ISSN (O) : 2456-6675, ISSN (P) : 0972-8058

BOOK-SCAN
Title: Understanding the Black Economy and Black Money in India
Author: Prof. Arun Kumar
Publisher: ALEPH Book Company. Effulgence
Vol. 15 No. 2
Date: 6 Feb., 2017
July-December, 2017
Rukmini Devi Institute of Advanced Studies
E-mail : [email protected], Website : www.rdias.ac.in
http://effulgence.rdias.ac.in/user/default.aspx
https://dx.doi.org/10.33601/effulgence.rdias/v15/i2/2017/107-109
Dr. Tripti Toor Bajpai

INTRODUCTION country and only 3.5 per cent of the black income
generated in 2016. Even if the government managed
to suck out all the black cash in circulation, it would
I t is a short, kindle-size book of 112 pages, where
he has brought to fore many diverse facets of
black money in our country and make some very
not have much effect on the black economy which
involves various activities in which black incomes
are generated. It does not stop these activities from
fascinating observations. The book is an insightful
continuing. Moreover, 80 per cent of the Rs 500 and
read for the simple reason that it narrated in a very
Rs1, 000 notes (which constituted 86 per cent of the
comprehendible and common man language
cash in circulation) was not black money, but rather
keeping the in-depth economic analysis of the
white money used by businesses and common
complex phenomenon of demonetization to be
citizens. Not only do a vast majority of Indians, rich
understood by all effected.
and poor, use cash and not credit cards for daily
financial transactions but businesses need it for
On 8th November, 2016 the government announced
working capital to buy raw materials, pay wages and
the demonetization of all Rs 500 and Rs 1,000 notes
other requirements for production and sales. What
citing two reasons — it wanted to eliminate
made the situation worse was the inept execution of
counterfeit currency used by terrorists and
the demonetization scheme. If over 85 per cent of a
smugglers, and it wanted to destroy the black
country's currency is demonetized at one go,
economy by forcing the 'de-hoarding' of cash held by
replacing it will take months if not years. The
those generating black income.
capacity to print notes is limited, especially if smaller
denomination notes are required. ATMs had to be
Prof. Kumar has completely appreciated the
reconfigured to take in the new notes (as they were
objectives of the government, but according to him
of different dimensions than the ones they were
the scheme was imposed on the country with little or
replacing) and this apparently was not thought of
no forethought. First, it must be understood that the
and took much longer than anticipated. To top it was
black money the government was targeting is only
the sloppiness of execution .The book points out is
about 1 per cent of the black wealth held in the
the fallacious thinking behind the scheme, including

Associate Professor, Rukmini Devi Institute of Advanced Studies, [email protected]

 ISSN (O) : 2456-6675, ISSN (P) : 0972-8058

following factors - account is that each counterfeit note can only be

used by a terrorist once to finance terrorist
• Only a small amount of the black economy activity; counterfeit currency is therefore
would be affected by the demonetization… constantly being generated and the onetime
• Much of the money that was demonetized was extinguishing of counterfeit currency does not
not black cash. solve the problem. Moreover, if the old notes
• According to the Pew Research Centre, in 2015, could be counterfeited it is likely that the same
only 22 per cent of adults in India had access to will happen to the new notes. It must also be
the internet. This means the vast majority who understood that terrorist activity is not just
do not have access to the internet will be unable financed with Indian currency; it can be and is
to use online banking. fuelled by dollars, gold, diamonds, drugs and so
• Only 17 per cent of Indians have access to smart on. Terrorism is a continuing problem, not a one-
phones and consequently to mobile phone off thing.
banking.
• In a population of 1.3 billion and counting, there The book concludes that the demonetization scheme
are 24.5 million credit cards and 661.8 million will not solve the problem of the black economy.
debit cards. A fairly large number of Indians do Rather, we see that the economy has been impacted
not have access to credit or debit cards. Most in a different manner. The livelihoods of the poor
small businesses do not have card readers so the and small traders who depend overwhelmingly on
cashless economy the prime minister and his cash have been especially hit hard. They have had to
cheerleaders have been talking of cannot become cut down expenditures, leading to decline in
a reality overnight. demand across the economy. The well-off sections
• It is unlikely that black marketeers and other facing uncertainty have also become judicious and
generators of black money will suffer because discretionary in their spending expenditure on
the biggest fish were able to quickly convert things like white goods. All this has impacted
whatever black cash they had into white. Some agriculture, services and industry. As the profits of
of the avenues used, according to media reports, industries decline, they may not be able to pay their
were the purchase of jewelry, cash donations to loans soon so that the NPAs (nonperforming assets)
temples, conversion of old notes to new notes in banks will rise. As a result of this, the capacity of
with the connivance of corrupt bank officials and the banks to lend will decline further. Businesses
circulation through the Jan Dhan accounts of the facing excess capacity and uncertainty have also cut
poor. In other words, despite the massive back investment. Ever since demonetization was
exercise of demonetization, the total amount of announced, unemployment has risen, investment
black cash that has been demobilized is very has fallen, banks are facing difficulties and the crisis
small. in agriculture has been aggravated in spite of a good
• It was not explained why, when high currency monsoon. All this leads to the emergence of almost
notes were being demonetized for being the recessionary conditions in the economy.
choice of currency for black income generators to
hoard — currency of even higher denomination Deposits by people in banks is a temporary deposit
(the Rs2,000 note) was being introduced. Surely, and can only be seen as short-term lending although
this would be even easier to hoard? it was believed that when banks become flush with
• Anticipations were that the scheme would funds they could give these out as loans. It was
nullify the counterfeit currency which is thought argued that interest rates could be lowered so as to
to be used to finance terrorist activity. However, boost investment. But as soon as enough cash is
what doesn't seem to have been taken into available people will withdraw their money. Further,

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the bankers were too busy dealing with cash and sections of the unorganized sector may move
handling serpentine queues, to focus on lending. towards using less cash. The government is pushing
Regarding lower interest rates leading to an increase hard for it and so are the companies involved in
in investment, this is unlikely to take place since electronic banking and related financial companies.
when capacity utilization is low, investments do not Even though all this will take time, it could help
take place. In the US, Eurozone, etc., in spite of make the economy more efficient in the medium run.
interest rates being close to zero, investment did not The proponents of this move expect that people
revive for a long time after the 2007 economic using electronic transfers of money will leave a trail
meltdown. which will make it more difficult to generate black
incomes. If this comes about, the demonetization
Further, it has been argued that the budget could would have been of some use, but all this lies in the
stand to benefit through increased tax collection as future and there is no guarantee that it will happen.
the black economy declines. However, as explained, Moreover, this move could have been initiated
the black economy is unlikely to be impacted by independently of demonetization and with adequate
demonetization. Even if there is an effect, it will be preparation.
not very significant. The bigger impact is likely to be
the advent of recessionary conditions and a decline The book concludes that the demonetization scheme
in production and incomes which will adversely has had deleterious short, mid-term and long-term
affect tax collection, leading to an increase in deficit effects. Meanwhile, illegal activities, black markets
and additional problems for the government. and real estate scams, the production of spurious
drugs, capitation fees and various other components
Nevertheless, there could be some benefit over the of the black economy will carry on albeit, after a brief
medium term. The organized sector and some hiatus.

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