Archive for September, 2012

Daily Mail, a UK based newspaper recently published a news item (I read it in the online edition) which reads “Sweden could be first country to go cashless as even churches are taking cards for offerings”. The report states that:
  • Sweden was first Nation in Europe to bring in currency notes in 1661 
  • Bills and coins now come to just 3% of Sweden’s economy
  • Bank robberies plunge, but cyber crime surges
  • A small, but growing number of businesses only take cards and some bank offices – which make money on electronic transactions – have stopped handling cash altogether.
  • There are towns where it isn’t at all possible anymore to enter a bank and use cash
Though the concept of Cashless Economy, where, in the place of Print currency, other modes of payment viz, cards, cheques, mobile phone payments are adopted for Financial Transactions in the economy, is yet to get popularity in India. However, we can undoubtedly tell that non-cash transactions are gaining popularity here also, as the days pass by. 
So, before branding the above news item as irrelevant for this biggest democracy with half of its population below poverty line and in that a lion’s share illiterate and not having any bank account, let us go through the facts from various corners of this world in this regard.


The Context


In their article named ‘Hiding in the Shadows – The Growth of the Underground Economy’ by reputed economics professor Friedrich Schneider (Johannes Kepler University, Austria) & Dominik Enste, published during March 2002, which is available in the International Monetary Fund website, gives a detailed account of genesis, modus operandi and impact of ‘Shadow Economy’ over the Official economy. As per them, the underground, informal or parallel economy – the shadow economy – includes not only illegal activities but also unreported income from the production of legal goods and services, either from monetary or barter transactions. Hence, the shadow economy comprises all economic activities that would generally be taxable, if they were reported to the tax authorities. 
The news item of Daily Mail on Sweden brought out Mr. Schneider’s statement that “the prevalence of electronic transactions — and the digital trail they generate — also helps explain why Sweden has less of a problem with graft than countries with a stronger cash culture, such as Italy or Greece. If people use more cards, they are less involved in shadow economy activities”
The opinion of the learned professor is to be readwith the saying that “Black economy is cash economy”. Non traceability, the most significant feature of Printed Currency which enables the user to use it without leaving any trail, is making the Printed currency the most ideal medium for the Corrupt, Terrorists and other players in the Shadow Economy for transaction & storage of Value – two of the primary functions of Currency. Needless to say that Tax evasion and coexistence of Counterfeit Currencies are other banes. It has various other disadvantages like inconvenience to carry, theft proneness and arguably its role even in the spread of Prostitution and AIDS, as many experts on the subject points out. These aspects are not intended to be discussed here.

Is cash-less economy a solution?

In Cash-less economy, principally all transaction will be done through accounted money in the banks, through various instruments like Debit Cards, Credit Cards, Internet Banking, Mobile Phone Banking etc. Multiple Platforms for transaction would be available. The biggest advantage of Cashless Economy is that all financial Transactions can be traced, which prima-facie can drastically reduce corruption and terrorist fundings, besides avoiding the Cost incurred in the Printing/ Minting of Currencies/ Coins. Remember, 2012 Currency Budget of US (Printing, Trasportation, Currency education & Counterfeit-deterrence research) is totaling $747.0 million.  
It may be surprising for those who are not economists like me, to learn that Nigeria has initiated great steps to bring down the use of Printed Currency. Central Bank of Nigeria (CBN) has introduced a new policy termed ‘Cash-less Lagos Project’ which, as per them, aims at reducing (not eliminating) the amount of physical cash (coins and notes) circulating in the economy, and encouraging more electronic-based transactions (payments for goods, services, transfers, etc.). Various African Countries like Uganda and Zimbabwe are Officially encouraging non-currency transactions, especially over Mobile Phones.

Shadow economy and India

Shri Dev Kar, formerly a senior economist at the International Monetary Fund (IMF) and now Lead Economist at the Global Financial Integrity in his November 2010 report titled “The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, published for Global Financial Integrity brings out that:
  • India lost a total of US$213 billion dollars due to illicit flows, the present value of which is at least US$462 billion (based on the short-term U.S. Treasury bill rate as a proxy for the rate of return on those assets)
  • The total value of illicit assets held abroad represents about 72% of the size of India’s underground economy
  • India’s underground economy has been estimated at 50 percent of India’s GDP (or about US$640 billion at end 2008)
  • Over $125 billion of that was lost between 2000-2008
  • Over $96 billion of that amount left the country between 2004 and 2008.
  • These illicit financial flows were generally the product of corruption, bribery and kickbacks, criminal activities and efforts to shelter wealth from a country’s tax authorities.
  • Had India managed to avoid this staggering loss of capital, the country could have paid off its outstanding external debt of $230.6 billion (as of end-2008) and have another half left over for poverty alleviation and economic development
  • “Total capital flight represents approximately 16.6 per cent of India’s GDP as of year-end 2008.”
  • “Transfers of illicit capital through trade mispricing account for 77.6 per cent of total outflows from India over the period 1948-2008.”
  • Illegal flight of capital, it says, “worsens income distribution, reduces the effectiveness of external aid, and hampers economic development.”
Trade mispricing is a technique adopted especially by Companies (ultimately by High net-worth individuals) to transfer money out of the country for the purpose of evading Tax, routing through Companies registered in Tax havens, using fraudulent commercial invoices.
Based on this report, Shri P. Sainath, well reputed journalist wrote an article in the Hindu daily, titled “Illegal financial flows: the great drain robbery” with the following analysis:
  • India is losing nearly Rs.240 crore every 24 hours, on average, in illegal financial flows out of the country
  • In just five years from 2004-08 alone, the country lost roughly Rs.4.3 lakh crore to such outflows. That is — nearly two and a half times the value of the 2G telecom scam now exercising Parliament and the media. The Comptroller and Auditor General of India (CAG) pegs the 2G scam at almost Rs.1.8 lakh crore.
  • Dev Kar, told The Hindu that “India is losing capital at an average rate of $19.3 billion per annum. India can ill afford to ignore such a loss of capital.”
  • And even the total $462 billion, says GFI Director Raymond W. Baker in a letter prefacing the report, is “a conservative estimate. It does not include smuggling, certain forms of trade mispricing and gaps in available statistics.” Factor these in, and “it is entirely reasonable to estimate that more than a half-trillion dollars have drained from India since independence.”
  • That does seem an obvious outcome in a country where according to the National Commission for Enterprises in the Unorganised Sector (NCEUS), 836 million human beings live spending Rs.20 a day or less.
  • The GFI study makes two vital points amongst others that will surely stoke ongoing debates in the country. One: the drain bloated massively in the era of economic liberalisation and reforms starting with 1991. Two: “High net-worth individuals and private companies were found to be the primary drivers of illicit flows out of India’s private sector.” Conversely, “India’s underground economy is also a significant driver of illicit financial flows.”
  • Only about 28 per cent of illicit assets of India’s underground economy are held domestically. It also strengthens arguments that “the desire to amass wealth without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital.”
The above are only illicit outward flows. The total size of Shadow economy in India in such a case will be unimaginably high. 

Initiatives by the Govt. which can potentially bring in some change:

In the ‘White Paper on Black Money’ published by Ministry of Finance during May 2012, the Central Govt. is hopeful that Public Procurement Bill 2012, Unique ID Cards, Implementation of Lokpal & Lokayukta, Agreement between countries for Revenue Sharing etc. can reduce generation of Black Money and repatriate Black Money stashed abroad. It is explicitly stated therein that action by state Govts. in reducing Organised Crime, benamy deals in real estate etc. are vital.
I’m a strong supporter of linking bank A/c and Transaction details to the proposed Unique ID Project, as the Nation cannot afford to have generation and smuggling of such a huge amount of Black Money and an ever enlarging shadow economy. Proposed plan to distribute mobile phones to households below poverty line also can give a great positive momentum for our economy in its journey towards becoming a Cashless Economy and emerge out of Shadows (Courtsey to the above professors).
But all these require commitment of the policy planners and implementers (yes of the voters as well). We know what is happening with the proposed General Anti Avoidance Rules (GAAR), a landmark-extremely advanced instrument of tax administration, which can drastically curtail the tax evasion by Corporates, the implementation of which, as per the latest news reports (The Hindu 1.9.12), is going to be further delayed. The expert committee on General Anti Avoidance Rules (GAAR), has advocated postponement of the provision by three years till 2016-17. 
Important References:

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