Although the term “Black money” creates an impression of a person hoarding unaccounted hard cash, the truth is slightly different. “Black money” or unaccounted wealth is now not only stored in Cash but also in Gold and Real Estate. One major criticism of the demonetisation scheme is – Oh, the cash component of black money is minor. Most of it is in Gold and Real Estate.
So is the demonetisation scheme unwarranted?
Nope. You had to start somewhere. What-about Gold, What-about benami properties, cannot be the rationale to counter a measure to tackle other forms of ill-gotten wealth. And cash is the only practical starting point from the point of view of maximum compliance.
Could you have gone after gold first or Benami property first? If Yes how? How would you make sure that people suddenly started declaring all undeclared and unaccounted Gold and Benami Property and clean up the mess in 50 days? If some genius has a plan, I would have happy to hear it!
On the contrary, the current plan follows a logical path. It started with IDS and now is the turn of demonetization to clean up unaccounted cash. And now one can go after other form of assets.
Imagine that in February if Modi says – declare all your Gold that you bought without bills and make it white by paying 50% penalty on the value.
Do you think people would do it? I think Yes. For they would have seen what happened to the cash that was not declared. People were forced to burn it, or they faced risk of facing IT notices and paying massive penalty.
There will be fear that what if Modi comes out with some scheme in future where the government could open all your bank lockers to check for undeclared gold? The risk of losing it all will force people to declare those assets to the government during the first declaration drive, if they do it.
The key is the crooks need to be gone after with a carrot and stick approach, and the stick needs to be a real stick, not some imaginary hypothetical twig. Can you imagine the response the IDS scheme would have got if there were clear indications that post the IDS scheme, the Government will bring in demonetisation? Those people who did not opt for it now know that the threats issued during the IDS scheme are not hollow. And this will be playing on their minds, and it is precisely this which needs to be tapped further, to extract the harder-to-crack assets such as Gold and Benami properties.
It’s not easy to get rid of gold or benami properties so easily. You can’t sell your gold because you won’t easily find a buyer who is willing to buy it without any paperwork. Also, there could already be a cash squeeze in the market because of demonetisation.
So people will be stuck with their gold or other undeclared assets in that situation. Those who declare first can save some of it in IDS kind of scheme. Those who don’t risk losing all of it. So when the government comes up with another amnesty scheme targeted especially at gold or real estate, trust that the conversion rate will be better next time.
Gold and Real estate are black money reserves. They are sort of a Savings Account of black money, while Cash is the current account of black money (not saying all cash is black money). Government has gone after the current account of black money. Savings accounts will be the next.
