A tale of stocks and flows

Jagdeep S. Chhokar

It may be considered impudent by some in view of the ebullient mood in some sections of public opinion but it is necessary to introduce a dose of realism in the euphoria over demonetisation of existing currency notes of Rs 1000 and Rs 500. Some of us seem to be considering it as a panacea which will get rid of the scourge of black money, eliminate corruption and make India into a cashless economy, free elections of the ill-effects of money power, and many other such good tidings. A cold, hard look at reality might be sobering.

First of all, getting rid of black money. Black money is not a self-generating thing, it is the outcome of a process that, for want of a better expression, can best be called black economy. What the demonetisation of the higher denomination currency notes will definitely do is to get rid of the existing "stock" of black money. There is no denying that by itself that is a big achievement. At the same time, it needs to be remembered that mere replacement of currency does not do anything at all to the processes that generate black money, it does not stop the functioning of the black economy.

Black economy works when people refrain from declaring even their legitimate, earnings because they do not want to pay taxes. One of the standard reasons mentioned for not wanting to pay taxes is the unduly high rate of taxation but that is not really the reason all the time. Some people feel that the government does not use their money properly and therefore they refrain from paying by not declaring their earnings. Others may just not feel like parting with what they feel they have earned through their hard work. This tax-avoidance happens not only to income tax but also to all kinds of indirect taxes such as when we don't insist on the neighbourhood grocery store or chemist issuing us a receipt because we also do not mind not paying the sales tax.

Of course, larger chunks of black money are generated when project estimates for projects running into crores or thousands of crores are inflated, and import and exports are mis-invoiced, or when money is moved across national borders, either through hawala or other non-declared channels, without declaring it to the authorities. All this will not stop with the replacement of currency. At best, what would happen is that once the existing "stock" of black money is exhausted, the undeclared activities will start generating the new "stock," which will be stored in the new currency in which the new Rs 2000 notes will be more useful than the erstwhile Rs1000 notes!

Making India corruption-free is a utopia that no society will ever get to. All that can be aspired for is to bring corruption down to such levels that it is no longer dysfunctional to society in as much as daily transactions of citizens with authority are not made unbearably painful. There are only two ways to make a dent in corruption. One is transparency and the other, to which hopefully transparency will lead, is for public authorities to realise is that they are there to serve, assist, and help ordinary citizens and not to lord over them or exploit them. A bribe seeker will still ask for bribe even when the new currency is in circulation.

Cashless economy is another pipe dream which is not going to be realised at least till there is reliable and uninterrupted power supply in vast tracts of rural India. Of course, the assumption is that it is there or will be there in urban India. There are all kinds of reports about universal inclusion, or lack of it, floating around in the media that it seems very difficult to get a true picture. Despite that it seems reasonable to assume that a very significantly large proportion of the population in villages as well as in cities are far from being able to survive on electronic transactions.

And finally to elections. It is undeniable that if the stock of black money in the economy and society is severely depleted, less black money will be available for use in the elections and the effects of money-power will be less. At the same time, if the stock of black money is going to be recreated with new currency as explained above, then this lessening of the ill-effects of money power on elections will be short-lived. The only way the impact of black money or money on elections can be reduced is if political parties are transparent in their finances. Elections will be rid of "the pernicious influenceof big money in derailing the democratic process and … the evils of big money influence … ", as the Law Commission said in 1999, only when people know how much money does each political party have, how does it get it and from whom, and how it is spent. The chances of that happening in the near future seem remote given the stand that the Union of India has taken in a case in the Supreme Court seeking implementation of an order of the Central Information Commission declaring six national political parties as "public authorities" under the RTI Act.

The writer is a former Professor, Dean  & Director in charge of the IIM, Ahmedabad.