The “Black Money” Backlash: These Are The Illegal Workarounds To India’s “Cashless” Chaos

The “Black Money” Backlash: These Are The Illegal Workarounds To India’s “Cashless” Chaos by Tyler Durden

Over two weeks after India’s abrupt demonetization of high denomination banknotes on November 8, the cash-driven economy still remains largely in a state of standstill, particularly the rural parts of the nation, where the government’s attempts to restock banks with “new” cash (even with the use of army helicopters) have failed to re-normalize commerce. As a result, the local population of business owners, unable to spend or deposit their “sackfuls of large bank notes amid India’s crackdown on hoarding cash”, is taking matters into its own hands, and as the WSJ explains, has started paying employees months of salary in advance, ringing up bogus sales and even buying gold they can smuggle overseas to get rid of stashed money or conceal its source.

The problem is that such workarounds are illegal and threaten to undercut the very premise behind Prime Minister Narendra Modi’s shocking move to cancel India’s highest-denomination rupee bills, which was meant to punish tax evaders and other criminals and bring more of the nation’s $2 trillion economy out of the shadows. As we explained previously, it was also meant to eliminate as much as $50 billion (or more) of the country’s debt.

And, as the paper notes, if Mr. Modi’s unprecedented social-engineering project fails to net too many of the biggest tax cheats, he risks further incurring the wrath of Indians already frustrated with the pain and economic dislocation the experiment has brought about in its first two weeks.

According to some, Mody is already on the defensive: “Canceling these 500- and 1,000-rupee notes has caused inconvenience to you,” the prime minister said at a recent rally. “But some people’s whole life has been ruined—that is how I have punished them. Because they looted the poor, the middle class. They looted your money to run their business. That is why I launched this fight.”

On one hand, Modi’s move was somewhat justified: as a mostly cash-based economy, it is relatively easy to engage in all-cash transactions which leave no trace, and thus lead to no taxes. Tax officials in India have for decades played testy games of cat-and-mouse with rich individuals and businessmen who accumulate wealth off the books and store it as real estate, jewelry, financial assets and cash stuffed in wardrobes. It also explains why India was, until recently, the largest importer of gold in the world (at least until China’s recent ascent to the top spot).

In a stunning statistic, only around 20 million individuals and families, or around 1.6% of the country’s population, paid any income tax in 2013. Government revenue from income tax is less than 6% of the size of the economy in India. In advanced nations, the average is around 12%.

So in an attempt to overturn the existing system, one where vast amounts of wealth were concentrated in inert cash, Modi launches the biggest demonetization experiment in modern history: requiring Indians to exchange their big bills at banks for newly created ones—or suffer a quiet, potentially catastrophic financial loss—was the prime minister’s way of forcing hidden riches to the surface. There, authorities would be watching, ready to examine large cash deposits. Or at least in theory: the exchange process has been plagued with inefficiencies, shortages, massive lines, in some cases even casualties.

While millions of Indians have heeded the call and more than $80 billion in old bills have been exchanged or deposited since the November 8 announcement, this is insufficient and represents just 40% of the value of all large rupee bills in circulation. The deadline for turning in canceled bills is Dec. 30.

And it is here that those who are unwilling to exchange their “unprovable” cash for new banknotes, are coming up with novel ideas, and are discreetly jettisoning their cash stockpiles in more inventive ways. Some examples:

In Kolkata, a longtime hub for illicit financial activity, a lively trade has sprung up for converting voided bills into new bank notes, gold or checks, each for a different price. Tax officials say some people are buying gold with old notes and smuggling it out of the country, where it can be resold for hard currency. Recently, a man was caught trying to bring 2.5 kilograms of gold, worth nearly $100,000, on a Mumbai-to-Dubai flight. Usually in India, the gold-smuggling goes in the other direction.

“We are on alert as more people try to take gold overseas,” one revenue official said.

Ironically, what was until recently the world’s biggest (illicit) importer of gold, may soon become the biggest exporter.

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