Published date: 9th Dec 2016, Nikkie Asia Review

Modi’s war on black money has hit India’s economy. Is the price worth paying? Modi’s Finance Minister Arun Jaitley on Dec. 8 announced a raft of discounts and tax rebates for citizens who used credit or debit cards and mobile wallets for transactions including buying petrol and train tickets, paying tolls or insurance premiums. Government ministers have been commanded to get their armies of bureaucrats to reduce their dependence on cash.

Cashless life?

Jaitley said the government would issue 43 million RuPay debit cards to farmers to encourage digital payments in the countryside, and that two point-of-sale machines would be installed in each village. Banks have been ordered to install an additional one million PoS machines nationwide, in addition to the 1.5 million already in use.

As much as 93% of India’s workforce is in the unorganized sector, accounting for about 45% of GDP. Modi’s government said in early December that it had organized more than 270,000 “camps” to encourage unorganized workers to move away from cash, and more than 2.45 million new bank accounts have – been opened.

Demonetization has also spawned a huge flood of grim social-media humor, but along with the jokes have come rumors about the government’s next steps, ranging from a total lockdown of all real-estate transactions in 2017 to imminent seizure of gold jewelry, traditionally hoarded by Indian households over generations.

Will demonetization put an end to India’s black money? RBI Deputy Governor R. Gandhi said that until Dec. 5, the value of the banned banknotes deposited totaled 11.55 trillion rupees, which works out to about 78.5% of the total banned value of 14.7 trillion rupees.

off, even considering a scheme announced by Modi on Nov. 28 that allows Indians to come clean on undeclared wealth, incurring tax and penalties totaling 50%, with a further 25% frozen for four years in state-backed poverty alleviation program.

Experts caution that black money is only a small part of the black economy which, besides criminals, counterfeiters and tax evaders, also consists of millions of people in the informal sector whose incomes fall below tax thresholds. Estimates are complicated by the fact that agricultural income is not taxed, although the government is looking at taxing farm incomes that exceed 10 million rupees annually.

Economist Arun Kumar, who has been studying illegal fund flows for over 30 years, has just published a detailed paper that estimates the size of the black economy was 62% of GDP as of 2012. “The average rate of growth of the black economy in the five-year period up to 2012 was about 20%,” Kumar wrote.

Authorities have been racing to stay one step ahead of India’s ingenious money launderers and black marketers. The RBI has issued more than 50 notifications in the month since demonetization was announced. The government says it has so far suspended about 35 officials at state-run banks for facilitating illegal transactions, and income-tax investigators are probing 50 bank branches. But the battle is all uphill, and already, investigators report that illegal stashes of newly issued banknotes and large stashes of undeclared income have surfaced in seven major cities.