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Demonetization and Black Money: Past, Present, and Way Forward
Demonetization and Black Money: Past, Present, and Way Forward
Money
Past, Present, and Way
Forward
Presentation Outline
• Meaning of black money and its measurement in
India
Government’s Version
Demonetization
• On November 8, 2016, the government announced a
historic measure, with profound implications for the
economy.
• The two largest denomination notes, Rs 500 and Rs
1000, were “demonetized” with immediate effect,
ceasing to be legal tender except for a few specified
purposes.
• At one stroke, 86 percent of the cash in circulation was
thereby rendered invalid.
The aim of Demonetization
• The aim of the action was fourfold:
1. To curb corruption
2. To curb counterfeiting
3. To curb the use of high denomination notes for
terrorist activities
4. To curb the accumulation of “black money”,
generated by income that has not been declared to
the tax authorities.
The Impact of Demonetization
• The public debate on demonetization has raised three
sets of questions.
• First, broader aspects of management, as reflected in
the design and implementation of the initiative.
• Second, its economic impact in the short and medium
run.
• Third, its implications for the broader vision underlying
the future conduct of economic policy.
Cash and GDP Growth
Purpose of Cash Use
• All cash holdings may not have been used for legitimate
transactions, but perhaps for other activities such as
corruption.
Corruption (underlying illicit Decline due to non availability of Could decline, if incentives for
activities) cash. compliance improve.
Unaccounted income/ black money Stock of black money fell, as some Formalization should reduce the
holders came into the tax net flow of unaccounted income
Private Wealth Private sector wealth declined, Wealth could fall further, if real
since some notes were not estate prices continue to decline
returned and real estate prices fell
Impact of Demonetization Contd..
Impact
Real estate Prices declined, as wealth fell while Prices could fall further as investing undeclared
cash shortages impeded transactions income in real estate becomes more difficult
Broader economy Job losses, decline in farm incomes, Should gradually stabilize as the economy is
disruption in cash-intensive sectors remonetized.
GDP Growth slowed, as it reduced demand, Could be beneficial in the long run if
supply, and increased uncertainty formalization increases and corruption falls
Tax collection Income taxes rose because of increased Indirect and corporate taxes could decline, to the
disclosure extent growth slows
Benefits
• The most important way to view demonetization is as a
tax administration measure, one designed to tax
holdings of black money.
• Demonetization could also aid tax administration in
another way, by shifting transactions out of the cash
economy and into the formal payments system.
• Once the tax department identifies the people who
deposited large amount, they may be tracked in future.
• It will channel savings into the formal financial system
Early evidence for potential long-term benefits
• Cash accounts for about 78 percent of all consumer payments.
• They are also costly to users, since e-payment firms charge both
customers and merchants. (2% to 3% of transaction value)
• Compare this with the figure of 14.6 lakh crore existing in `500/`1,000
notes, the main component of the black money stock.
• Even if we assume 50% of these notes comprise black money, that would
mean a mere `7–`8 lakh crore, that is, under 10% of the total black income
being generated.
• Now the fear is that almost entire amount is back in the banking system.
Counterfeit Currency
• As for fake notes, the amount of counterfeit currency seized
between 2012 and 2015 was mearly 147 crore, that is, 37 crore per
year.
2. India has one of the highest cash to GDP ratios in the world, 12%
compared to a world average of 4%.
3. Nearly 6 crores debit cards and 3 crores credit cards are in use.
(without excluding multiple cards by same person)