Modi is crimping the black economy; but this is also delaying the economic revival

Discussion in 'Economy & Infrastructure' started by I_PLAY_BAD, Oct 23, 2015.


    I_PLAY_BAD Regular Member

    Aug 25, 2015
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    If the Indian economy is not rebounding quickly back to 8 percent after UPA more or less killed growth in its final scorched-earth years, it is because of an "X" factor. This “X” factor is directly related to a key success of the Narendra Modi dispensation: the assault on black money and cronyism. There is a short-term downside to fighting crooks and cronies as the old ways of doing business start shrinking.

    Unaccounted cash is no longer king. It is certainly not about to disappear, but its growth has been checked and new business uncertainties are being created as a result.

    The problem with considering black money as pure evil is that it discounts the reality that it is also an engine of demand and growth. Black money is high-powered money, as it evades taxes and leaves more money in the hands of cronies and ordinary citizens. Whatever the moral objections to it, the fact is it also drives growth in the form of consumption, even conspicuous consumption. So any fundamental attack on the sources of black money will have a medium-term impact on consumption and investment.


    Consider what has been done by the Narendra Modi government.

    First, it has more or less banished business lobbyists from the "bhavans". This means the big time business of buying and currying favours by plying netas and babus with cash is difficult. Businessmen ave found that PM Modi is not accessible as CM Modi in Gujarat, as the Economic Times story documents. When cronyism is banished from the corridors of Delhi's durbar, it automatically shrinks bribery and cash.

    Second, coal allocations - one of the biggest reasons for corruption during UPA - are now being done entirely by auction. The UPA had made spectrum auctions more transparent towards the end of its regime, and NDA has continued with this policy. When so much money is sucked out from corporations legally, their ability and willingness to pay bribes - with cash or other unstated resources - reduces. The rentier economy is shrinking, and the bank-funded formal economy is swelling.

    Third, the whole subsidy regime is shifting towards direct credit of beneficiary accounts, often with the help of Aadhaar unique identification of the poor. In the case of cooking gas, the entire subsidy payment has shifted to direct benefits transfer, a process facilitated by Modi’s Jan Dhan universal bank account that has achieved close to 100 percent coverage of households. In the months ahead, when the direct benefits transfer scheme is extended to other subsidies and government payments (for kerosene, food subsidies, and NREGA wages), the cash economy - pilferage from which is a key source of multi-point corruption - will be in further retreat.

    Fourth, the hunt for black money has further crunched the space for cash in the economy. The government's black money penalty scheme – the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 - did not gain much traction, but has effectively locked out cash from coming back to government coffers through the formal route. The only routes left for unaccounted cash in Swiss banks and other tax havens is the use of anonymous participatory notes (P-notes) for investment in Indian stocks and private equity funds funnelled into real estate projects. If the government now phases out these options, black money flows will taper down further. This will impact stock and realty valuations, curbing liquidity further.

    Fifth, when the goods and services tax (GST) comes into force, perhaps by late next year if the political stars are in alignment, excise and tax evasion will become even tougher. This means cash - the bribes given to excise staff to under-declare production or avoid paying entry and local taxes - will be in final retreat.

    When cash is crunched by law, the economy takes a blow too. If grease is in short supply, the wheels will face friction in the short term.

    Estimates of black money in the economy vary from 30-50 percent of GDP, but no one can say for sure. This kind of money sloshing about creates its own economic activity, aiding growth surreptitiously.

    Take an illustration. Let's say I am a small-time babu earning money from every file I push in Udyog Bhavan. My income is thus more than my tax-paid salary. This cash income goes to buying my daily necessities or minor luxuries, generating demand for the formal economy. I can't put this money in the bank, so I have to spend it - or hoard it another way. The only way to hoard it is by investing in land/property or gold, or spending on inessentials like a lavish wedding party.

    When my cash flow is constrained, I will spend less and hence contribute to the consumption slowdown. This logic applies whether I am a small-time babu in Delhi or a businessman with hundreds of crores stashed away somewhere. Or even a crooked politician who hoards cash for election-eve spending or to ply his party faithful with funds when they need it.

    The fact that real estate is seeing two years of de-growth is further evidence of the dethroning of the illegitimate economy under Modi. Politicians usually invest their dirty money in benami property, since this is the last refuge of rentier income. This is because supplies of land and building permissions can be artificially curbed and illegal profits harvested by the neta-babu combine.

    Rajiv Kumar, a Senior Fellow at the Centre for Policy Research, makes the linkage between cash and growth very clear in an article in The Times of India. He writes: "Chartered accountants and legal consultants.....complain about the government having come down too heavily and too early on the cash economy. This seems to have unnerved private business, especially in real estate, defence...and some service sectors.”

    He adds: "With government signalling strongly against the cash economy, it has turned turtle. Almost 50 percent of economic activity, a conservative estimate for the parallel economy's share in aggregate economic activity, has consequently been hit."

    The short point is the attack on black money is growth-retarding in the short-to medium-term till cronies and crooks learn more honest ways of doing business.

    This has two implications. As banks and corporations are short on capital and also cash for investment, it is government that has to step in to fill the void. It is happening in roads and railways, but not fast enough. It could do more.

    If government is needs to be the engine for growth, it should not focus on the fiscal deficit, but only the revenue deficit, in the short term. A small rise in fiscal deficit will do no harm as long as the extra money is used only for public investment that will enhance economic activity.

    Having decided to attack cronyism and cash, and after declining to offer an amnesty for black money (which would have given the government enormous and cheap tax revenues for investment), the Modi government has to get the investment cycle going largely on its own. Growth now depends largely on government spending on infrastructure.

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  3. indiatester

    indiatester Senior Member Senior Member

    Jul 4, 2013
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    Ironic that people are suggesting to depend on corrupt practices to keep economy on track.

    However the article is true on the scorched earth policy the UPA government followed.
    Saving grace has been the low crude oil prices.
    We need this low crude prices with good monsoons for a few years to actually make a recovery within the timeline of this government.
    Else the good work of these people will be enjoyed by the next government.
  4. Rowdy

    Rowdy Co ja kurwa czytam! Senior Member

    Sep 6, 2014
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    Milky Bar
    The author seems to worried about the real estate sector :lol:
    Fresh graduates live like cattle 5x in one apt at a salary of 15k in hand in places like Mum .... this is how much the real estate bubble is inflated.... mostly from black money.
    The rest of his rant of "Consumption" can be countered by a single argument.....
    "If you take steroids you can get in good shape but it is not sustainable..there is no substitute to hard work"
    Batfan and indiatester like this.
  5. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

    Apr 28, 2012
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    What he said is true, but the bitter pill needs to be taken at some point. Good that Modi bit the bullet in his first years. Things should be decent by the end of his term.
    indiatester likes this.
  6. Sameet2

    Sameet2 Regular Member

    Sep 19, 2015
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    Black money charges: BJP targets Sonia, Rahul Gandhi
    Man this headline makes me the most happiest person . I know the Task is tough but it would be completed the culprits will be Butt naked in front of people . The unholy nexus of crooked media and leftist politicians will be over . Acche din is not what I want I need the End day for corrupt and unholy Bast###!

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