23 May, 2011

Black Money

“Nothing seems to get done, even after paying money”, lamented a relative of mine and expressed absolute disgust at being harassed for getting a simple marriage certificate, for his daughter. The fact that he lives in US, did not help matters. He told me that he was able to get his daughter’s birth certificate in 5 minutes. “Citizens rights are well protected there and such harassment is unheard of”, he added nodding his head in indignation.

Now, that is not a welcome sign to any Indian wanting to return home. With India really shining, thousands want to come back. The intrepid among them, have done it too. But there are many more who dread the system. They know they can get suitable work in the country; they want to contribute to their motherland; they want to come back. And then they hear of the bribery scandals that have rocked the country and some of them also have the mortification of experiencing the sleaze firsthand. Then they decide against coming back. We can be cockish and say that it’s their loss. It’s a greater loss to us. Our globalizing economy and industries need people with international experience. NRIs are a perfect fit here. We are scaring them away with our stinking systems. The sooner we set it right, the better the country would be for it. It is only then we will be able to get the talent home.

Now, that is the perpetual problem, we citizens face, when we deal with government machinery. Bribes are asked and given, as a matter of course. It is so engrained from the lower most level. The entire system is corrupt. Politicians have honed it into a fine art. I hear there is a system where the chief minister of the state is supposed to send a certain amount of money (like Rs.1,000 Crores ) every month to the party boss. No wonder that the targets that our politicians gun for are not developmental targets, but the ones that generate the sleaze capital. For that, they depend on all the arms of the government machinery to do the job for them. There is an elaborate machinery they have to intimidate and subordinate the citizens and businesses. They have various ministries which can change rules for or against businesses, they have various arms like excise, sales, income tax departments to do their calling and intimidate them. Those who remain foolish can expect visits from factory inspectors, pollution control / health inspectors, a visit from the representative of labour department etc. CBI has become a tool in the hands of politicians. Judiciary has also lost it’s above-board character and there have been instances where even judges were embroiled in corruption and bribery scandals. Politicians control all levers to extract money.

Welcome to India – the land of Black money.

Talking of black money evokes yawns here. It is an open secret that the tentacles of corruption has reached, right till the top. This is not freely reported, that’s all. The scandals getting reported these days seldom is less than tens of thousands of crores. We now have 2G scam of hitherto unheard of magnitude – Rs.1.76 Lakh Crores! The politicians & bureaucrats have created a crony capitalism system that is now well entrenched.

Education : Illgotten money is siphoned off into land & other property deals. Education institutions have been built by politicians with their slush money and a veneer of legitimacy is sought to be introduced in their wake. They are attracted to this as they can get huge amounts of land allotted to them in the garb of constructing an educational institution and more black money can be utilized in constructing the buildings and other facilities. They also get donations from charitable trust ( there was a controversy regarding Siddhivinayak trust allocating money to trust run by some politicians, years ago ), where they control the levers of power. This is another abuse of power. Once the buildings are up, they start off another money minting exercise. These institutions charge huge fees and offer a large number of seats in the management quota, where a suitably high “donation” is taken before admitting the student - ofcourse in cash. So, this is another black money generating machine. We have hundreds of such institutions across the country, which are ripping the people and producing students of dubious quality, who may not make the cut with the industry.

Corruption and Black money brings in huge problems for the whole country. Inflation is fanned by Black money.

Inflation : This is problem no.1 of black money. The parallel economy is estimated to be between 40-50% of the real economy. The slush economy is then Rs.23 Lakh crores to Rs.29 Lakh crores! That does not include the money stashed away at destinations abroad which is thought to be well beyond US$ 1 trillion ( for perspective, our GDP is US$1.3 trillion ). Every passing year, more money gets added to this hoard.

Inflation is a consequence of this. Inflation occurs if there is too much money chasing goods. Prices go up across the board in this case, unlike in the case of demand / supply mismatch where the price of a particular commodity/ item alone, will go up. For instance, if there is a poor crop of sugarcane, only sugar prices will move up. Unaccounted money however, pushes up prices across all categories. The only categories that don’t get affected are the hyper competitive categories like TVs and other white goods.

This affects everyone. It has affected the aam aadmi the most, in whose defence they keep mouthing platitudes. Prices of basic food articles have shot through the roof. In some vegetables, the prices have moved up by upto 200% in the last 2 years. And the prices have plateaued at much higher level compared to the levels earlier. Aam Aadmi is the worst affected as most of his budget anyway is spent on food and since this has shot up, he is unable to allocate money to anything else.

Real Estate : Black Money affects people in different other ways too. Land prices and property prices have gone through the roof. Politicians have invested in a huge way in real estate. It is said that hundreds and thousands of acres of land have been bought by the politicians in every locality across the country, from the slush money they generate. The reason why it goes into real estate is that huge amount of cash can be ploughed into these transactions. Part of the reason why the land and property prices have shot up is black money and the inflationary pressure it is exerting on the prices of land and other property.

This affects the normal citizen, who finds the going really tough, in view of the astronomical rates being quoted for real estate. The middle class citizens finds that they need to go far out to buy anything within their budgets. So, they need to take huge loans which they need to pay all through their working lifetime. They have to pay huge amounts of money as an upfront payment too, which means that they will have to cash out a lion’s share of their savings for that. In many cases, they are asked for substantial sums as cash – ie. Black money.

Now comes the funniest part… the buyer draws out huge sums of properly accounted money and hands over huge sums of cash to the seller. The irony here is stark. We are forcing our citizens to convert their proper, accounted money to black money! Without that, transactions don’t happen, because the seller wants cash to pay for another property, where they demand cash payments. Hence, the more the property transactions in the country, the more accounted money is getting converted to cash! So, all of us are contributing towards expanding the black economy, though we may be unwilling participants. The system is now so well entrenched that this is an established practice.

The irony does not end there. He is exposing himself to inquiry from the taxman at any future point as to why he withdrew lakhs of rupees in that period and what was the end use. With terrorism threats looming large, huge cash withdrawals are monitored. So, a law abiding citizen can be exposed to inconvenient questioning, which he will not be able to handle… he cannot reveal that he drew cash to pay the black component, nor can he think of a way which could absorb lakhs of rupees, where he has spent on. In effect, it is choice between a rock and a hard place. By this one transaction, the law abiding citizen has placed himself open to inquiry at any point in future. When questions come up and heat is turned on, it becomes fertile ground for further corruption. He will have to pay further cash to extricate himself from the mess he created for himself by paying – cash!!!

Now look at the other part of the transaction. If a seller has received a huge amount of cash, he cannot deploy the cash anywhere. He just has to keep it with himself, at huge risk and without earning any interest… till he identifies another property. That may take six months or a year. Till that time, the money will just lie as cash, which goes against all canons of proper money management.

Gold : The other area where black money gets parked is in Gold. Now, Gold has always had a lure with our citizens. That is also a good place to park the cash. Many buy jewellery, which means it is partially an item of consumption and partly an investment. Even if bought as gold coins or bars, one still has to pay a 5 – 15% premium on the raw gold prices. But purely from an investment perspective, this will be a poor way of deploying money. The best way to invest in Gold is through Gold Exchange Traded Fund (ETFs ), where one can get the returns offered by Gold without the attendant costs, problems of purity etc. But Gold ETF cannot be bought with black money as that is to be bought in a stock exchange and for that PAN and other details are necessary. So someone with black money will invest in physical gold only.

When investing black money, one is not really looking at maximizing returns; it is more to keep the money, without getting caught. Again, partly due to this and due to the volatile global situation, Gold has become a preferred investment even for governments. This has pushed up prices for everyone.

Other asset classes : Since, in most other investments giving a PAN is mandatory, black money does not feature in Equity , Equity MFs, FDs, Bonds etc. To that extent, these sectors are clear of Black Money. But money does get into the stock market, through money coming from abroad.

Article by Suresh Sadagopan ; Published in Money Mantra on Feb 2011

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