Black cash in India

Rumours of even a 1 percentage point decline in GDP growth for 2016/17 are vastly exaggerated, have no basis in logic or fact. The demonetisation policy will likely be a huge success in garnering tax revenue

C R Sasikumar

DM are about equal to the benefits. But let us get back to our earlier calculations — Rs 8 T is black cash, not black income stashed away in real estate, gold, foreign currency etc. Assume for a moment that black cash is the average of the two estimates — Rs 2 T (“theirs”, the six per cent formula) and Rs 8 T (ours, based on estimation of excess demand).

If Rs 5 T is returned to banks with a tax penalty of 50 per cent, then that is a tax gain in 2016/17 of Rs 2.5 T. At a lower 30 per cent tax rate in the future, this is an extra Rs 1.5 T in perpetuity because these individuals will now be permanently in the tax net with a higher level of income than before. At a five per cent discount rate, Rs 1.5 T in perpetuity is Rs 30 T. This is under the assumption that black cash has a low shelf life because smart money doesn’t keep black income in cash.

So a proper static benefit cost analysis of the DM policy is as follows. In 2016/17, costs are Rs 1.5 T and benefits are Rs 1.5 T + 2.5 T or Rs 4 T. Just a one year calculation shows a more than 200 per cent return on investment! But future gains, through higher direct tax revenue collection of Rs 1.5 T means a very, very large return on the investment. This result is predicated on the assumption that two-thirds of notebandi reflected legitimate income or savings, and only one-third was illegal. One can change various assumptions (amount of legitimate returns, discount rate etc), the result will not be changed. Even on a static no-future-policy-change base, the demonetisation policy will likely be a huge success.

But,ifotherpolicymeasurestoreformindia are not forthcoming (decline in personal income tax rates to discourage tax evasion, elimination of stamp duty and long-term tax rates on property, a clampdown on the extortion power of tax officials, and reform of election funding), then history will view demonetisation as a colossal failure of thought and reform. Itwouldbesounlikepmmoditostophere,and I am not betting that he will.

The writer is contributing editor, Indian Express, and senior India analyst at Observatory Group, a New York-based macro policy advisory group. Views are personal.