This article analyses and validates demonetization on the assumption, NDA Govt's CLAIMS are true. Their claims are, demonetization is to eradicate black 'money', to abolish counterfeit currency flow across India-Pakistan Border, to end the bribing, and finally, to encourage a digital society!
Informal Sector: Livelihood of a developing country
The informal sector is a part of an economy that is ‘neither taxed nor monitored’. It is not counted in a nation’s GDP or in the production of goods and services [0].
The Unaccounted Economy…
It mainly includes both grey and black markets.
If you own a branded camera, watch or a sun glass or something else that you bought at a lower price than that of its market value or manufactured by some other unauthorized company; it’s from the grey market.
If you use drugs or own weapons or if you are not given a sales invoice (the record of the transaction!) when you buy any goods or services, say an ink pen or a chocolate; it’s the black market.
Note that the black market includes the transactions of both the illegal and legal goods and services.
So intentionally or unintentionally we all are a part of it! We all encourage the circulation of both black and gray money. In other words, we can’t survive if we are trying to step back from that economic transactions.
Really?
No, not necessarily. But you should insist for a record of purchase even if you’re buying a toffee of 50 paise!
The general properties of the informal sectors (gray and black market) are, as stated above, not taxed, not monitored, there is no job security for the sellers (once their shops are closed they’re sent to suffer from no means of income but to start another gray or black market) hence NO SOCIAL SECURITY, in other words, it is not counted by the govt.; the unreported employments.
The street vendors, trash collectors, small scale private transportations, daily wage workers like the construction workers, home based tutors, the child labor, small scale businesses, drug dealings and roadside vegetable sellers (THE VAST MAJORITY) under typical gray and black markets.
So, are you saying that these are the people who withhold the calculated 20-30% of the withdrawn Indian denominations, 500 and 1000 rupees???! (Answer is in the next section)
Footnote:
In 2009, OECD (Organization for Economic Co-operation and Development) reported that half of the world’s workers were from the informal sectors. They predict it will be two-thirds of world’s workers by 2020; the shadow economy or system D; The second largest economy in the world (if it was a country) with (a GDP) $10 trillion (whereas US ranks first with GDP $18.5 trillion and India ranks seventh with GDP $2.25 trillion) [1].
The only way to decrease/get rid of the shadow economy is, decrease the unemployment rate (unemployment forces one to step into the shadow economy for hiser living). It can be done by employing them in in both private and govt sectors. But how much job security your family will have if you are working in a private sector and die accidentally on a day? How about after retiring? How much private sectors provide a pension after retirement? The private sectors are far from the public sector in terms of job security and hence social security (hence loopholes for a shadow economy). So we’ll have to modify the statement such that, ‘decrease the unemployment rate under the proper supervision of govt’.
BLACK MARKET IS UNAVOIDABLE UNLESS A NATION WIPES OUT THE UNEMPLOYMENT IN THAT NATION.
But, who’s there to provide a job for an uneducated shoe shiner? (For now, leave that question. Let us not divert from our discussion)
Footnote:
System D culture: If, someone tells you (or you advise someone) ‘It won’t work. Adapt to the surroundings and get your things done’ when you (hesher) quarrel with a shopkeeper for not providing the bill of purchase and being teased by the rest of the customers in that shop… click! Hesher (you) is a part of the shadow economic culture, so are the audience, the deep and wide informal sector…
‘Off The Books’: reported employment and under/unreported economy
(Contin. Of the question from the last section)
No, it’s not just them! You missed an important but less stressed point; the ‘the record of a transaction’. That not necessarily comes under the unreported employment but under/unreported economy, which doesn’t follow the tax rules.
Everyone is supposed to pay the tax directly or/and indirectly. No one is exempted from it, even if you’re a jobless person and you want to buy a toffee of 50 paise, you’ll have to pay the excise duty/ customs duty, VAT and other forms of sales taxes. If your annual income is greater than 2.5 lack rupees, you will have to pay income tax too, based on your income slabs [2]. Apart from these, there are several other forms of taxes like property tax, service tax, and inheritance tax etc depending on your economic platforms.
Script 1: Take an auto rickshaw/ private bus from your home to the nearest chocolate shop. Buy a diary milk of rupees 10. Walk away from the shop. Either eat it or gift it to someone. Script ends.
You get no discount in general for a dairy milk of rupees 10, and the MRP (maximum retail price) includes all the possible taxes that you’ll have to pay for it. In our script, you didn’t demand the bill (the record of the transaction). The same happened in the bus and auto rickshaw if they didn’t provide you a traveling ticket and if they didn’t turn on the taximeter respectively. You left no records of transactions (assuming the bill/ticket/taximeter is not bogus).
Now, you get no profit out of the sales taxes you paid for the chocolate (or for the travel), moreover, you’re ROBBED (/fooled because of your ignorance) if the shopkeeper doesn’t pay sales taxes to say, VAT. Similarly, they can easily fake their true income and hence the increased likelihood of income tax evasion! If you are buying 50 dairy milk of rupee 10 to distribute among your friends on your birthday, with no effort, you gave the shopkeeper an opportunity not to show the details of those transactions!
The profit from this sale goes to the black economy with no effort…
Generation of black money is not that difficult, is it?
Whenever we go to a grocery shop, to buy rice, biscuits, pen or a book, do we get a printed invoice? A market is designed such a way that the seller will get profit even if hesher pays the taxes (profit of rupee 1 in the lowest extreme). In the diary milk birthday case, the grocery shop owner collected rupees 500 solely from you. Similarly, hesher sells rice, round the price of rice to 30 rupees per kg. Selling 10 kg rice would help himer to collect 300 rupees. Now comes the vegetables, salt, and sugar etc; the fundamental items… Superficially, we can assume hiser profit to be not less than 1500/- per day (Because otherwise it’d be a non-profitable thing to do and hesher will be forced to close the shop). That would sum up to 547,500 rupees in a year that is greater than 2.5 lacks. Hesher is liable to pay income tax of rupees 34,500 per year, according to the tax slabs, 2015. You may check yourself in detail in this website [3].
Oh, God! That’s a lot!!!! It’s so rude of the govt. to ask himer to pay such a high tax for barely an annual income of ~5.5 lacks!
Mhmm? Ok, in the first place, do you think the profit of a grocery shop owner per day would be just 1500 rupees? And let us collect information about the income tax collection of our govt. between; I don’t have much to offer you as statistical data since the govt. doesn’t make all the details available to the public… Things are less transparent… :/
Income of Govt.: Tax Collection
The main sources of income of a govt. are Govt. owned industries, fines, debt (from World Bank, IMF etc), govt. banks, and various TAXES.
By the report of RBI in 2011-12 [4], 56.83 million (5.7 crores) Indians work in the formal sector (12.04 million private and 44.79 million in public sector). That would be around 4.6% of the whole population. So, rest of the 95.4% Indians (wrt to the population in 2011-12) are either jobless (or children) or work in the informal sectors; aka black and gray sectors… It includes daily wage workers, road side vegetable& fruit sellers, drug dealers, farmers etc with a majority of farmers.
Now among the workers, barely 2.9 crore individuals filed income tax returns AND among them, just 1.25 crore individual paid income tax in the financial year end on March 31, 2012. Among them, over 1.11 crore (89% of the tax payers) had an average tax of rupees 21,000! [5].
This is just about the income tax in the formal sector. How about the rest of the 95.4% of Indian population who works in the informal sector? How about other taxes like GST, CST, VAT, property tax, and inheritance tax etc? How about the under/unreported transactions???
Footnote:
On Jan 1st one of my neighbors grandly celebrated their housewarming amid the demonetization issues. A very astounding two storied house. Well, they belong to BPL (below poverty line), or in other words, in that family, the wife is jobless and the husband belongs to the informal sector.
The govt. systems are either inadequate in monitoring the tax evasion or they encourage the black economy.
Still, things are not clear... You said 95.4% of the population is in the black and gray sectors and barely 1.59% of the ADULT population pay tax, among the tax payers, 89% pay around 21,000 rupees. So where is the black money? Is it with the street vendors collectively?
Wealth Distribution: The Extent of Tax Evasion
Well, it's a genuine question when you don’t know the wealth distribution.
What is wealth? Possession of anything that has an exchange value. Any kind of investment like gold, land, market shares etc. When the street vendors or millionaires spend their money on food, it doesn't count because it is not an investment. But if the street vendors or the millionaires spend it for purchasing gold or sharing it in a market, that is called wealth.
India has a total individual wealth of 358.8 trillion INR. 54% of it is held by the top 1% millionaires (it will be 49% excluding ~8,5000 NRI millionaires), based on global wealth data book 2014-15 [6][7][8].
Now, from the above section we saw, 1.25 crore individuals pay income tax, which is 1.59% of the ADULT population(wrt to population 2011, based on the financial year ended in March 2012), with 5000+ individuals pay more than 1 crore as income tax. The top 1% excluding NRI, who hold 49% of total wealth is consist of 1.59% of the ADULT population (1.29 crore wrt population 2014).
Moving ahead with an eccentric imagination such that, all the formal sector workers are in the top 10% richest, and take 6.4% top richest from the informal sector, which adds up to the top 10% richest in India (12.95 crores). They own 74% of India's wealth (excluding NRIs), yet just 1.25 crores pay income tax!
The REST evade from paying tax, with another eccentric assumption that the tax payers don't fake their true income! They have the bulk of black 'wealth'...
The only way to get rid of the black economic transaction is account each and every transaction!
Footnote:
"According to IHDS-II, if your annual household income is greater than Rs. 1.6 lakh INR (ie around 450 INR per day), you belong to the richest 20 per cent of the country" [9]. Note the extremity!
Demonetization: A major step to tackle the black money
Indian govt. announced demonetization of 500 and 1000 currencies, the two highest denominations of Indian rupee on November 8, 2016, at 8pm, as a major assault against black money, corruption, and counterfeit currency.
The withdrawn denominations in circulation add up to 14.18 trillion INR, 3.95% of the total wealth (358.8 trillion INR). We expected 20-30% black money stored in currencies in that 3.95%. That would be 2.8-4.2 trillion rupees (0.79-1.19% of total wealth were expected to be stored in currencies). Now, let us go to a scenario of demonetization, executed PERFECTLY as 'planned'.
Script 2: Assume that 20-30% of the demonetized denominations were black money as expected. Rest of the currencies came back to the govt. with none being fake currency. New currencies of rupees 500 and 2000 equivalent to the withdrawn/collected denominations were introduced in one or tw week. Everything was restored to the old situation as on Nov 8, 2016, or in a better way. GDP growth had just small dip due to the economic loss equivalent to working hours that citizens spend in front of ATMs and banks and the GDP growth was restored after that week. Script ends.
NOW, WHAT?
Yes, now what? What would have happened to the counterfeit currency, corruption, and black money (or black economy in the first place) after a successful implementation of demonetization? How much we earned/lost?
India's gross domestic product (THE MEASURE OF A COUNTRY'S OVERALL ECONOMIC OUTPUT) wass equivalent to 142.69 trillion INR in 2016 or 0.39 trillion INR per day. Assuming a kind of partially strike like condition in the one or two weeks in our script (due to the queue to take/exchange cash and lack of currencies etc), we would have lost 2.73 - 5.46 trillion INR at maximum [10] (REF ■), which is greater than or equal to the targeted black money stored in currencies. Apart from that the cost of printing new currencies and repair /replacement of ATMs etc contribute to the cost. The cost is higher than what we would have caught from the black sector.
When we look for long-term effects on black money or fake currencies or corruption, from our study, we infer the followings.
Demonetization by no means supervises the tax evasion.
The 95.4% of the population who work in the informal sector still remain in the informal sector. The shadow/black economy
It does nothing to monitor/prevent the illegal outflow of wealth. (India ranks 3rd in the world [11])
It doesn’t ensure if the consumers are given the TRUE record of the purchase of goods & services.
It doesn’t catch the drug/ weapon transportation.
It doesn’t ask you not to pay the sales tax of dairy milk of rupees 10 in script 1 if the seller doesn’t report it to the govt.
Finally, it does nothing to the wealth distribution because of all the points stated above!
ACCUMULATION OF BLACK MONEY (WEALTH) EVEN IN NEAR FUTURE IS HARDLY AFFECTED by the seven points stated above.
Next is the Counterfeiting. If we can assume script 2, the emergence of fake currencies of new 500 and 2000 notes are highly likely within the next 6 months.
Corruption; currencies are not the only means of corruption, and we have new 2000 rupee notes to bribe!
THE END
Footnote:
To eradicate the black economy and wealth what we can do are
Decrease the unemployment rate and shrink down the informal sector.
Strengthen the security checking so that no illegal activities will be done across the borders of India.
Educate, Edify, and Empower the public about their rights, responsibilities to eradicate corruption.
Insist on proper tax inspection.
Legally limit the wealth an individual can own.
Add your points now…
A few more reading materials:
http://blog.ted.com/system-d-the-informal-economy-robert-neuwirth-at-tedglobal-2012/
http://www.nipfp.org.in/blog/2016/11/16/impact-demonetization-what-expect/
http://www.forbes.com/sites/timworstall/2016/11/19/effects-of-demonetisation-on-indias-gdp-difficult-to-calculate-we-dont-even-know-the-sign/#68e423754a1a
.
REF■: A Glance at the Economic Equivalency of Working-hours and GDP
Script 3: You have got a new job with an exciting salary, and you live alone in a flat that you own. On the first weekend of your job, on Sunday night, you played hide and seek with a mischievous child from your neighborhood. Hasher tied you to the pillar in the center of your drawing room (about which you always wondered ‘why the hell this is here!’ and now you got a chance to curse it for causing you trouble) with hiser newly brought electronically controllable and automated stress-strain tying rope, out of which you can escape by no means but its remote controller. The child switched off your cell phone and segregated it into different parts, switched off the electric and water supply. Then the child went to hiser home. Script ends.
You didn’t go to your job on the next day, Monday. The attendance registrar marked ‘absent’. You lost the wage on that working day. Oh, poor you… :(
The only thing that you have done on that day is breathing. Apart from that you left no sign of a living being in terms of consumption. But that doesn’t count economically since the govt. has assigned no market value for oxygen in the atmosphere. You brought nothing. You sold nothing. You contributed nothing economically on that day (not even a debt!).
So, YOU’RE ECONOMICALLY DEAD!
Eh! How?
Simplifying the problem to a level that your brain can access and understand, you’re dead and buried in general sense. You produce nothing, you consume nothing. Or, you cause no change in the mobility of goods and services. Or, you cause neither progresses nor problems of a nation (or world in a broad sense) you lived in.
Now going back to the real script, when you think, ‘you are paid for your job’ what it actually means is, ‘you sell your abilities/work (physically/mentally) for a certain currency value or denomination’. Or, there exist a fixed exchange rate to your abilities/work (physically/mentally), with which you produce goods/services. So, when you don’t work a day, it is equivalent to say that you produce no goods/services on that day.
Let us assume that our nation is 100% self sufficient such that we literally produce everything we need. Then, we wouldn’t even have to communicate with any other nations in the world. Still, we would have currencies (or other electronic means of ‘money’) to ease the circulation of goods and services, otherwise the old barter system would eat(???another word?) our time from hours to days or months for transactions of the goods and services depending on the availability of them.
So, the correlation of circulating currencies and the goods& services is such that,
1. When you do not work or consume, you do not produce/buy goods or services; as a result you cause a depression in the self sufficiency of the nation (Apparently, you don’t get paid).
2. When there are no enough currencies in circulation,
a. People will hesitate to sell what they have. (how long will you continue in a job if you are not paid for what you do?)
b. The result is the same as the first case; depression in the self sufficiency (or, depression in the economy)
Hence a DEPRESSION IN GDP…
