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Demon(et)izing the Black Economy - I

Ashish H.K. Jha

Ashish H.K. Jha Opinions & Updates

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ByAshish H.K. Jha Ashish H.K. Jha   {{descmodel.currdesc.readstats }}

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Centuries ago, from the island of 'Yap' (in the Western Pacific) Yapese explorers journeyed miles to the island of 'Palau' and bumped into limestone (Choona-Patthar in Hindi) for the first time in their lives. The explorers fell so much in love with limestone that they instantly negotiated a deal with the inhabitants of Palau. As per the deal, Yapese established a limestone quarry in Palau to carve disc-shaped stones and called it 'Rai'. These were huge stones - some even larger than 12 feet in diameter with a hole in the center weighing more than a modern day car! Yapese used these discs as currency - for marriage, inheritance, political alliance and in times of difficulty, even to exchange food. Most of the times, these heavy stone discs did not require a physical exchange between the two parties as everybody in the village just acknowledged that the stone had a new owner.

        Though, the value of each rai primarily depended on its size, its legacy too determined its value.

For example, if a person died while trying to rescue a stone, its value went up! Once, as per the folklore, a stone disc was lost in a sea storm by a Yapese while bringing it back to the island. Everyone on the island heard and believed the crewmen’s account and accepted that the stone lay at the bottom of the sea. Hence, the crewman was granted a claim over its value. The stone lying at the bottom of sea or the idea of it was as good as real money. Later on the value of this stone, lying unseen on the sea bed, was being transacted on the island. Though, the quarrying of rai stones ended in early 19th century the Yapese (6500 of them are still living), even today, exchange discs to commemorate their traditions.

The history of rai, teaches you an important lesson. It tells you that money is nothing but an idea or abstraction built on trust. That is why today you can buy anything by just swiping a plastic card. A proof that a deal no longer requires money in the form of gold, notes or coins. The value between two parties can be exchanged through a transfer of information. Modern ambitious options (such as 'Bitcoin'), do not even require a government fiat proving that Yapese wisdom was so right even centuries ago. The wisdom that

      Cash derives its value from the information it contains and can be replaced by a suitable substitute

You may argue that if cash is so dispensable and replaceable why has it gained so much importance? I believe that cash has gained its prominence owing to a combination of rational, behavioral, institutional and emotional drivers. You as a human being derive a certain value from holding cash which goes way beyond its economic value. Cash thrives on your powerful force of habit and inertia — providing both compatibility and comfort in your everyday transactions. More or less everyone accepts it including the government and banks. Further, it gives you a sense of control over spending and visibility over how much of your budget has been spent. Last but not the least,

cash offers you total secrecy and privacy resulting in total anonymity!

Sadly, this last quality of cash also breeds a class of 'Shadow-hunters' — who create and run a shadow economy popularly know as 'The Black Economy'.

You already know that black economy is created by money arising from illegal activities such as crime and corruption. But the idea of black economy thriving on illegal activities is a mere poke at the  tip of the massive iceberg. Rest of this black iceberg is made of legally permissible activities - except that they are not disclosed to the government as per the laws of the land. While the source of generation of black money may lie in any sphere of economic activity, there are certain vulnerable areas, which by their very nature form the major chunk of this iceberg. These include real estate, jewellery, financial markets, public procurement, non-profit organizations, external trade, international transactions involving tax havens, and the informal service sector. But the question is how do they continue to do it without being caught?

To put it simply, you as a business must report your financial activities through two books of account. One where you capture all your income and expenditure called as ‘Profit and Loss Account’ (P/L). The other, where you capture your possessions (assets) and obligations (liabilities) called as ‘Balance Sheet’ (B/S). Tax evasion involves manipulating the facts in these books of account. You can see the broad contours of bookkeeping gymnastics in the chart above. Interestingly, the chart has been taken from GOI's report whose title almost sounds like a pun - 'White Paper on Black Money' :-)...And for real life examples...time to call your long forgotten friend who is a successful CA now!

You may think that this black money, so painstakingly generated, is hoarded either as cash or deployed in domestic market through 'benami' (fake) investments in various asset classes. But this method, in modern times, is supposed to be too crude, old and naive to be followed.

The sophisticated methods introduce you to a new applied financial science called 'Money Laundering'

Money laundering is the art and science of rotating money in a way that the money loses its illegal past (trail)! It is done in three sequential steps - placement, layering, and integration. Placement refers to introducing black money into the financial system. Layering refers to concealing or camouflaging the source through complex transactions or structures (read make-up). And Integration refers to routing this money back to you. Now, your black money is both accountable and legal - you can not only legally possess it but flaunt it as well!

Coming back to India, in 2007, World Bank estimated that India's shadow economy was worth around one fourth of the visible economy. Assuming India's GDP at Rs. 125 lakh crores, the shadow economy translates into a whopping 30 lakh crores (24%) - Impressive isn't it? This is what has lured the government into its stunning move to demonetize Rs 500 and Rs 1,000 currency notes. The move is expected to affect around 14.2 lakh crores of Rs. 500/1000 currency in circulation (86% of 16.42 crores worth of currency in circulation). The experts expect around a third of it to be black (~6 lakh crores) - This is mad money. GOI expects much of this money would get mainstreamed because of the demonetization move. ICICI has predicted a 4.6 lakh crores windfall gain for the government while Edelweiss has pegged it at 3 lakh crores. Everyone has hailed the move and added that while it is inconvenient for common man and Indian economy in short-term, the significant benefits in longer run far outweigh the chaos. Further, these 'experts' say that, Tuesday’s move, could change the face of the Indian economy, improve the government’s fiscal position and ensure better tax compliance. The market pundits predict that size of the cash economy is going to shrink, as will the black money generation avenues, because of better trails on cash-flow and future support from GST.

Does it sound like a Utopia to you?...I mean too good to be true? I will share my perspective with you in the second part and if you need an instant I go...

      कोई मेरे दिल से पूछे, तेरे तीर-ए-नीम कश को...ये खलिश कहाँ से होती, जो जिगर के पार होता... (Mirza Ghalib)

(teer-e-neemkash = half drawn arrow; Khalish = pain, anxiety)

Meaning: Someone should ask my heart, what the hit of your half-drawn arrow means...The anxiety could not still exist, had it (the arrow) pierced my heart and flown across...

Epilogue: Arguments have typically a plurality of causes and hence, the only thing constant about my views and perspectives is that they change...and sometimes...@ diapers changed by an old man under the twin influence of - mobility impairment & loose motion. I rationalise it as an essential cost for being open! The views expressed are fluid in nature and a result of the subject, length and tone of my conversation/s at 'Brown Chai ki tapri'; the intensity and duration of scolding received from my mother; number of zombies killed by me in 'Plant vs. Zombies' & the gestation period of both the view & research done on the idea I am writing about...and hence, liable to change in time, space, degree or manner...even contrary to those you read today! Feel free to challenge, disagree, or share the wisdom that God is supposed to bless and not replace psychiatric treatment!!! The skeptics with action bias are further encouraged to file an RTI demanding the details, duration and expenses incurred towards my psychotherapy...but...I reserve my right to delete any comment even if your comment is an insufficient but important part of an unnecessary but sufficient argument! Or for any reason I may create (abusive, profane, rude, anonymous, not appreciative enough) – so would you just keep it polite...if you may...please...

Disclaimer: It would be dangerously unwise – even if the concomitant pauperism is not factored in – to play tic-tac-toe between my personal and professional opinion (read life), as defunct as either might be. Hence, if any/some/every-thing is stupid here - It is mine and mine alone ( can't have what is mine!). Apologies, in advance for the cliched repeat "The opinions expressed here are strictly personal and my own and not those of my employer."

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