In a strong reaction to Prime Minister Narendra Modi announcing that the denomination of Rs 500 and Rs 1000 would no longer be legal tender, former finance minister P Chidambaram has said that the introduction of “new series of notes” of Rs 500 and Rs 2,000 denomination is estimated to cost Rs 15,000-20,000 crore", wondering if the economic gains of demonetization would be "at least equal to that amount.”
Pointing out that demonetizing of the two denominations is no guarantee that black money would be unearthed, Chidambaram says, “In 1978, the Janata government demonetized high denomination notes”, yet that action “failed to achieve its objectives”, and “high denomination notes were re-introduced shortly afterwards and the volume of unaccounted wealth and income admittedly increased.”
Suggesting that things are far more complicated than in 1978, Chidambaram says, “Rs 500 and Rs 1000 notes in circulation, by value, account for 86.4 per cent of all the notes in circulation”, adding, forty years ago, “a Rs 500 note was a high denomination note. Today, it is doubtful. One has to take into account the inflation in the intervening period.”
Wonders Chidambaram, whether with the demonetization the present cash to GDP ratio, which is 12 per cent, will it come down to the world average of about 4 per cent, asking, “Will gold imports surge indicating that unaccounted income/wealth may seek refuge in bullion and gold jewellery? ”
Chidambaram's commentary comes amidst a senior economist, Prof Prabhat Patnaik, doubting whether the Government of India understands what black money means. Patnaik says, the implicit understanding that “black money” consists of hoards of cash which are held in trunks or pillowcases or buried under the earth is totally wrong.
“With this understanding, it is then suggested that if Rs 500 and 1000 notes are demonetized, then people going to banks to exchange large amounts of old notes for the new legal tender would make the banks suspicious; and banks in turn would convey their suspicions to the tax authorities who would then catch the culprits”, Patnaik says.
What is not understood, says Patnaik, is that “black activities”, like “white activities”, are meant to “earn profits for those engaged in them; and simply keeping a hoard of money earns no profits.” He adds, “Profits are earned not by hoarding money but by throwing it into circulation; the 'miser' does the former, the capitalist the latter. Those engaged in black activities are capitalists not misers.”
Giving example of what black money is, Patnaik says, “If 100 tonnes of minerals are extracted but only 80 tonnes are declared to be extracted, in order to reduce tax payment, then we have a case of 'black money' being generated. Likewise, if $100 of exports are undertaken but only $80 are declared, and the remainder $20 are kept abroad in Swiss Banks, which is against the law, then we have a case of 'black money' being generated.”
In a separate commentary, Prof Kamal Mitra Chenoy, professor of political science, has said that Modi government's tactic of replacing Rs 500 and Rs 1000 notes is not “an economic but political move”, adding, “As the Panama Papers have shown, all major industrialists in many countries have used Panama as a tax haven”, whether it is the President of Iceland, who had to resign because of investments abroad, or Pakistan PM Nawaz Sharif's three sons, President Vladimir Putin's friend and famous cellist, or actor Amitabh Bachchan.
“The truth is that more than 90% of black money from India is in tax havens or banks abroad. Why isn't the Finance Ministry taking interest in getting black money into India where it can be used for public investment?” he asks, adding, “Ram Jethmalani claimed last year that the Germans were willing to repatriate black money, but the Modi government refused to write officially to the German government.”