How Bleak is the Situation of Black Money in India?

HOW BLEAK IS THE SITUATION OF BLACK MONEY IN INDIA?

The issue of black money has been making the rounds for several years now and it appears to have become more of a political issue than an economic one. I have been a student of Economics for over 2 decades and I wonder what this issue all about is? What is being said is that this money stashed in Swiss bank is ill gotten by the depositors and is to the tune of 1,456 Lac Crores. One of Anna Hazare’s sites says the following:

Do you know what will happen if 1,456 Lac Crores comes back?

1. India will be Financially No.1

2. Each district will get 60000 Crores & each village will get 100 Crores
3. No need to pay taxes for next 20 yrs.
4. Petrol 25 Rs, Diesel 15 Rs, Milk 8 Rs.
5. No need to pay electricity bill.
6. Indian borders will become stronger than the China Wall.
7. 1500 Oxford like Universities can be opened.
8. 28,000 kms Rubber road (like in Paris) can be made.
9. 2,000 hospitals (with all facilities) all medicine Free.
10. 95 crore people will have their own house.

While, I am supporter of Anna Hazare against Corruption in India, my understanding of Economics says that this is not possible. According to me if this money is brought into circulation, the Indian economy will collapse and we will have to carry sack full of currency notes to get home hand full of goods and this phenomenon in economics is called ‘hyper inflation’. I quite agree with the PM on this that “this is a serious issue” but I do not agree with him that “there is no simple solution”. The macro economic theory suggests that if the government expenditure is more than its revenue, it is good for the economy. This fiscal deficit is funded through deficit financing (printing of currency notes without a basis) and if this excess money is spent wisely on developmental projects, it will generate employment which in turn will generate consumption which in the long run, will boost production leading to further employment and further consumption and thus this spiraling goes on gradually year after year to increase our GDP in a controlled way, keeping inflation under check. The word of caution is that such deficit financing must be kept under control as they tend to cause inflation in the short run. As against this backdrop, the Indian Government has been steadily infusing excess currency into the system under all kind of schemes intended to reach the poor and build national infrastructure. But sadly, the money instead of developing the much needed infrastructure and generating employment and income for the poor is being siphoned off and stashed into Swiss bank by corrupt politicians, bureaucrats and contractors. Some amounts remain within India stashed in bank lockers, and some get converted into ‘benami’ property both in India and Abroad and a small amount gets spent. Therefore, steadily the deficit financing as a percentage of GDP (BE) has been growing each year and it stands at a staggering figure of Rs 1,41,587 Crore in the first two months of 2012-13 itself, constituting 27.6 per cent of the budget estimates (BE) for the entire financial year. The government is targeting at 5.1 per cent of gross domestic product (GDP) for this year which going by this trend is utopian. On the other hand the revenue deficit, too, is fast approaching the BE, at 33.8 per cent in the first two months itself.

What does this mean to a lay man? The real income of the poor did not increase and hence the consumption of basic goods did not increase and thus the production did not increase resulting in lower employment, lesser incomes, and lesser consumptions and so on…. Thus clearly the economy has been negatively spiraling over the years. No wonder the share of agriculture in the GDP has been steadily reducing and farmers are committing suicide because the per capita consumption of basic goods like agricultural products have reduced in real terms and is not fetching better returns to the farmers. Lower production is leading to food inflation which in turn is reducing the per capita consumption even further. On the other hand the demand of high end goods and services which caters to the needs of the rich has been increasing steadily and no wonder the contribution of service sector to the GDP is increasing.

Internationally this mindless infusion of money in to the system is debasing our currency and this is one primary reason for depreciation in the value of Rupee against US $, because a huge amount of the rupee has no basis to exist. This is resulting in increase in the current account deficit (payment deficit caused due to import-exports). The imports are becoming expensive and thus we owe more to the foreign countries from where we import. This will eventually lead to a repeat of 1992 when we had to sell gold and devalue our currency.

Where does all this take us to? It is simple. The divide between the rich and the poor will grow and if this is unchecked the country will soon witness a bloody civil war. The farmers are gradually selling away their lands for survival and while it may see through one generation, what happens to the next generation is the major question? The rise in crime rate in the society is a clear warning of an impending civil war. Thus, I firmly believe the government must wake up from its deep slumber and announce a date by which all are to justify their deposits abroad and thereafter confiscate the unaccounted money.

The question is what could be done with that money? Of course the answer is not what team Anna is trying to suggest. If that huge sum of 1,456 Lac Crores is distributed to villages as being professed, the poor will die of hunger due to inflation. At best this brought in black money can be defaced and our cumulative fiscal deficit be reduced by that extent. This will strengthen the value of the currency and our current account deficit will reduce. We will be able to import oil, which constitutes a major portion of our total imports, at a cheaper rate and thus the price of fuel can be brought down. This will have a great impact to start with. There will be more money available for consumption in the hands of the middle class which will spur up demand and eventually the supply. Once the oil prices come down, the general price level of almost all products will come down. The poor will start feeling comfortable and can get absorbed by the growing industry / farm sectors and this process alone can bring positive buoyancy in economic activity.

This is not enough. As a parallel action, the government must declare a date to deposit Rs 1000 and Rs 500 currency notes and justify the source of income and take a new currency note instead. After that, the old currency notes must be debarred. This way the entire currency stashed up in lockers will fall out and find its way into temple donation boxes. This way the cumulative fiscal deficit can be further reduced. While this process may not be all that easy, where there is will there is always a way. Having done this, the government must ensure that the various schemes are implemented properly for which a strong ‘lokpal’ is a must. Unless there is deterrence in our society, the history will repeat. While the whole world criticizes the Arab nations, the singular reason for low crime rate in these countries is deterrence in the form of capital punishments. Let us realize that if capital punishment is bad the other extreme of no punishment is worse.

Why Mr. PM and the government is not keen in sorting out this issue is quite clear from the expose made by Julian Assange. Assange has done this much, let us do the remaining and crack the whip.

To know more on the expose made by Assange follow the link http://incredibleorissa.com/en/black-money-in-swiss-bank-mainly-from-india/.