Tag Archives: 500

Money Legally Laundered

November 8th, roughly around 8 pm, the Indian PM Narendra Modi is addressing the nation via the electronic media. The conversation is veering towards a general statement with the tone and manner of fighting corruption and the black money and bringing transparency in to the system. Most of us will admit that we have heard Mr. Modi speak about this and we are kind of used to the drift of the address – general statement, a bit of banality and nothing in specific. But then those statements were building up to the operative theme of his address – Rs. 500/Rs. 1,000 would cease to be legal tender from November 9th 12.00 am onwards. There were just 4 hours given to anybody who was a somebody to do what he can choose to.

These two currencies are estimated to make up about 85% of the entire cash in the system amounting to around 15 lac crores. By abolishing them, Mr. Modi had sucked out bulk of the cash from the system and the black marketeers or cash hoarders were left to fend for their ill-gotten wealth. It is estimated that in those 4 hours (so to speak) the amount of gold (jewellery or units) sold was much higher than what was sold on Dhanteras 2016. The ‘so to speak’ is essential since there would have been more than a few jewellers who would have sold their wares by back-dating the invoices. Now there have been numerous articles in the newspapers saying that this demonetisation is not going to help much since everybody who is anybody and has a stash of black money doesn’t necessarily keep it in paper. He invariably looks to hedge and pick up either real estate, foreign currency or gold. This might be true but then there is strong complementary benefit of demonetisation even though we are not able to get our hands on the supposed black money hoarders or their ‘invested’ stash. The biggest complementary benefit that would accrue to India is that the cash has come back home to issuer i.e. the money – black or white has come back to the system.

That is one hell of a complementary benefit for the action. Perhaps, the complementary benefit was the main reason why the action was taken in the first place. The Modi Government is well aware of the wherewithal of the black money hoarders and the ingenuity and ‘jugaad’ with which they would hanker to save their ill-gotten cash. So the main objective would never have been to net these black marketeers but to net the cash that is swishing around outside the formal system. So even if a black money hoarder bought gold on the 8th of November, the jeweller who chose to sell him will have to declare the money, since him not choosing to do so makes the cash he holds invalid and illegal and so is the case with a real estate developer. Let all and sundry accept the ‘illegal’ tender after the 8th of November, but it has to somewhere surface in the system in one form or the other or else it is just worthless piece of paper. It is a foregone conclusion that the Income Tax for the quarter till December is going to see a serious bump up.

Perhaps the black marketeer feels that he doesn’t want to buy gold and then look to carry the commodity on him (adding another dimension that will be discussed a bit later). He is confident enough to game the system and deposit the cash in the bank – either via money mules, mother/daughter deposit, extra sales in the on-going financial year or Jan Dhan Accounts – yet the complementary benefit holds true. The amount that was hitherto out of the formal system has come back to it. It is another issue whether the money was unaccounted for and the Government has the option of hounding the person and hauling him on live coals if he is detected. So, if we take a very conservative estimate of 20% being the unaccounted money (some experts estimate it to as big as 35-40%) of the total amount of 15 lac crores held in 500/1000 notes then we are looking at a figure of some where close to 3 lac crores. 3 lac crores or about more than 50% of the fiscal deficit of India for FY 2016-2017. There are a whole host of attendant benefits – the Government will have to borrow less thus not crowding out the private sector, has the wriggle room to spend more and to add to it there is the strong possibility of the banks reducing interest rates due to they being flush with money. Let us not even dwell on the fact that the liability side of RBI will be extinguished proportional to the amount of cash not returning back to the system and an equal amount could be transferred to the reserves and thus adding a hefty dividend to the Government. There are various opinions on the do’s and dont’s or the modality of this transaction and the most vociferous of that lot is a former FM who is supposedly trying to bring the negative view of other world central bankers if such a transaction were to take place. Anyways it is again a foregone conclusion that the Government of the day is going to use this bonanza to reduce it’s fiscal deficit – no two ways about it. There might be any form of balance sheet trickery or statement of accounts skull duggery that could be employed but the Government is going to take that money under its fold – let all economists or finance ministers or eminent personnel wail and cry foul as much as they want.

One more upshot of all this is and it is clear that the Government will not stop at this. There is more to follow. It is going to be a pincer attack on the black money – in all forms. There is going to be a crackdown on benami property transactions – it is already being touted as the next move by the PM. There is another aspect that is yet unfurled but could be in the offing. The Government in due course will come out with a notification that it will be mandatory to operate the bank lockers in the presence of a revenue officer or an IT person. There is a goodish chance that this will come out post 30th December when every body has had the chance of changing, depositing the old legal tender. Perhaps, a bit later around February/March 2017, when most of them have been lulled in to no action on the bank lockers front. All the black money that has been used to buy gold or has been bought up until now has to be accounted for somehow and that is the other dimension in purchasing gold that was spoken about earlier. A certain leeway on the amount of gold that a person holds would be allowed and for the rest, receipts and the income trail would be expected.

Thus, the black money crackdown is expected to come half circle i.e. cash, real estate and gold. The other half is of course the political funding that is hitherto unscrubbed and untouched. The PM did mention about state funding of elections but then it is to be seen if and ever such a move would take place.