Shadow economy, black money and currency demonetization

5
1338

In India, along with our real legal economic structure, there exists a shadow economy of black money. This parallel economy has become significantly large and damaging national development in a big way. Monetary system of country is regulated by RBI and watched by various agencies and departments of government. Government makes assessment of economic activities in country from time to time, it helps them in making better policy decisions, estimate tax revenues and understand health of the national economy.

Accounting of money circulated in economy through banking system and books of accounts is not that difficult because of technology today. However, accounting of black money, which is a considerable portion of our Economy, is out of question as public or even private disclosure by its stakeholders is impossible. Estimates say it has grown as big as 40 per cent of real economy in size.

Black money is the amount of money in the economy for which tax has not been paid to the government in order to avoid taxation or to hide the source of income. The black money is in the form of currency notes, precious metals, real-estate etc. In most of cases the source of such income is illegal such as bribe, drugs, human trafficking, fake notes, illegal mining, various crimes etc. But, a good percentage of black money also comes from unaccounted avenues (of legal source) but aimed at avoiding tax payments such real-estate builders, retailers, doctors, professionals, etc.

With time, the accumulation and flow of this black money in economy has grown enough to be called a parallel economy in country. Cash currency in this illegal system acts like blood in body. Corruption, benami transactions, hawala, money laundering, unaccounted cash transactions, swiss banks deposits, election expenses, dowry etc. have developed a symbiotic mutualistic relationship with black money and growing together.

As in India, more than 80 percent of cash are in the form of 500 and 1000 notes and around 20-25 percent of it is in the form of black money kept as wealth. The surprise decision of government to declare 500 and 1000 notes a non legal tender and making it a piece of paper from immediate effect has snatched away scope of money laundering or conversion into other currency notes, gold, property etc. The stockpile of unaccounted cash at hands became somewhat useless as government has fixed various quantitative limits in exchange process for common public.

Now all these existing 500 and 1000 notes will have to go through banking system. And in this way the wealth of individuals and the nation will get accounted for various uses including tax assessment, at the same time a huge sum of black money in the form of 500 and 1000 notes will get flushed out of the system as well. Sudden loss of old currency notes will cause severe damage to this parallel economy. Even black money deposits in foreign banks will become stressed asset as hawala and other instruments of transactions will become weak.

Currency replacement is only beginning of crusade against this mammoth. Government will have to become far more vigilant toward money laundering and black money transactions in order to achieve goal of making this country corruption free.

Deputy Governor of RBI, mentioned that the number of 500 notes in economy is around 16.5 billion while 1000 notes are around 7.5 billion. Replacement of such a huge amount of notes in one of the largest economies of world is not an easy task. But this time people, banks, government/s are on same page today to make it a success.

This big decision has not been taken in arbitrary manner but with due diligence. Think tanks have been advocating for such steps from long time. This was right time to make it happen because of existing Jandhan Yojana accounts, payment banks, lakhs of ATMS, thousands of bank branches, aadhar cards, seamless governance and great political will.

Nobody was expecting such a bold and beautiful move, we have witnessed various crusades from Jantar-Mantar against black money but for first time it originated from PMO.

You may like reading

Facts About Indian Currency

Currency Notes and Coins

5 COMMENTS

  1. No doubt it is a very good move. Howvever, demonitisation of currency just flushed the black money that is in the form of old currency notes of 500- 1000. But how the government failed to consider the black money that is still been accumulating in the form of new 500 and 2000 rs notes . For e.g. suppose a flat owner was earlier charging Rs. 26000 . from the tenants and has not shown the amount as his income so as to evade from taxes and keeps the lumpsum amount in his locker at home. Now after demonitisation, he has still been charging the same amount and still not showing the amount as his income and keeps it again in his locker. The only difference however, is that earlier the black money that he has accumulated was in the form of old currency notes and now they are in form of new currency notes. New Currency notes are not at all the certification that the money is white.

  2. Moreover, what about control over commission that Bank and Private firms in collaboration with Bank employees have now been charging to convert black into white.

  3. The government have shown its willingness and will to eradicate the corruption, Now it is the turn of citizens to show their patriotism, How they can avoid further corruption by accounting their money in a systematic way.

  4. @nikhil anand Tenant doesn’t have 26000 cash in new currency. So he will give a check. So owner will go to bank to encash it. So it’s accounted in his account n mentioned as his income from rent.

  5. IT IS AISO GOOD THOUGHT FOR DEMONITIZATION, BUT IMPLEMENTATON IS NOT PERPRCT. THEY RELEASE ONLY 2000 NOTES.SO TAHATS WHY PEOPLE ARE IN PROBLEMS IN WITH DRAWL FROM BANK AND ATM CENTERS.
    SO RESERVE BANK QUCKLY RELEASE THE 500 AND 1000 NOTES. SO THAT TIME PEOPLE ARE NOT FACE THE PROBLEMS IN WITH DRAWLS THE MONEY.BANKS OR ATM CENTERS TRASACTIONS ARE EASILY COMPLETED. SO CENTRAL GOVT QUICKLY PASS THAT NOTES.

LEAVE A REPLY