A Neglected X-factor that Lies at the Core of our Economic Stasis

Context: The Indian economy is struggling to get back on its feet, especially since its slowdown showed little signs of easing even before COVID-19 lockdowns happened.

Various measures taken by the Government to tackle Black Money:

• Two high-penalty tax amnesty schemes in 2015 and 2016 (one each for foreign and domestic incomes and assets), 
• An attack on shell companies, 
• A tapering down of participation certificates for stock market investors from abroad, 
• Renegotiations of our tax treaties with Cyprus, Mauritius and Singapore, 
• The use of Aadhaar authentication for direct benefit transfers, 
• The implementation of a goods and services tax (GST), 
• A bankruptcy code,
• A notification on Benami (false name) transactions, among other things.

Reasons for the slowdown of the economy before Demonetisation

• Efforts to reduce black money has hurt the economy:

• Centre’s squeeze on the black economy came too quickly and too abruptly for India’s corporate sector to adjust.

• Aggressive Reserve Bank of India (RBI) bad loans resolution:

• RBI forced banks to recognize their bad loans and start providing for them
• This turns into a credit-cum-capital squeeze for most companies
•  Many big businesses went bankrupt and were forced to sell their best assets

• Government’s attitudes towards cronyism and tax-evaded income and wealth: For, E.g. there are negligible businesses that went bankrupt and were forced to sell their best assets and not the worst ones.

Disadvantages of Black Money: 

• Bold steps may hamper medium-term growth: Crimping the supply of tax-evaded and concealed incomes may hamper  growth in the medium-term

• Jobs in the illegal ecosystem: If an entire illegal ecosystem of cash incomes is squeezed dry, it can also damage the jobs of those who live off this source.

• Consumption suffers: Cash from an illegal source is more likely to be spent than cash on which taxes have been paid

• Side effects of aggression towards black money: The aggression on black money has probably driven it deeper underground to zones that don’t benefit the economy.

Way forward

• Use black money wisely: Put black money to work for a domestic revival by offering tax amnesties that are enticing.

• This is possible since the Corporate tax is low-income taxes have already been trimmed to boost cash flows in the hands of citizens and smaller firms.
• New amnesty scheme focuses on allowing firms to receive unaccounted money with, say, a tax rate of just 30%,
• Companies in liquidation are allowed to be bought with unexplained money sources.