After a month of demonetisation, Indian economy is in a state of turmoil with drastic decline in consumer spending, sales of most firms also taking a huge dip, tourism badly hit and farming activities down. And now we are hearing reports of a complete shutdown in small-scale industries (locks in Aligarh, brass in Moradabad, zari and handicrafts in Rampur) in several parts of India.
With most of the withdrawn currency back in the banks, hopes of considerable loss to black cash holders from demonetisation have also evaporated in thin air. On the contrary, counter intuitively, the demonetisation move is proving to be a boost for black economy in ways not many amongst us consciously recognise.
Shortage of Cash leading to rampant black marketing for cash
While over fourteen lakh crore worth of currency has been made invalid, even after a month less than five lakh crore of new currency has been made available. This has created huge shortage of cash. This shortage of cash has led to rampant black marketing for cash. The difficulty in getting cash is leading many who need cash urgently to pay exorbitant commission to get access to their due deposits.
Many bankers have been arrested and even more transferred and subjected to disciplinary actions while carrying large cash amounts. This rampant black marketing for cash is a direct boost to black economy that demonetization has provided.
Birth of new black economy
Demonetisation was initially expected to destroy lakhs of crore of illegal wealth. But it seems to be failing spectacularly in its aim with around 12 lakh crore of the currency back in banks, even the secretary concerned conceded that all of the cash will be back. This success of the black money hoarders is because of their ability to convert their untaxed cash into white.
At a commission of 20-30 percent any amount of old cash is being converted into new white money, with no questions asked. This industry for converting black cash into white has seen exponential growth in the last few weeks. This, in turn has made black economy even more pervasive with a new and far richer avenue for making a windfall through nefarious activities.
Made criminals out of law abiding citizens
A very large number amongst those who have made gains through acting as exchangers for turning black cash into white are people who had before this never had any experience of being involved in any illegal activity. But due to the rise of new black economy to convert illegal cash into white, lakhs of our otherwise honest citizens have been turned into criminals.
Now, they have got a taste of illegal profit and, therefore, are more likely to favourably consider illegal activities in future too. They are also more vulnerable to become participants of black economy as they have now become accomplice in crimes and the fear of law being their adversary will forever haunt them now.
Return of the Raid Raj
The government has been turning out new regulations by the hour in a bid to somehow salvage the gamble of demonetisation. Among the prominent such regulations are those concerning arbitrary and draconian regulations regarding permissible deposits in ones banks and gold holdings. It is simply impossible for the tax authorities to enforce these regulations for everyone, so instead they are taking refuge in discretionary raids. Raid Raj is the best boost a black economy can receive anywhere and same is the case with India.
These raids are providing new rent seeking opportunities for the taxmen who can merely hold the out the threat of a raid to extort businessmen who don’t want their business to be disrupted by raids. This return of the Raid Raj with a new vehemence is one the biggest bonanzas Modi government has gifted to the black economy.
A suffering economy creates further incentives for all sort of black activities
When there is more growth, more jobs and more prosperity, the compulsion to indulge in illicit activities is lesser than when opportunities are restricted due to slower growth and job losses. By flooring the flying Indian economy through forced withdrawal of cash, Modi has rendered lakhs of employed Indians unemployed and more desperate to do anything and everything to survive.
Many of these desperate people, due to limited opportunities in the white economy, will now turn to black economy to make a living and make up their losses. Also, with slower growth, the state’s revenue will considerably shrink thereby reducing resources for welfare activities. And with reduced resources, the state’s ability to police black economy will become that much harder.