Demonetization… The Good, the Bad and the Ugly – Concluding Part

Part –4: The other forms of Black Money besides Cash

When I first heard the news of Demonetization of Rs.500, 1000 notes, my first reaction was… it will reform 4 areas of the economy… 1. Black Cash, 2. Real Estate, 3. Gold, and most importantly 4. Tax collection. How this single move will have such dramatic impact? let’s evaluate:

Black money in Cash: As Explained in Part-2, the Black Money in Cash will get a big hit from the demonetization move. Whatever, would remain or regenerate would get flushed out in the second demonetization of Rs.2000 notes. So, soon in next 2-3 years, we will see a huge reduction in Cash Economy and eventual demise of Black Cash Money.

Real Estate: The modus operandi is simple to understand. Declare lesser value for the property, accept Check/Bank Transfer for the declared value, register the property at the declared value saving on Stamp Duty for buyer and Potential Long Term Capital Gain Tax for the Seller. Both are benefitted so, it’s like a win-win deal. The chain goes on and Cash gets accumulated which is Black Money.

Now how the demonetization would curb such Black Money investment in Real Estate? Let me explain it: With the Adhaar Cards and PAN cards being compulsory as well as the Biometric Data collection for the registration of Real Estate Property, it is becoming very difficult to buy multiple real estate properties without disclosing it to Government. But again, there is another problem that is the Benaami Property. I invest my black money in Real Estate and get it registered in some fake name or maybe in the name of my worker/servant/relative/friend. Now, at one end, I am able to invest my black money in real estate, I stand to risk this investment in case the holder of the property turns against me. I would need to get a lot more safety than just holding the property papers in my custody as that person can always claim to have lost the papers and eventually with the help of Biometrics can claim the property in his name. Too risky… still viable. So, what’s the solution… Government has enacted the Benaami Property Act effective 1st November 2016. Yes ! just recently which is in line with the Economic Reforms and elimination of the Black Money from the market. As per this law, any property that is bought by someone under someone else’s name would be considered Benaami. You cannot even buy a property in the name of your parents. Only allowed are your spouse and children who can own the property paid by you. The penalties are stringent including a 7 years’ jail term and confiscation of the property as well as fines and penalties. So, now, even this door is also closed for investing your black money into real estate. The net impact will be, the artificially inflated prices of the real estate will be corrected and hence, property prices will come down to its fair value helping genuine buyers to be able to afford a home and property in their name. If you have legitimate money, then you can buy as many as property and keep using it for your benefit as long as you abide by the law.

Black Money in GOLD: India is the largest consumer of the Gold. Traditionally we are a nation that is addicted to Gold and we use Gold as a hedge and as a safe investment. A substantial amount of black money was invested in Gold. As usual, no questions asked, as long as you can pay, you can buy as much as gold you want. Lot of black money hoarders have used Gold as safe investment to park their black money. Now, the Gold could be in two forms… Bullion or Jewelry. Investing money in Jewelry is not worthwhile as you do not get the fair value if you want to dispose it off. But Bullion or Biscuit/Coin/Brick remains attractive as there are no losses if you want to dispose it off.

Now, be prepared as Government is probably planning to bring a regulation to Bullion trade in India. You would very likely be restricted to buy bullion at all or in very small quantity. The downside of Bullion would be that you need to declare all your bullion purchase and as such all minted Bullion is Serial marked for tracking purpose and all your such purchases would be recorded. Although, economically hoarding or investing in real gold is not a great alternative as the gold ends up in a locker or safe. The Money has to get into the economy and rotate so as to stay alive and multiply. Gold becomes a dead investment and only the capital appreciation in gold gets better return. Now the appreciation in Gold price is subject to Long Term Capital Gain Tax. Which means that, first of all when you try n sell your Gold Bullion, you may have to declare the source of it and very likely it would be tracked based on the serial numbers and stamps. Secondly, you have to prove the purchase price of it. Thirdly, on sale, the proceeds of the Gold sale will go to your bank account not in Cash and hence, you will have to disclose the net capital gain on it. Which eventually gets taxed. So, even if someone has invested in Gold, he will very likely be going to feel strangulated once Government brings some regulations to Gold purchase. It is expected that Government would allow certain amount of Gold in Jewelry to be held by individuals while any excess amount has to be declared and may be monetized by the government. Gold will come under regulated commodities and hence not much as an option to invest your black money in it. Government may even ban trading in Gold Bullion except for the registered manufacturer of Jewelry.

Now comes the Final Part of impact on Tax Collection: While as we have seen so far that, this move to demonetize Rs.500 and 1000 note is to clean up the economy with unaccounted cash. All accounted and legitimate cash must come into the system once. Whatever remains will be useless and will lose its value eventually. Based on the cash collection, government will have a fair idea of how much is being circulated in Genuine business. With a push towards electronic funds transfer and Cards based payments, majority of transactions will get accounted. I would like to believe that more than 60-65% of overall transaction volumes which would be approximately 84 Lakh Crore Rupees. This huge volume of electronic funds transfers will be taxed as appropriate for GST or Income Tax. Since, there would be considerably less evasion of Tax, all the Tax collected will add to the topline of the Government. Government will have funds to finance the Infrastructure, welfare, Healthcare, Education, Employment and other programs of National Importance. All this money will help Government to rationalize Taxation… instead of multiple taxes like Securities, Services, Stamp Paper, property, wealth, gift, Capital Gain Tax, Excise, etc. Government would be happy to relax these multitude of taxes to simple tax on Income Tax and GST while ensuring that tax evasion is not easy anymore. Every earning member of the population will be identified uniquely with his Adhaar Card and PAN and hence, all transaction by him would be accounted under his ID, giving a very fair idea of the total income and expenses of each and every earning individual in the economy.

Political Funding: One important corrupt and grey area remain is Political Funding. Lot of the black money is channelized to fund political parties in return for some favors when these parties come into power. Reduction and shrinking of Cash Economy will bring crunch to the Political Funding from unknown sources. There is a strong current for Political parties to declare all their fund sources and hence, with elimination of Black Cash economy, Political Parties will be forced to receive funds through Banking Channels with transparency in funding. Both the beneficiary and the Donor would be identifiable and hence Election Commission would be able to impose restrictions/limitation on how much of funding is reasonable. Politicians at the same time will not be obliged to the donors to return favor but to work in the interest of the Country. It will become difficult for these parties to buy votes by paying cash to voters.

Impact on Indian Economy as a Whole

  1. Cash: out of 14 Lakh Crore cash in circulation, expectedly, 70% of it will come under Banking. Banks will be flooded with Cash and liquidity. Out of this cash, a substantial part of undeclared money would attract Tax which is expected to be about 4-5 Lakh Crores. The written off liability of the Government through destroyed and illegitimate and Fake currency will amount to about 4 Lakh Crores. Government would be able to Print that much value of currency in the new fiscal year bringing a fresh load of liquidity in the market. Government’s Fiscal deficit will be taken care of by the additional tax collected and Government will not be under pressure on introduction or increase of Tax on common man.
  2. Banks with the liquidity, will reduce Interest rates on Deposits as well as Lending rates. This will help people to borrow money cheaply for Property, Personal, Business and all other legitimate purposes.
  3. Business: Initially, the business will be hit with the Cash Crunch what was earlier overflowing cash based economy. Soon, it will smoothen out with more plastic and electronic currency which is all genuine and legit business transactions. Businessmen would be depositing all GST collection to Government and Pay the Tax on their incomes that will help reduce Fiscal Deficit for the years to come
  4. Stock Market: After initial Jolt, Business with the new liquidity and lower cost of capital, would be able to grow their business. This Business growth will strengthen the Stock Market and it will stabilize in midterm.
  5. Real Estate: This market will be hit the worst in the short run. It is expected to correct by 30% due to imposition of Benaami Property act as well as reduction in Cash Economy. The Property prices will smooth out at its fair value and in the midterm, the market will be flush with supply and hence not much of appreciation would be expected in midterm. The property prices will grow fairly in line with the Economic Growth of the Country
  6. Gold: It will be hit worse. People hoarding large volumes would be discouraged and hence, gold will come into market through various Government and Formal channels. People would be encouraged to invest in ETF (Exchange Traded Funds) instead of Physical Gold which puts a huge pressure on Government regulations and controls. ETF prices will be governed eventually by the global Gold trade balance. India may not remain largest consumer of the Gold.
  7. Elections and Political Funding: There has been a strong wave now to bring transparency in Political and Elections funding. Government may be able to bring partial State funding of elections while allowing political parties receive funding from Individuals and business through declared and banking channels. It will bring a huge level of transparency and people would know which Companies and People are funding whom and how these Political parties are getting their money to be spent in elections and other rallies. Currently, it is known that all the Black Money is used to fund the Political Parties and these parties after coming to power feel obliged to do favors to their investors and fund raisers. Any Extra-ordinary funding would come under the radar of Election Commission with accountability on both the Political Party as well the Donor.
  8. Indian GDP Growth: It will be a boon to the Indian Economy. More money in circulation would mean more liquidity, uniform distribution of wealth, easier tax regime, easier to do business with less corruption, better trade and commerce, higher efficiency and productivity would result in Higher GDP Growth. Whereas the reaching a double-digit growth is a challenge, it will be easy to reach and maintain a double-digit growth rate over a longer period of time.

Well, this concludes the third and final part of the article on Demonetization Move. We started off by saying the Good, Bad and Ugly of Demonetization. Here it is to summarize this:

  1. Good: it is reformatory measure. It will help bring lot of goods to the economy including the reduction in black money, it will further trigger lot of reforms in taxation, politics, real estate, Gold trade, etc.
  2. Bad: It will hurt the economy and people in short term. Small traders, unorganized businessmen, service providers, helpers, would be impacted. They will have to learn the way to do business in modern times in more organized manner. Maintaining accounts, electronic transactions, tax payment, etc. will seem a lot to do but eventually it will fall in place and only those who would be willing to do a fair business would remain. Rest, while some of the petty services people may survive unfortunately it will be the stubborn and dishonest business/service providers who would perish.
  3. We have already seen some ugly scenes. Reports of people dying because of exhaustion, fatigue, have come. Although none has been verified but we are seeing suffering of people who are below the average living standard. Poor people are getting fooled by some crooks and they are losing their hard-earned money due to lack of knowledge and exposure and access to banking system. The ugly truth about the Indian Politics will be visible worldwide where our politicians will make a mockery of democracy and instead of supporting and helping Government to succeed in this move, they will try and do everything in their might to sabotage and fail this measure and try to hold on to their hordes of black money and investments. We have already seen lot of ugly scenes and hopefully it will get better from here.

Disclaimer:  The author is not associated with any Political Party or Government Organization and no one has paid him for this article. This article has been written out of his own understanding of the subject and at free will. Although certain numbers and figures quoted here are based on information available on Internet and other Mediums, the author does not guarantee the accuracy of these figures.

© Copyright 2016. All rights reserved with the author.

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About Rajeev

Known as "Guru" the author has a wide and broad interests from Food, Technology, Health, LifeStyle and Spiritual Yoga. As an Energy Professional with extensive Technology Experience specializing in Program Management, Business Transformation and Strategic Management. Likes to simplify Technology that can be used in everyday life without needing to be a whiz.

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