The Color of Money (2)
28/11/16
The month of November, 2016 has witnessed many reports on the topic of black money in India. One thing which is apparent from reading many of these articles is that there is a group of (antisocial) individuals in the country dealing with black money, and the people who are writing about this do not belong to this group. There is a nice feeling of one-upmanship on the score of morality, that if you write about it you are superior, and if you are inferior you do not (or cannot) write about this topic. There is also an alignment of this stand with the love for your country – if you write about this topic you are a patriot, if not you are a traitor. So, let me declare upfront that I am going to speak for the unspeaking while dwell on some questions nobody seem to address, and I don’t want to claim any political affiliation in the points I am trying to make.
Firstly, I have never seen black money, but money in many other colors – pink, blue, yellow, green, etc – unless the currency was Xeroxed (in black and white). The point is, unless it is a counterfeit currency, the physical currency itself is neither black nor white; it is black or white only when it is utilized in transactions in a certain fashion. If used for legal transactions it is white, while using it in a way the law prohibits its usage, it is black. Storing it, per se, is not utilization, and hence it is neither white nor black.
Secondly, people store currencies for various reasons, least of which is to avoid paying taxes. Many economists have pointed out that there are denser ways of storage and avoiding taxation. Some of the reasons for storing money are , both for legal or illegal transactions, to have liquidity, spend during emergent circumstances, as a souvenir, not having other avenues to save, not willing to spend, etc. Thus, it is convenient to have a high value currency for the purpose of storage, and I suspect that the government has introduced Rs.2000 note for this purpose (no other explanation appear logical, and assuming decision making is logical).
Thirdly, it appears that the government wants us to believe that there are only a small fraction of the citizens (or is it also foreigners?) who have black money, and it is them they are after by the changes they have brought about this month. This is a naïve argument. I think every citizen who is participating in the economy is involved both in the white and black economy. The only difference is the scale and the split, but on qualitative terms everyone participates in both the economies. The only group not participating in the economy is those with no income and no expenditure, like children and dependents whose needs are taken care of by someone else. The economists call the black money by other terms such as black economy, parallel economy, shadow economy, etc. to emphasize the transactions and not the instrument as the undesirable element. Simply put, it is that side of the economy that is not traceable, or as government looks at it, taxable. It is quite simple from the governments pronouncements that they are interested moving this money from the shadow to taxable part. Why everyone is involved in black economy – it is because many of the transactions all of us make doesn’t come under the ambit of taxation. For example, agricultural income is non-taxable and hence is poorly accounted for. All of us are involved in either buying or selling some agricultural commodity, directly or indirectly. Poor accounting provide a good scope for exploitation in the form of under or over invoicing, arbitrary rates, extortion, distress sale, hoarding, etc., and some benefit from these transactions while many lose value by supporting these transactions. Other transactions like gifting, buying from road side vendors, etc. are economic transactions almost all citizens are involved in, and thus participate in shadow economy or untraceable economy. If the government could track your gifting to your employees or your spouse, they will find a way to tax it. Thus, this notion of only some shadowy characters are involved in black money is a myth most writers don’t want to recognize or acknowledge.
Lastly, on the issue of taxation: this whole exercise of “surgical strike against black money” is really to expand the tax ambit of the government. Why people want to avoid paying tax? I think there are a lot of my fellow citizens who happily give money to God (and presumably are not paying to the God’s representative, the government, with the same enthusiasm). At least God does not ask for your accounts when you give Him money, presumably because His accounting system is very different and most of us are not able to follow it. People don’t ‘like’ to give money to the government because they know that they are paying into an inefficient system. It is no secret that the efficiency of tax utilization by the government and the return on this expenditure to the tax paying citizens is very low. There are many loop holes and pilferage. Thus, the belief of the paying citizen is eroded, causing one to find schemes for evasion. Thus, the question to ask is will the corruption come down because of this exercise? I believe people (irrespective of ideologies and party lines) are very ingenious and when you try to push a system, the response will be greater in the opposite direction.
Economy, taxes, demonetization
Delectable Debates 