Black money

Wednesday, February 2, 2011

There has lot of hue and cry over corruption and black money over the past few days. By some estimates, Indians have the highest quantum of black money in the world amounting to nearly USD 1.5 trillion (1.5 times the GDP of the country). Instead of talking about how did this amount was allowed to grow and which political figure or bureaucrat has the maximum amount in black let’s ask some basic questions – Is there a way to get back the money? What can be done now to stop it?

I believe that the only way to get back black money is to have a Black Money Amnesty Scheme (BMAS). This will be similar to Voluntary Disclosure of Income Scheme (VDIS) launched in mid 1997 where around INR 7,800 crores were garnered for the exchequer. The controversial part of the VDIS was that it provided immunity from prosecution to all those who had evaded taxes in the past and had opted for the scheme. But you need to make such concessions as this single act was responsible for turning INR 33,000 crores to white. BMAS will have to be a more general amnesty scheme where not just tax evaders but also people who are involved in money laundering can come clean by disclosing their wealth by paying tax. This is a bargain which we must take as there is no political will to take action against such people anyway.

For the above step to be successful we need to make sure that other ways of converting black money to white must be made difficult as it is impossible to stop it completely. Also these steps should be efficient otherwise the operational cost will go up which is not desirable.

How to prevent further money laundering -

1. PAN number must be mandatory for all transactions above INR 50,000 and this should be made through a RBI gateway. The first part is already followed in many banks. This will ensure that easy tracking of money transfers. Also the corrupt people have to make lot of payments less than 50,000 to get his or her way. This would hamper their abilities in a big way.

2. Corporate governance standards must be improved thorough independent auditing. This is already done to a certain extent by independent auditors who check the books of companies every three years. Here government can set up a regulatory body that will have constitutional backing to carry out audits anytime. This independent watch dog can deter the bribe payers from paying under the table.

3. All Government schemes where money is involved must be made public immediately to avoid over pricing. Delhi Metro Railway Corporation (DMRC) already does it and so do many other government agencies. This can be made a norm rather than an exception. At least then any one can have a look and people can easily figure out malpractices, favoritism etc.

4. Make collection of money for elections transparent. This happens in US where companies declare the election fund they are giving to different political parties. Politicians need money to win elections and hence this acts as a big driver to involve in money laundering. By making donations transparent people with charisma and not necessarily wealthy politicians will be able to bring big money into political parties and have their voices heard.

5. Investment through benami accounts must be checked. This is a primary way of converting black money into white. We must allow only trusted third parties to invest in our country or at least one must get the list of investors who are involved. SEBI has almost curbed p-notes in the stock market. Similar steps can be taken in FDI also.

Don’t want to hurt sentiments of people who follow Ramdev Baba, but his idea of stop printing high currency notes is grossly impractical and will increase the transaction cost in India by a big amount. Also printing low currency notes is a costly affair for the RBI.


Anonymous said...

What about honest tax payers? Wont they feel cheated by such amnesty schemes. Rest of the stuff i agree completely

Chinmay said...

There are too many emotions attached with this issue, but lets keep them aside for a while.
First, I am not sure how successful 1997's experiment was because INR 33,000 is just a figure and not a percentage of total black money. Also, I think there has to be a demographic trend in type of people (type by job) who took advantage of VDIS. In my opinions these were not big guys. VDIS did not work in case of big guys, so I don't think something similar will work now.
The people who didnt care about tarnishing their image by accepting that they had black money preferred VDIS. However, politicians and big industrialist have lot more at stake than just money. I am skeptical.

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