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have you ever thought about how these terrorists get their
money? Enemies from across the border run their operations using
fake currency notesMany times, those using fake five hundred
and thousand rupee notes have been caught and many such notes
have been seized (PMO 2016).
The third claim is that the unearthed black money would expand
the fiscal space of the government. One, when unaccounted cash is
not returned to the banking system, the Reserve Bank of India (RBI)
can use the savings to pay the government a dividend. Two,
unaccounted cash that is voluntarily disclosed would be subjected
to a 50% tax as per the Taxation Laws (Second Amendment) Bill,
2016. Unaccounted cash not voluntarily disclosed but detected by
tax authorities would be subjected to a 75% tax. Further, the
declarant would have to deposit 25% of the undisclosed income
into the Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS)
2016, which would be used to finance programmes of irrigation,
housing, toilets, infrastructure, primary education, primary health,
livelihood, etc.[i]
Counterfeit Currency
Black Money
In fact, the idea that only illegal holdings of cash lubricate the black
economy is itself misplaced. This presumption has not only
infiltrated the public discourse but has also seeped into some of
the academic work on the subject. In his much-quoted work on the
subterranean economy of the United States (US), Gutmann (1977)
chose a base period in which he considered the size of the black
economy to be negligible. The currency-to-deposit ratio of the base
period was then applied to the deposits in 1976. Such a method
gave him an estimate of the legitimate currency requirement in
1976. The ratio of GDP-to-legitimate money (legitimate currency
plus deposits) multiplied by the currency stock in excess of its
legitimate requirement, then, gave Gutmann his measure of black
income in the US.
The problem, however, is that transaction balances used for
generating black income need not be undeclared or illegal. For
example, a firm can declare cash in its balance sheet and then use
it to procure inputs at inflated prices from an associated firm that
operates from a low tax jurisdiction. The profits can then be
ploughed back into the firm, say, via the foreign investment route.
The expansion of liabilities that results may, at least temporarily,
cause the firm to hold even larger amounts of cash. In this case,
there is nothing illegal about the original holdings of cash or their
subsequent augmentation. In fact, since transaction balances are
held legally as cash, they could well be held as deposits. The
example, therefore, shows that bank deposits can also finance
black activities. This, of course, goes against the very grain of what
Gutmann suggests and what the current Indian government would
have us believe.
In the days soon after 8 November, the buzz in policy circles was
that demonetisation would extinguish close to `3 lakh crore of
RBIs currency liabilities. The enlarged net worth of the RBI, it was
hoped, could then be transferred to the government in the form of a
special dividend. The legal permissibility of such a transfer was a
matter of speculation for almost a month after the announcement.
However, two points may be noted in this context. First, the transfer
of extinguished currency as dividend to the government was ruled
out by the RBI itself. Urjit Patel, the RBI Governor, clarified on 7
December that the withdrawal of legal tender characteristic status
does not extinguish any of the RBI balance sheets ... They are still
the liability of the RBI. Secondly, as on 10 December, an amount of
`12.44 lakh crore in the old series of notes had already entered the
banking system. The public had time till 30 December to deposit
old notes with banks, and they could continue to submit old notes
to the RBI until around March 2017. In other words, there is likely to
be very little money left with the RBI to extinguish.
Given that the dividend route is closed, the government would bank
on the second version of the Income Disclosure Scheme (IDS) to
improve tax collections and enlarge the kitty of the PMGKDS 2016.
However, one wonders why such a scheme could not have been
announced without demonetisation. Perhaps, demonetisation has
armed the government with evidence on big ticket deposits that it
can use to confront tax evaders. Yet, why would anyone deposit a
large sum into a bank after 8 November and invite scrutiny from tax
authorities? According to news reports, people may have split their
large hoard of cash into smaller parcels before converting them
into deposits. The tax authorities now have the unenviable task of
establishing the trail from the original hoard of cash to multiple
small-ticket deposits in the millions of accounts spread across tens
of thousands of bank branches.
Less-cash Economy
Finally, cash leaves no trail, while digital payments leave a trail. For
this reason, the potential for state surveillance, violation of privacy
and abuse of civil liberties rise significantly with the replacement of
cash payments with digital payments. New sources of metadata on
everyday transactions of citizens are emerging; big data analytics
is increasingly becoming big business. Such personal data of
citizens turn into commodities in the grey markets, resulting in a
breakdown of trust between the state and its citizens. While strong
laws on privacy and cyber-security exist in many Western
economies, Indian legal system is marked by the absence of such
legal safeguards. The introduction of Aadhaar, and its expansion
into the Orwellian idea of India Stack and the JAM (Jan Dhan
AadhaarMobile) trinity, present new threats to the freedoms of
Indian people that have not been adequately appreciated in the
public discourse on cashless transactions.
Conclusions
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