganized sector of the economy everything is left to be done by the individual from choosing the product to drawing up and commissioning the project to marketing and filing returns. Every fault on the part of the entrepreneur is punishable with  fine or jail for a certain term or both. It looks to the entrepreneur after sometime as if s/he had made a mistake by opting for entrepreneurship over a government job. The courts only add to the discomfiture of this harassed entrepreneur. This makes even the honest citizen turn sagacious fast and acquire the virtues (?) of the successful entrepreneurs in business. That means joining the club of the black economy members because that is the only methods left for any entrepreneur in the country to run her/his business successfully. To ensure the success of the revolutionary step to curb black money and corruption, reforms to suit our requirements and capabilities are the urgent need of the hour.

We have proved ourselves a nation of great dissemblers by swearing in the name of socialism but practicing the life style of the rich and wealthy. Corruption has been the means of financing such a life style. By demonetizing the 1000/500 rupee notes, Prime Minister Narendra Modi has carried out a real surgical strike against all such politicians and bureaucrats, who sleep on mattresses filled with these notes. That is how corruption affects every citizen as those sleeping on such mattresses dream of wealth for themselves rather than improving the condition of the poor masses. Prime Minister Narendra Modi has struck hard at corruption which has been attacking the poor for decades with impunity while the average Indian has always prayed for a modest two roti and dal (bread and lentil). Although s/he may need 4 rotis and more than a bowl of dal but thanks God so long as she gets just 2 rotis and one bowl of dal. S/he can do even without dal if gets one onion or green chilly and salt. It is not out of sheer humility but based on statistics. People who consider India an under developing country need to remember that all its traditions and customs are statistics based. A matrix of available food and mouths to feed on Earth as a family (Vasudhaiv Kutumbakam) is taken into account for working out the average food required. May be it works out to a minimum of just 2 rotis plus a bowl of dal or their equivalent of nutrition per person in the world. When the availability of food is limited, our prayer should be reasonable. Modernity has differentiated the purchasing power of individuals causing food shortages/ surpluses due to demand-supply imbalance. Corruption grows  the most in such circumstances. But when even 2 roti/dal is made costly, the situation becomes unbearable. A roti today comes @9/apiece. Onion had earlier gone to 100/kg and salt which fueled Mahatma Gandhi’s movement against the British sells for 22/kg.

India can’t afford the luxury of such a high cost economy. It suits only the corrupt, whose miserly conduct is exhibited in making lower than lawful wages to their servants. They promote an economy based on waste, but India lives by recycling and reusing products. This culture has contributed to checking piling of garbage and waste, which causes pollution and consequential health problems. Compare it with the insurmountable problem of managing urban solid waste and electronic waste in cities and the pollution problem it has created with that of manageable waste some three decades ago and the results will be for all to see.

While it is not possible to artificially or unreasonably control prices of commodities, it is certainly possible, and required to protect the vulnerable sections from exploitation by the market manipulators by indulging in reaping windfall profits. The people will be looking for ethical price mechanism in the country, so that there is no temptation for resorting to corrupt means to add to incomes or meet the gaps between earnings and expenditures.

Plastic money will naturally increase in the country. Carrying soiled notes is no happy experience to the people. It will curb growth of black money. The tax payers will no more be ridiculed by the tax evaders.

The country will learn to acknowledge the value of investors, brands, trademarks, intellectual property rights, innovation, product and process development, research & development, returns on investment, cost of capital, interest rates, loan servicing, defaults, bankruptcies,  legal provisions, skill development, employment opportunities and means of livelihood.

Those politicians who have been mocking the Prime Minister promising people Rs. 15,00,000 credited to her/his account by unearthing black money should remember that fiscal discipline administered the way Narendra Modi has done enhances the value of money and results in higher purchasing power of the rupee. Prices, inflation and lower tax rates are instruments of giving people additional income which was so far being denied to them by the black money holders. Reforms as proposed in the foregoing will usher in the Golden Period for doing ethical business with ease in India, which is an innate quality of the people- the hard working honest Indians, whom the political & black money mafia has always derided as “kisan-majdoor-minority-schedule caste, schedule tribe, backward, women, destitute, poor, poorest etc.” and never acknowledged as skilled artisans and workers providing traction to the economic activity in the informal or unorganized sector.

If Prime Minister Modi has taken the initiative at this juncture, many other reforms can be expected in the next 2 years before he gets caught in the election for the next Lok Sabha in 2019.

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