Should black money be wished away?

By S. Swaminathan

Some western commentators on the Indian economy have characterised it as one of the most under-performing economies in the world. A far truer description could be that it is an economy with large segments of activity lying outside the system of taxation. Even after fifty years of organised self-government, India has one of the lowest rates of aggregate tax revenues, in terms of the GDP. For the Union Government, the tax/GDP ratio in recent years has been slippery around 9 per cent.

With the growing range of economic activities, especially after 1991, and with the emergence of a fairly active services sector, the question of resource mobilisation through taxation, has evidently assumed critical importance.

Almost all the budgets of the Union Government since 1991-92 have suffered from the twin perils of high levels of fiscal deficits and ballooning public debt. From Dr. Manmohan Singh to Mr. Yashwant Sinha, the predicament of the Finance Minister has virtually remained intractable in so far as efforts towards expenditure containment have proved as elusive as those feebly mooted for additional resources mobilisation.

The dogged declarations about fiscal correction notwithstanding, the task of reining in the fiscal deficit has continued to be almost insuperable.

Disinvestment - a mirage?

Over the nine years since 1991 the possibilities of stopping the needless diversion of budgetary resources towards loss-making public enterprises and those of raising resources through disinvestment of Government equity have hardly availed owing to the dominant mindset in the political system which refuses to come to terms with the inexorable need to disband enterprises in the public sector which have become technologically obsolete, economically unsustainable and financially bankrupt.

Despite a Disinvestment Commission making detailed recommendations case-by-case for dealing with 58 public enterprises of the Centre, the spectacle of budgetary resources being spent on paying wages for workers for abstinence from production, goes on thanks to a perversion of political consensus.

The belief that disinvestment itself can generate substantial financial resources for the Government for use in restructuring viable public enterprises and for deployment in the critical infrastructure and social sectors, is fast becoming hypothetical what with the disappointing record in disinvestment.

With all the new capacities built up in different industries over the last nine years, it is indeed doubtful whether there will be any takers for the sick public enterprises from among the domestic entrepreneurs or foreign investors.

Revenue buoyancy

That the Government can hope to garner increased tax revenue as a consequence of higher rates of GDP growth of 7-8 per cent in the medium term, is a prospect which ought to bring some cheer to the policymakers, granted that expenditure control will not remain as pathetically inefficient as it has been over the years.

Such an expectation would however hinge on another vital requisite, namely, that tax administration and enforcement will themselves improve substantially apart from the tax net being enlarged to cover hitherto untaxed incomes as in agriculture, the unorganised sector and in professional services.

The underground economy

Despite many amnesty schemes in the past, unaccounted money (the parallel economy) continues to be a major challenge. The latest among such schemes (leaving out the largely infructuous Kar Vivad Samadhan scheme) was the Voluntary Disclosure of Income Scheme (VDIS) which Mr. Chidambaram so zealously pursued in 1997-98.

That scheme netted around Rs. 8,000 crores on a declared income of around of Rs. 30,000 crores. There has been a lot of moralising against such schemes but what cannot be totally overlooked is that no Government can remain apathetic to the fact that owing to a complexity of socio-political and ethical failures, the generation of black money and the financing of many enterprises in the economy through tainted money, have been a disconcertingly enduring phenomenon.

The fact is that black money is both a stock and a flow. As a stock, much of it perhaps is embodied in real estate and jewellery besides ``gold biscuits''. But this apart, black money is a perennial flow in an economy where corruption flourishes.

It is no new thesis that tax evasion is pervasive in India whether it relates to income-tax, excise duty, customs duty or commercial taxes. That a large part of the flow of black money finances trade in commodities as well as consumer durables is a known fact.

The question then is whether the Government should seek to tap such black money for developmental activities or assume a ``holier than thou'' approach in refusing to recognise the phenomenon at all. The new Money Laundering Law proposed can be expected to deter people from acquiring money/property through unlawful means but it cannot eliminate the evil of black money.

What should a pragmatic Government do in the face of this continuing menace in the economy? Those who advocate stringent action including confiscation of property on a charge-sheet being filed against an accused party are perhaps not reckoning with the new forms of corruption which such an approach may breed.

A more constructive approach, perhaps, could be to channel black money into productive investments in the economy and particularly in infrastructure and housing. If such an approach can also benefit the capital market by enlarging the funds available to it, so much the better.

There are ways in which corporate enterprises engaged in infrastructure development, real estate promotion, house building and in the development of townships, satellite towns etc., can be encouraged to access black money through bonds and equity (brought under an amnesty scheme).

Of course, the criticism against the Government for what would be called ``compounding with the evil of black money'' would have to be faced. Moral obloquy would not matter so long as the larger social benefits of an upgraded infrastructure and an expanded stock of housing facilities can be ensured through such a scheme.

The traditional bias against such a proposal comes from the moral sensitivity (hypocrisy?) about the Government surrendering to evil forces in the society. This attitude has an ostrich-like quality of wanton refusal to recognise the fact that tax compliance can never be universal even in an ideal society.

No Government which looks at social and economic development of the people in terms of maximisation of investment in infrastructure and in basic amenities can afford to turn a blind eye to black money.

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