Neither money nor manpower should remain idle.

A country develops when its capital and manpower are  fully utilised. In the past there was shortage of capital and it was utilized fully. However, black money was remaining mostly idle. Manpower was not fully used as there were not many avenues for employment. The best thing to have been done is allow black money holders to bring out the black money with some assurances and some concessions and encouragement. If this had been done there would have been no need to resort to demonetization.

Now what is to be done is to ensure that black money is not created by reducing corporate tax. Income tax rates are already low, compared to rates in many of the developed countries.

Demonetization- should it be put to plebiscite

There are different claims about the support or opposition to the scheme of Govt.of India of demonetization of Rs.500 and Rs.1000 currency notes being implemented by the Government. Opponents talk of the damage to the economy, the GDP lowering by a few percentage points with no success in bringing out black money, in eliminating fake currency notes or in eliminating corruption. And they also talk of untold suffering of the people, with no money to buy essential items of consumption and the loss of lives of several people. They demand withdrawal of the scheme. At the same time while admitting the sufferings of the people, the government asserts that the suffering is only for a short period, but there are long term gains in terms of elimination of black money, fake currency notes and corruption and assert that the scheme will continue. The issue being very important and serious, it should be put to plebiscite and the outcome of the plebiscite should be respected and implemented and no further discussions should take place on the issue.

Better ways to minimise black money than demonetization

There are better ways than monetization, to minimise black money. Some of these ways are;

1. holders of black money could be allowed to bring out black money with or without payment of taxes/penalties if they (particularly in industrially backward areas)set up factories which will give employment to certain number of people. By this scheme a number of people will get employment in construction of factory and in running the factory, transport etc . In a country where educated unemployment is large, this step will prove to be beneficial to the people/country. It will also contribute to government funds by way of licence fees, duties, taxes etc. The scheme to be successful, black money holders should be assured that no questions will be asked and no adverse publicity will be given.

2.Black money could be used for laying /widening roads, and the holders could be permitted to collect toll charges

3.Black money could be allowed to be used to construct new railway lines and run trains and/or be permitted to collect charges from those operating trains on the new lines.

Black money could be allowed to be used for other infrastructural projects

In these schemes the focus is on utilizing black money for the betterment of the country rather than punishing the holders. The wealth of the country is the combined wealth of its individual citizens. The gap between the rich and the poor can be bridged at a later date, when the country is well developed.

Inflation

Excerpts from “Simple Alternate Development Strategy”

. A large amount of foreign and international aid is received in India. The aid comes in the form of foreign exchange (cash) in most cases ( only in a few cases it comes in kind) and equivalent Indian currency is released in circulation in the country (or is used to import things). This means that the currency in circulation increases to this extent. India receives financial assistance from World Bank, International Monetary Fund, Asian Development Bank, foreign governments , their agencies like the Swedish International Development Authority(SIDA), , Overseas Economic Cooperation Fund of Japan, Danish International Development Agency (DANIDA), European Economic Community Overseas Development Agency, UN Fund for Population activities (UNFPA), UNDP, UNICEF, FAO etc. All this means increase in money circulation in the country. According to the authentic statistics published in newspapers, from February 94 to February 95, money in circulation increased by about Rs. 80000/- crores or by about 18% from Rs. 426,000 crores to Rs. 504,000 crores. The inflation was stated to be only 10% – 11%. The inflation would have been nil or much less, if production has increased correspondingly. Foreign aid is also received also for works which could be carried out without foreign assistance. For example buildings are built with foreign aid. Transport vehicles are financed from foreign aid. As stated, foreign aid in cash in effect, means increase in circulation of rupees in India. Inflation will be there whether currency notes are printed for conversion of foreign currency or for meeting developmental needs. But when increase in circulation of money leads to higher production, the inflation will come down to the extent of increase in production. If the value of production is more than the currency printed, there would be deflation i.e. prices would come down.

The foreign currency would be useful to facilitate imports, but why
should there be imports ? In the recent past, it is noticed that because of comfortable foreign exchange position, non-essential and luxury goods have been allowed to be imported. .(There are suggestions for liberalising imports of capital goods and other goods just to liquidate the foreign currency accumulations.) This has not in any way contributed to the country’s development. On the other hand, unrestricted imports of certain items have damaged the local industry, though for argument sake, it can be said that the imports provide competition to local producers to improve their performance. The competition could be provided by setting up more factories in the country. This may take some time but in the country’s life, one has to think of longer term strategies. If an industry’s performance has not been good for 40 years, or 50 years, it can remain so for another 2 or 3 years or 5 years, till new factories are set up in the country itself. The large scale imports recently of granite industry machinery prevented the development of local granite machinery industry in the country. India now has quite a large granite industry, but does not have technology for making machinery. By the large scale import of granite machinery, India has only helped Italy and other granite machinery exporting countries to not only increasing their production but also improving the technology. The same is the case, to a lesser extent of leather industry machinery.
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78. In early 1995 about Rs. 70,000 crores in foreign exchange reserves were there. For part of this money, currency notes have been printed. For instance, when a foreign company participates in the equity capital of a local company with cash contribution, or when Indian companies raise loans in foreign countries, the equivalent of the foreign currency is to be paid to the Indian company by the banks/ Reserve Bank of India. This definitely increases money in circulation.

An amount of over Rs.200,000 crore (Rs.2000 billion) is said to be unaccounted ( black) money with the people i.e. the money on the earning of which tax has not been paid. Only a negligible part of this money is in circulation. There is a suggestion for bringing this money into circulation after the owners of the money have paid tax. If the entire money comes into circulation, will it not lead to inflation ? The effect would be the same as printing this much of money and bringing the same into circulation. There cannot be anything different. ( There can however be a marginal variation in that , already a very small part of this money is in circulation but then lot of unproductive work is involved in calculating and collecting tax.)

It is quite clear thus, that bringing foreign money into the country or black money in circulation in India has the same effect as printing currency notes.

Some people may argue that for printing currency notes, we should have adequate gold reserves. There is absolutely no need for this. Gold is one of the several metals. It is valuable now, because people give importance to it. It sells between US$ 300- 400/- per ounce. Tomorrow, if people of India decide not to wear jewels, and do not buy gold, the price of gold will come down to less than US$ 300 per ounce. If the people of other countries like China , Pakistan, Bangaladesh etc. also decide not to buy gold, the price of the same will come down to less than even US$ 50/- per ounce. It is therefore clear that printing of currency notes should have no relation to the gold reserve.

Black Money- Government powers are limited

A lot of discussions,meetings, agitations etc are taking place in India asking the Government to bring back the black money of Indians to India. In this connections,there appear to be the following constraints

1. the money belongs to individuals In he normal course, only the owners can take the money from the banks, though the government can explore possibilities of freezing the accounts etc but then the government should have details. individual depositors or foreign banks will not disclose the details.

2. The money is not with the foreign governments It is with the banks in foreign countries. Government of India can only negotiate with the foreign governments and not with the foreign banks as the banks would not negotiate with any one except the depositors Foreign governments may not be able to interfere with the banks without enacting new laws.

3 even if foreign governments enact laws to empower themselves to ask their banks to transfer the money to any bank in India, the foreign banks may not agree. the banks may go to the courts. courts will take into account the laws in existence at the time of deposit of the money.

From the above, it appears that it may not be easy for the government to bring the black money to India. But the government can certainly encourage those who have black money abroad to bring the same to India, by waiving punishment, penalty and also offering lower rates of tax. For example government can announce that the black money can be transferred to India and that those who transfer would need to pay tax of only 20% or 25% and that no questions would be asked. Since the deposits in foreign banks carry no or very low interest, most of the depositors would be willing park their money in Indian banks which pay nearly 10% interest.Unlike in the past,foreign exchange is easily avialable for all legitimate purposes. And also as the Indian Rupee is fairly stable, there is no particular advantage for majority of the people to keep their money abroad. Considering all these,some depositors may not mind paying a penalty/higher tax of 35% or 40% or even more)