Black Money - Who's responsible to avoid this

Hello friends.... Happy to be back with yet another blog.  Time permitting and my mind working as well as it should,  decided to bombard you all with a new blog every week.😃

We all understand and agree that Black Money is one of the biggest problem in this country and we all scream that the Government should do something to eradicate black money.

This blog can be considered as a sequel for my previous blog on Demonetization, which can be found at: https://eskay-blogs.blogspot.com/2018/09/demonetization-was-it-right-thing-to-do.html

The common misconception among general public is that black money is mainly being hoarded by politicians, cine actors and such.  Aren't there common man, with whom we interact on a daily basis, who's earning in black and do not disclose the actual income to the Government?

Let us see some of the statistics about Income Tax before we get into the specifics of how common public also involved in the generation of black money.

As per the Chairman of Central Board of Direct Taxes (CBDT), for the FY2017, total number of Income Tax assesses in India was around 6.26 crores.  Earlier year (FY 2016) it was only around 4 crore.  So, for FY 2017 there has been almost 50% jump in the number of assesses (source: https://www.deccanchronicle.com/business/economy/250717/number-of-taxpayers-in-india-goes-up-from-4-crore-to-626-crore-in-fy17.html).   

Out of this 6.26 crore assesses, only about 24.40 lakh individuals/entities have declared their income to be in excess of Rs.10 Lakh a year (that's only 3.90% of the assesses earn more than Rs.10 lakh a year).  The other factor to wonder is total number of cars bought by Indians in 2016 (since we are considering the IT returns for FY 2017, I am taking the figures for 2016) was 36.69 lakhs.  Out of this at least about 40,000 cars are high-end luxury cars.  Don't we think there's a disparity here between what assesses declare as income compared to what they spend?

Now, the concept of Black Money and the huge sums held in black money are unfortunately not new to India.  Below is the statistics of black money estimated in India:

• FY 1975-76   -  Rs. 11,870 Crores (about 18% of India's GDP)
• FY 1980-81   -  Rs. 23,678 Crores (about 20% of India's GDP)
• FY 1983-84   -  Rs. 36,784 Crores (about 21% of India's GDP)

The above figures are from the White Paper prepared by the then Finance Minister Mr. Pranab Mukherjee in May 2012 in a 108 page document and submitted in the Indian Parliament based on RBI's white paper submitted to Finance Ministry. (source: http://www.prsindia.org/uploads/media/White%20Paper%20Black%20Money/WhitePaper_BackMoney2012.pdf).  The best part is after submitting this report in May 2012, Mr. Mukherjee was removed from FM post in June 2012.  I think it should be a coincidence!!!

RBI's white paper submitted to Finance Ministry and Indian Parliament regarding Black Money, ways to curb black money and other details can be found at: https://www.incometaxindia.gov.in/Communications/Circular/910110000000000365.htm.  This study is almost in line with the above referred White Paper submitted by Finance Ministry.  This white paper by RBI is almost about 50 pages long.

For the FY 1994-95, India's black money was estimated at Rs.1,10,000 Crores (by Parliamentary Standing Committee on Finance).  Prof. Madhu Dandavate (then Dy. Chairman of Planning Commission) estimated this figure to be Rs.80,000 Crores.

Dr. Poonam Gupta and Sanjeev Gupta conducted a study and concluded that NIPFP (National Institute of Public Finance and Policy) has underestimated the circulation of black money and have stated the following to be the 'best estimate' of black money in India (source: http://www.yourarticlelibrary.com/india-2/black-money/parallel-economy-and-estimates-of-black-income-in-india/63014/):

• FY 1980-81  - Rs.    50,977 Crores (41.70% of GNP)
• FY 1983-84  - Rs.    85,208 Crores (45.80% of GNP)
• FY 1987-88  - Rs. 1,47,297 Crores (51.70% of GNP)

You can search the Internet and see which party was in power and who was the Finance Minister during these periods.

If we have to blame a particular political party for black money in the country, during the above periods the country was ruled by Congress.  As you can see from the data, Black Money in India grew exponentially during the Congress Government.  Black Money monster was created and later no government were able to beat the monster.  I leave this at this as I don't want to get more political.

Currently, India's black money is estimated at Rs. 37,94,530 Crores, which is about 25% of the country's GDP.  As India's economy was growing, black money also grew.  The only comforting data in this is black money was 21% of GDP in 1983-84 but only 25% in 2015-16 even though the volume of money is quite huge (as the economy grew).

We can categorize the black money in two parts for better understanding.  To do this, let us consider black money in following two categories:

1. Large lump-sum money taken by politicians and others as kickback for various things.  This type of money mostly never enters the black economy.  Normally these are big sums (like 500 crores, 1,000 crores, etc.).  This money is deposited or invested in foreign countries, which are tax havens and do not ask any question about the source or origin of fund.  These kickbacks are common Indian public's money and could have very well been spent for India's development.  The only advantage (the better of these two evils) is that, this money is not in black economy and does not multiply within the Indian economy.
2. The second part is the black money held by individuals, companies, corporations, etc.  This type of black money is used in everyday business transactions.  As people/companies/traders do business with this black money, it earns them profit and such profits (again profits are also black money as nothing is recorded in book and are cash dealings only) are again reinvested in business thus the black market economy keeps growing and competes with the country's GDP.

To understand the quantum of black money stashed abroad (as described in point # 1 above), see below:

An estimate by Washington-based research and advocacy group Global Financial Integrity in its report "Illicit Financial Flows from Developing Countries: 2003-2012", suggests that around US$ 439.60 billion of black money left Indian shores, between 2003 and 2012.  US$ 439.60 billion is equivalent to Rs. 26,38,000 CRORES.  This is during a nine year period between 2003 and 2012.

Out of this Rs.26,38,000 Crores at least 95% of it would be the money sent abroad by politicians and their families.  The balance 5% could be from big corporations and business houses.  If this much volume of money was sent in nine years, what would be the total quantum of black money stashed abroad since Independence???  (source: http://indpaedia.com/ind/index.php/Black_money:_India).

Now, for the black money in circulation within India (parallel economy), let us consider the following:

Total earning population in India (employed and self-employed put together) is around 67.72 crore out of this about 16.42 crore is engaged in Agricultural sector and hence we will leave them from taxable income group.  That leaves us with about 51.30 crore earning individuals in this country.  If we have only 6.26 crore assesses, that's only 12.20% of the earning individuals in this country.  Are we saying 87.80% of earning individuals earn less than Rs.2,50,000 a year (if you earn Rs.2.50 lakh or less per year, you need not pay tax)?  I don't think this is true.

Now, coming to our blog topic, how all black money is generated and in what sectors.  Let us ponder the below:

1. Real Estate / Construction: The first and foremost sector were lot of cash deal happens is real estate.  To a greater extent we have to blame the Government also for this as the property value is grossly undermined as per government records.  The properties do have "Guideline value" and "market value".  Guideline value is the value for the property in that particular locality fixed by the Government.  In most cases, guideline value is about 50% to 70% lower than the market value.  As buyer, you cannot register the property for actual value as it will be far higher than the guideline value.  So even an honest person is forced to deal in black money.  This is the reason real estate market took a big hit after demonetization.  For calculation purposes, let us conservatively assume only Rs.10,00,000 Crores of black money is involved in this industry.
2. Private Loan sharks: A lot of small businesses/individuals and others borrow money from local loan sharks.  The interest rates charged by these lenders varies from about 3% per month to about 8% per month.  Let us assume an individual loan shark has Rs.5,00,000 to lend and he lends this money at 5% interest per month.  In a year his Rs.5 Lakhs black money would have earned him Rs. 3 Lakhs in interest.  So by end of the first year, he has Rs.8 Lakhs black money.  If he keeps lending money (including the interest earned), within 3 years, his initial black money of Rs. 5 Lakhs would become at least around Rs. 15 lakhs or more.  Let us assume in entire India we have only about 1,00,000 such private loan sharks and assume they each have only about Rs.15 Lakhs, that's about Rs. 15,00,000 Crores of black money (again this is a very conservative estimate).
3. Professional fees in cash:  The biggest section of professionals who prefer the fee to be paid in cash are advocates.  As per Bar Council of India (BCI), it is estimated that India has about 15,00,000 lawyers.  On an average, let us assume even 50% of them take Rs.500 (bare minimum) per day in cash as their fee and only 100 days a year this happens (very very conservative estimate).  This will work out to Rs. 3,750 Crores per year.  Do you think this much amount received in cash is declared by these lawyers as their income and proper tax is paid?  Another scary data is that, as per BCI, at least 20% of the lawyers practicing in India are fake and do not have proper degree (or completed it).  This was informed to Chief Justice of India by BCI.   You can now guess the amount of black money only this section of the society is creating every year.
4. Other consultants / professionals: In a big country like India, there are many number of professional consultants viz., Sales Tax Consultant, IT Consultant, Chartered Accountants, agents for customs and the like.  Let us assume India has about 3,00,000 such consultants (CA's alone are 1,25,000 who are in full-time practice) who provide various service to the business community and individuals.   Let us assume these professionals/consultants, on an average, take Rs. 250 a day and work only for about 200 days in a year.  That's about Rs.750 Crores a year by these professionals.  This is a bare minimum and very optimistic estimate.
5. Restaurants / Dhabas and other eateries: As of 2010, it was said that the reported turnover of restaurants and hotels in India was Rs. 43,000 Crores with a growth rate of 15-20% every year.  Of course, this does not include the roadside eateries / Dhabas and other small outlets.  Let us assume that India's current spending in restaurants and other eateries are around Rs.50,000 Crores (as reported to authorities) and I would strongly believe that there will be at least 15% of this as unreported sales.  That's about Rs. 7,500 Crores a year as undisclosed sales (in cash).  Many small roadside eateries and fast food joints do good business and for our estimation let us consider it is only around 50,000 such eateries in the country and each one of them make about Rs.500 a day in profit (cash sales).  That's about Rs. 912 Crores a year in black money.
6. Cinema Industry:  This is another giant of an industry revolving in handling a lot of black money.  Not just the highly paid actors but also the producers and others.  There are private loan sharks who offer finance to the film industry at an exorbitantly high interest rates, as high as 15-20% interest a month.  As of 2017, Indian Film Industry was valued at a Rs. 19,200 Crores.  This is only the official estimate and does not take into consideration the amounts paid and received in black.  It would be very safe to assume that this industry (to the actors, loan sharks, etc.) at least contributes Rs.3,000 to Rs.4,000 Crores a year in black (about 20% of the value of the cinema industry, which is a conservative estimate).
7. Logistics Industry:  In this category, let us forget about all other components of the logistics and concentrate only on the transportation part.  As of 2013, India's road transport network contributed about 4.90% of the country's GDP.  Remember, India's worst growth of GDP was for the FY 2012-13.  If Road Transport industry (mainly private owned as Government owned Road Transport network is very minimal) contributed 4.90% of GDP in FY2012-13, it should be around Rs. 7,43,727 Crores a year.  Let us assume these transport companies have hidden only about 5% of their turnover from the authorities (got paid in cash and didn't declare in the IT returns), it will be around Rs. 37,186 Crores a year.  Again, this is a conservative estimate as number of transportation companies operating in India are quite high.  Refer https://web.iima.ac.in/assets/snippets/workingpaperpdf/12319057932015-12-02.pdf for some good "bedtime reading" prepared by IIM, Ahmedabad to understand the Indian Logistics industry better.
8. Small Businesses: This category is probably the huge in terms of number as I want to cover the corner provision store, tea shop, supermarket, private transportation business (non-goods carrier) and the like.  Let us assume there are only about 1,00,000 such entities in India, who's daily profit is in the range of Rs.500 and do not disclose their actual turnover/profit to the Government.  This alone makes it about Rs. 1,825 Crores a year in black money.

After reading this far, you all would agree that the above are all quite a conservative estimate.  We have not included few other categories of professionals, like doctors, in our calculation above. Without going into any further division of businesses dealing in black money, let us consolidate the above sections of the society and see how much black money is being generated a year.

From above, it is evident that about Rs.25,48,423 Crores of black money is generated and in circulation in a year by the industry.  Looking at the statistics I have provided in my earlier blogs (average black economy in India is estimated at Rs.37,94,530 crores), I now confidently believe that this figure is conservative and I won't be surprised if black money generated in these sectors are much more than what I have estimated here.  As every figures has the keyword "estimated".

Now, as you can evidently see apart from politicians, there are lot of common public involved in creating this black money and we can't keep blaming the Government for everything if we, common public, are involved in creating/helping to create black money.  We, common public, have to understand that black money has very big negative impact on the country's economy and we look up at the Government for everything.  If we need the Government to provide a-z of our needs, then it's our duty to ensure we declare our actual income and pay the government the statutory dues as it generates more revenue.

As a friend of mine said, there's no point in talking about the problems and giving facts and figures to substantiate the problem.  Rather, we need solutions so that black economy has been considerably reduced quickly, which can help the nation in a big way.  Below are the measures I feel the Government and common public can adopt in order to curb this monster which is threatening our country.

• Real Estate - Government should come up with policy of removing the guideline value, market value and such.  If I own a property and I want to sell it for Rs. 2 crores and buyer is willing to pay me that price (even though guideline value is only about Rs.1 crore or so), I should be able to sell it for Rs. 2 crores and register the sale for full amount.  In order to implement this, Government should also reduce the stamp duty for registration of property sale.  Instead of current 7%+1% (in Tamil Nadu), let the Government say the buyer has to pay about 2% of the value of the property.  This will definitely help the common man a lot.  An average person who wants to apply for a loan and buy property (they are the majority in this country) will benefit a lot as banks will give only about 80% of the registered value of the property.  I believe there are quite a few individuals who will agree and will happily do this if implemented by Government.
• Income Tax - The current slab of no tax for income of Rs.2,50,000 or less a year should be raised.  We all know a family of three (husband, wife and a child) cannot live comfortably with an income of about Rs. 21,000 a month, particularly in urban areas.  For example, in Chennai city a decent house will cost you about Rs.8,000 - Rs.10,000 a month in rent.  If you have to pay 50% of your salary/earning a month towards rent, what will be left to run the family?  The system of Income Tax should get a complete overhaul as there are far too many parameters involved.  Let us assume, that I earn about Rs. 25,000 a month and have four dependents and my neighbor earns the same but have only one dependent, is it fair for us both to pay same tax?  I will have to borrow money to pay tax (same applies between same income individuals living in urban and rural area).  So, to be fair on the common public and to generate more revenue to the Government, the system of taxation have to be completely overhauled (many Western countries do follow taxation based on your marital status, dependents, etc.).  This will need a lot of time and energy, even by the Government, but I believe if done, will benefit the Government and common public in the long run and far too many people who evade tax today (because they can't afford it), will happily declare the income and pay. 
• Digital Transactions - Common public should try and use digital payments as much as possible (credit/debit card, online payments, payment gateways like PayTm, Airtel Money, etc.).  If we start this practice with many small outlets like restaurants, supermarkets, etc. we can reduce number of undisclosed transactions by them.  When they collect cash and do not disclose it, they just don't pocket the money we paid for goods but also the taxes they collected with it, so it's double dipping by these establishments.  It's very common that many people have debit/credit cards.  As of January 2018, Indians were having 3.62 crore credit cards and about 84.67 crore debit cards.  In order for public to use Debit/Credit cards more, Government should consider reducing bank charges for usage of debit cards and also lower the minimum balance requirements, even make the SB accounts as zero balance accounts.  Electronic payment options and payment through debit/credit card have increased significantly post demonetization of Rs.500 and Rs.1,000 notes (source: http://www.mbauniverse.com/group-discussion/topic/business-economy/demonetisation).  If we start using electronic payment options more and more, instead of cash, it will reduce black money generation quite considerably.
• No more high denomination currency notes - This may sound ridiculous but actually it will be very useful to do away with Rs.500 and Rs. 2,000 notes.  Rs. 200 note should be the high denomination note of Indian currency.  If we have high denomination note like Rs.2,000 it is very easy to carry Rs.4,00,000 (for example) as you can put 1 bundle of Rs.2,000 note in each pocket of your trousers.  Similarly, in a person's wallet it's very easy to carry around Rs.20K to Rs.50K with high denomination notes.  However, if Rs.200 is the high denomination note, imagine loan sharks roaming around with suitcases to carry Rs. 5 Lakh or so which they want to lend at high interest rates.  Doing this will also reduce the exposure due to fake notes.  If 100 fake notes of Rs.2000 notes enter Indian market, that Rs. 2 Lakhs, whereas this is not possible when high denomination note is only Rs.200.  Also, number of fake currency note printers will reduce as producing lower denomination note to match original quality will be expensive.  USA does not have dollar bill beyond $100.  Euro has only 200Euro note as highest denomination (they are withdrawing 500 Euro bill in circulation this year).
• Regulation on cash withdrawal/deposits in bank account - Government should impose restriction for cash transaction in bank accounts based on the minimum balance maintained by the account holder.  For example, if the average monthly balance in my business account was Rs.1 Lakh, I should not be allowed to withdraw or deposit more than Rs.50K in cash (50% of the minimum balance).  Again, this has to be dynamic depending on the size of the business unit and balance they hold in their account. This way, it can ensure suddenly I do not deposit a large sum of money claiming to be business earning or able to withdraw a huge sum to pay off some 'under the table' transaction.
• Establishing more banking facility - Much more banking channels should be open and accessible to the general public, particularly in rural areas and huge markets in India to make them deposit all cash sales money in their account before leaving the market.  The reason I am suggesting this is, on an average Koyambedu Wholesale market in Chennai (fruits, vegetables, flowers and provision) has a turnover of around Rs. 3 to 4 crores per day.  I would assume at least 90% of this (if not more) is cash sales.  Which means, the traders from this market walk away everyday with about Rs. 2 to Rs. 3 crore in cash!!!! Instead, Government should ask the vendors to deposit the cash daily in their account, which is linked to their PAN and AADHAR.  If one market in the country has cash sales of about Rs. 3 crores a day, imagine what will be amount when we consider overall India.  So, make things easy for vendors to deposit cash and probably even offer some incentive (like subsidy we get for paying fuel bill with debit/credit cards).
• Link all ID's into one - Since AADHAR card has been introduced and have become mandatory for many things, all Government related ID's such as PAN card, Driving License, Voter ID, Debit card and such should be linked to AADHAR.  So, for any transaction all you need is your AADHAR card.  With the current technology, it is not impossible to implement.  If you have multiple bank accounts, you should be given choice at the ATM to choose the account from which you want to withdraw or deposit.  This can also avoid people getting multiple credit cards using various means of address proofs and later not paying the dues to the bank issuing the credit card.

These are just a few major steps we need to take in order to put a clamp on the black money.  It's a huge monster in India and the fight against black money is not going to be an easy one.  If we control the amount of money in circulation in cash, automatically many other things will fall in place as people do not want to hoard huge amount of black money in Rs.100 and Rs.200 denominations.

Now, as I stated earlier, a common man with not much of experience/qualification in economy can suggest some ideas here, doesn't the brilliant minds of economists and financial experts in the Government doesn't know the measures to effectively control the black money?  I believe they do and I think nobody in the political system wants to start this as they are afraid of losing the vote bank as black money hoarders and people circumventing the system to evade taxes are becoming a majority.  So, as I always believe, this revolution against black money should also start from public to force the Government to implement measures to curb black money.

As I mentioned earlier, any economic decision in a vast country like India is not going to happen overnight and we may not see positive results for about two years.  However, given the seriousness of black money in India, it's high time we take these steps to initially control and gradually to eradicate black money.

Black Money in India has gone much deeper into the system.  Efforts to control and remove black money, which has so deeply engrossed in the economy is going to be a very painful process but this painful surgery is much needed to save the patient (Indian economy).