For the sceptics who are saying that ppl dont have black money in cash but in Gold and real estate
We did say we wanted less corruption
For decades, the honest have felt like fools in a nation that runs on graft. The complicity, and active encouragement, of the political leadership gave feet, legs and body to this parallel economy
Some of us in India have paid, what I call, the ‘honesty tax’ for decades. Our money is salaried, there is nothing on top, we pay our taxes, keep our accounts clean, pay for large spends by card, do real estate deals in white and become the guys who obey traffic signals while others in bigger cars zoom away with a smirk. We pull out our cards and carry home our small shopping bag. The guy in the next aisle pulls out a brick of cash and thumbs out a lakh in notes to take home the high-value gadget. We drive our Maruti home with the EMI (equated monthly instalment) sitting in the backseat, the luxury SUV guy comes with a sack of cash and scrapes our car out of his way. We wait to buy a house with white money, don’t get the choice set, pay more and end up feeling like losers for being honest.
For decades, the honest have felt like fools in a nation that runs on graft. The complicity, and active encouragement, of the political leadership gave feet, legs and body to this parallel economy. There is a saying that in any organisation 25% of the people will be honest, always; 25% will be corrupt, always; and the middle 50% will look at the boss and do what he does. The political boss has spoken in India finally, giving teeth to the war against corruption by making currency notes of Rs500 and Rs1,000 worthless overnight.
Why will this help? It makes the current stash of undeclared cash useless. Those who did not take the government seriously and did not declare their unaccounted income by 30 September, by paying a 45% tax plus penalty, now see a 100% loss rather than a partial loss.
Those who converted their cash into gold, art and real estate—the three sumps of black money—will sit on their assets for a while. When they do sell, the deal is likely to be completed electronically rather than in cash. With buyers unable to pay with old stashes of cash, how will the sellers sell? They will either barter or be forced to use a bank to route the money. Barter may work: in 2008, during the financial crisis, certain kinds of art became currency, after the price inflation in gold made it a bubble. Something similar may happen here too. Is it the end of black money? No. This is about raising the cost of keeping unaccounted for cash. There will be an underground market for sure: already you hear of a Rs1,000 note selling for Rs300 in the Mumbai grey market, but it just gets tougher to keep it black.
What about conversion to gold and real estate? Yes, conversion to gold will happen. But think it through— will you see a guy pull out five gold coins to buy an iPad at a mall? The government is just making the use of black money difficult. Why give just 4 hours? What would have happened in a month? It may have made the transition easier. Two things. One: cash would have been converted to gold and high-value purchases over the month. Already there are reports of brisk sales by jewellers till early morning of 9 November. Cash hoarders would have found ways to convert their money.
Two: cash that was about to die, would have found its way to the weakest in the food chain: those who don’t know they have to, or don’t have the power to, say no to getting paid with such notes.
End note
It’s not as if Prime Minister Narendra Modi has not taken a risk—both personal and political.
The move to demonetise currency notes, to suck out black money, will upset BJP’s key constituency: traders, realtors and small businessmen. The ground speak is that this government doesn’t know how to do dhanda (business)—who pays 30% tax anyway? It is unlikely that the party cadres preparing for election were prepared with Rs100 currency notes. If other parties have lost money, so has the BJP cadre. This is a big political risk. Modi is probably calculating that things would settle down in the next 18 months before the next general election. Modi also risks short-term growth by removing cash from the market. This cash pays for jewellery, high-value cars, gadgets, clothes, hotel bills. By suddenly making the stashes of cash useless, he risks offtake of goods from the market, which could affect the economy.
So the risk is real. Modi has taken a calculated gamble and we’re all hoping that it pays off. No transition is painless. He is pressing the reset button on corruption. We, who had so desperately wanted to kill corruption, now need to support this bold move by the government.
http://www.livemint.com/latest-news
