Black Money: The Indian Bogeyman

This article is the first section of a larger series that weighs up the reasons given for the demonetisation of 86% of Indian currency, and also seeks to uncover the true compulsions behind the monumental action.

The entire study can be viewed as one article. Link below.


Here’s a snapshot of the numbers— how much actual cash there was, the denominations it was in & how much has returned to us & to the banks.

Source: India Today magazine, RBI data, Business Standard. Note: RBI has not given out data on ‘cash recovered’ since Dec. 10th ’16.

Throughout this article, we’ll be dealing with all kinds of large number in lakhs, crores, million & trillions & everything in between. To help with quick conversion, here’s a ready reckoner for reference.

Source: Livemint, Wikipedia, Credit Suisse Global Wealth Report,

Before we begin, what exactly is Black Money? How is it made?

If you’re looking for a brief, simple definition, it is

‘any income from financial transactions, legal or otherwise, that the state did not get its rightful share of taxes from’

The point to remember is, black money is not a static object, it is a flow. Currency is simply a medium for its transfer. The same commodity, whether cash, gold, property. etc, can be held either as black money or white.

The only factor which decides its legal status, or should we say colour, is whether the current owner has declared it and paid tax on it, or not.

This benign anecdote might provide some clarity.


Okay, so exactly how much Black Money is there floating about?

No one really knows. From the earlier narration, it is evident that one can’t exactly put a number to it. During demonetisation, the current govt. had assumed that the total cash stash of black money was up to a third of the total 15 Lakh Crores of high-denomination notes (HDN).

The next point to note, comes from this White Paper on Black Money — demanded by the BJP back in 2012 and published by the Ministry of Finance (led by Pranab Mukherjee at the time). It tells us that only 5–6% of black money assets are stored in cash. This figure is backed up by income tax raids from 2006 to 2012, which found that hard cash, as a proportion of black money assets seized or uncovered, amounted to between 4%-7%.

Source: Ministry of Finance — as admitted in Lok Sabha
In a gist, if the aforementioned Mr. Hawalawala, or another black money operator like him was raided by the Income Tax Department, they would find that he possessed approximately 5 Cr. in cash, while 95 Cr. of undisclosed income would be stashed in other forms of wealth, such as gold, jewellery, benami properties, overseas bank accounts, shell companies, etc.

Point being, rather than put the entire nation through such a turbulent upheaval, it might have been far more productive, to first go after the 95% of hidden wealth that was not in cash. However much ‘dirty cash’ is captured after demonetisation, it will be a paltry amount compared to what could be recovered using better-aimed ‘surgical strikes’.


Source: The Hindu, Nov. 12, 2016

Alright, we’ve been told that our ‘shadow economy’ is really large? And that its immense size was clouding our growth prospects?

In all countries around the world, there exists, what is referred to as the ‘shadow economy’— defined as financial activity not reported to the authorities. In India, as in other poor nations, this shadow economy coincides with the informal sector — where organisations or individuals are too small or too poor to keep books of accounts and report the same to the govt. every year.

A 2010 World Bank estimate says India’s shadow economy was 23.2% of the GDP. Other studies have similar numbers.

Comparatively, is that a high number? Not really. Most developed countries in the west have figures between 10–20%. Our developing-nation peers fare worse than us. China is an outlier at 15%, mainly due to its 45% industrial centrally-regulated economy. Whereas Japan, with a small 12% shadow economy has the highest Cash to GDP ratio in the world at 22%.

Source: Statista, Size of the untaxed “shadow” economy in selected countries 2010, as a share of GDP

So was India ‘reeling under the menace of corruption’ or not?

Probably not. Corruption, as in dishonesty, is part of human nature — it exists in every country. Its scope and extent is larger in poorer countries where government officials wield inappropriate amounts of arbitrary power, and checks & balances are few and far between.

According to a report on black money by the Central Board of Direct Taxes, ‘Measures to Tackle Black Money in India and Abroad’ (2012), the main method for generation of black money in India is through commercial tax evasion. A range of business entities under-report revenues and inflate expenses in order to hide huge chunks of income. This further explains why countries rich in natural resources such as Russia, Nigeria and Brazil have such enormous shadow economies.

The worrying truth is that more than individuals, it is supposedly bona fide, large multi-national companies that create the bulk of black money through ingenious methods — the likes of which are elaborated upon in this Times of India article.


Round-Tripping of Foreign Direct Investment (FDI)

How black money is laundered abroad and brought back ‘white-washed’

Source: Scroll.in, May 11, 2016
Large amounts of Black Money are sent abroad — the infamous Hawala route being just one method. This wealth is then parked in shell companies in various tax havens such as Switzerland, Panama & its neighbours, and the Indian favourites — Singapore and Mauritius, which together account for well over half the (FDI) in India.

So basically the big players in the black money racket comfortably use these routes to funnel out cash. At the same time, ‘whitewashed’ black money plays an important roundabout role in sustaining the Indian stock market and thereby the formal business sector.

You’re telling me that the rich don’t need to use sleeping tablets?!

“The sleepless are those who need cash to get by; the truly rich are laughing all the way to their flats in London.” — The Economist, Dec 3rd 2016.

If we examine the ground-breaking corruption scams such as the Bofors pay-offs or the recent AgustaWestland case, or even the De La Rue scandal(brought to light by the Panama Papers) where the British currency manufacturer paid lobbyists in order to bag RBI contracts, there was no cash element to the bribes and beneficiaries were allegedly paid off in foreign currency through overseas bank accounts.

However, India has amended its tax treaties with Singapore, Mauritius and Cyprus in 2016. Tightening the noose around tax havens is a vital measure in reducing round-tripping.

So how do we stop the generation of black money?

While the demonetisation of 86% of currency might have laudable aims, or claims, it does nothing towards stopping the ebb and flow of this illicit wealth. To get serious about cracking down on large-scale corruption and the embezzlement of resources, governments, read: political parties, need to extricate themselves from their dependency on corporate funding — a subject we shall elaborate on later.

Meanwhile, everyday bribery and corruption can be stopped only by modernizing and streamlining the outdated Kafkaesque mechanisms of government — the bureaucracy, the judiciary and the police are massively flawed institutions which function as the very drivers of corruption.

If any government is sincere about recovering Black Money, the first and most effective place to begin, is the Income Tax department of India. This most vital cog in the fight against corruption and black money, is brazenly extortionate, incompetent (when required) and woefully understaffed. They are the ones who turn a blind eye to — or often coerce — businesses into fudging their books of accounts and in return, paying a rather hefty hafta.