BLACK MONEY AND HOW IT ENGENDERS INEQUALITY

 

rupee

 

In the last month’s edition of the mann ki baat programme, the prime minister Narendra Modi encouraged the citizens to declare the black money they have, pay a fine and get done with it.

Between June 1 and September 30, the government of India, is running a compliance window which allows citizens with black money to declare it to the government, pay a tax of 30%, a surcharge of 7.5% and a fine of 7.5%. This comes with the promise that for “those who voluntarily declare to the government their assets and their undisclosed income…the government will not conduct any kind of enquiry.” As Modi put it: “not once will it be asked as to from where all this wealth came and how it was acquired.”

It remains to be seen how successful this compliance window eventually turns out to be. But the fact of the matter remains that black money continues to remain a huge bane for the Indian society. The Modi government likes to distinguish between the black money that has left the Indian shores and the black money that continues to remain in India.

In the last two years it has been extremely aggressive about reclaiming black money that has left the Indian shores, but the same aggression has been missing when it talks about reclaiming the domestic black money. In fact, the total tax on domestic black money for those wanting to declare it, has been set at 45 per cent. In case of foreign black money this was 60 per cent.

One school of thought is that black money that remains in the country benefits the country in some ways. Let’s consider a politician who has black money. He invests it in a real estate project of a builder. The builder builds homes and sells it. In the process, infrastructure is created. At the same time, jobs are created as well. Further, real estate has a multiplier effect as well. It leads to demand for cement, bricks, steel, glass, and so on. So a lot of people benefit because of domestic black money, if it is invested.

The trouble is that this is just one part of the argument. A lot of homes that have been built using black money lie unsold. The builders are not willing to cut prices because they don’t want their investors to lose out. The investors in many cases happen to be politicians, who have put their ill-gotten wealth to use. This keeps real estate prices high.

Further, many homes that have been sold also, have been kept locked and not been given out on rent. This for the simple reason that rental laws in this country suck, and are loaded completely in favour of the tenant. Also, the current rental yield (rent divided by the market price) is around 2-3%. And at that rate, many landlords feel that renting out home is a risk not worth taking. Hence, many new homes that have been bought are kept locked. A home that is locked is of no use to anyone.

Also, a basic point that people miss is that black money is basically money on which tax has not been paid. When tax is not paid to the government, the government’s tax collections go down. This means that the government gets those who cannot avoid paying tax, to pay more tax. As Arun Kumar writes in The Black Economy in India: “This makes the latter [i.e. those who cannot avoid paying income tax] feel that injustice is being done to them.”

So the government gets those who are paying tax to pay more tax (let’s say by imposing a cess or increasing the rate of tax) or the government simply borrows more. Usually it does both. If the government borrows more, then the chances of interest rates going up, also go up. This again hurts those who are paying tax, more than it hurts others.

In this way, the prevalence of black money leads to more inequality in the society and that is obviously not a good thing.

 

The column originally appeared in the Bangalore Mirror on July 6, 2016

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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