Comprehension Passage
A demonetization that delegitimizes a certain currency, or even certain denominations of it, would extinguish wealth held in that form. What we have seen, however, is a less extreme case. In this one, holders of Rs.500 or Rs.1000 notes can exchange them or pay these into their bank accounts. This does not extinguish wealth as much as it will bring the hoards into the taxman’s radar when their owners draw upon them to make payments. For, as these will be bank transactions there would be a record of them. So, existing black money cannot be used to generate more of the same. To this extent the scheme cannot be faulted. Of course, it cannot be assumed that what is in a bank will necessarily be declared to the income tax authorities, but it will certainly come under scrutiny in a way that it was not when stashed under the mattress.
What are some reasons why we may welcome such a move? First, the concealment of income with a view to avoid tax is a crime. So, in a constitutional democracy such as ours those who avoid tax deserve to be punished. Second, in order to evade the law, those with unaccounted wealth proceed to corrupt others, most importantly representatives of the state. This criminalizes the system further. If democracy is a way of actualizing the public will, such criminalization of the machinery of government works against the ideal. So, the practice of tax evasion needs to be rooted. To that extent this move of the government may be welcomed.
But how significant is it likely to be in the punishment it metes out to tax evaders and in its ability to control the generation of unaccounted wealth in the future? The quantitative significance of this move depends upon the extent to which unaccounted, or ‘black’, wealth is held in the form of high-value currency notes of the specified denomination. If unaccounted money by Indians is held in the form of foreign bank accounts, the present scheme can do nothing about it. This speculation would suggest that if unaccounted money is not held as Rs.500 or Rs.1000 notes, the move is pretty much useless. There is, however, the separate issue of counterfeit currency. If there is a significant volume of counterfeit currency circulating in the form of Rs.500 or Rs.1000 notes, the demonetization will also extinguish unaccounted money from this source. If counterfeit currency is actually used to de-stabilize the Indian Union, as has been claimed, deflating this route enhances its security. This would count as another reason to welcome the move.
Now to the question of whether the demonetization will eliminate the black economy of the future. It should be obvious that it cannot by itself. For this we would need a policy that checks the generation of black incomes at source. It would be a good surmise that much of the unaccounted money is generated in the purchase and sale of gold and of property. The markets for gold and property are highly concentrated, with relatively few sellers exerting considerable control over supply. Monopoly power combined with the cultural significance of both a home and gold ornaments in India empowers these sellers to insist that they are paid in cash, leaving many ordinary people in this country to have to abet criminal activity. However, the very fact of property firms, lesser builders and jewelers being highly visible and small in number makes it that much easier for the long arm of the law to control them. For this to take place though, action by the tax authorities alone will not suffice. It would require the Central government to step in and legislate that all transactions in gold and property go through banks. There could be hue and cry following this of course, but you can’t govern crime by being sensitive to the grief of criminals.
According to the author of the passage, the demonetization move is only helpful when:
1
Black money is kept in the bank accounts outside India.
2
Black money is kept in the form of gold.
3
Black money is kept in the form of high-value currency notes of the specified denomination.
4
Black money is kept in the demat accounts.