Black Money fundas and Surgical Strike that I was trying to explain to my 12 and 10 year old when it happened. This is a hyper simplified version as explained by a non-economist, non-finance person to a not so interested captive audience who may get a candy if they listened :-)
The beginning.
Paper money is printed by sovereign nations to help their people barter/ trade within the political boundaries of their nation. The state gives a solemn promise to give the bearer of the note equivalent of the value printed on it. Even if the monarch or his agent signs the document and makes a God promise of honouring, we the people, don't trust them. So to ensure the trust, nations keep a non-decaying asset through which this promise is honoured. The reference standard currently in vogue is Gold. So, nations usually print just about money that they can honour using this standard. Will it be exactly the equivalent? Not likely, the conversion factor between the standard and the printed is an arbitrage which nations use as breathing space when things go bad.
Paper money is printed by sovereign nations to help their people barter/ trade within the political boundaries of their nation. The state gives a solemn promise to give the bearer of the note equivalent of the value printed on it. Even if the monarch or his agent signs the document and makes a God promise of honouring, we the people, don't trust them. So to ensure the trust, nations keep a non-decaying asset through which this promise is honoured. The reference standard currently in vogue is Gold. So, nations usually print just about money that they can honour using this standard. Will it be exactly the equivalent? Not likely, the conversion factor between the standard and the printed is an arbitrage which nations use as breathing space when things go bad.
Then whats black?
No, money is not printed in black for it to become black money! It is almost always multi-coloured. Money is declared black, if it goes outside the vision of the sovereign for a long duration of time. No, money doesn't have a tracer that will be used by the state to track them. It usually is in circulation and gets reported by individuals by way of bank transactions or tax returns, which allows the Govt to track the money flow. If for some reason you don't want to report, you pay by paper money that is not reflected in a bank transaction, a parallel market for money flow is established which is invisible to the Government. This invisible market allows people to horde goods, real estate, gold or just the money by itself without the knowledge of the Government.
No, money is not printed in black for it to become black money! It is almost always multi-coloured. Money is declared black, if it goes outside the vision of the sovereign for a long duration of time. No, money doesn't have a tracer that will be used by the state to track them. It usually is in circulation and gets reported by individuals by way of bank transactions or tax returns, which allows the Govt to track the money flow. If for some reason you don't want to report, you pay by paper money that is not reflected in a bank transaction, a parallel market for money flow is established which is invisible to the Government. This invisible market allows people to horde goods, real estate, gold or just the money by itself without the knowledge of the Government.
How else is black money made?
Almost all of the black money is generated within the country. But then there is an other way by which money can come. People can print it and that is called as counterfeiting. This can be done by the nation itself (remember the gold standard?) or by greedy people or by other nations that are inimical. Irrespective of who prints, the country is in trouble.
Almost all of the black money is generated within the country. But then there is an other way by which money can come. People can print it and that is called as counterfeiting. This can be done by the nation itself (remember the gold standard?) or by greedy people or by other nations that are inimical. Irrespective of who prints, the country is in trouble.
So how does that bother the Sovereign?
With this secondary market, state doesn't know how well off it is. It is like we have many packets of candies in the fridge but it is shoved behind a large vessel and you have to beg Amma for a candy concession to treat that sweet tooth. Similarly nations have so many things (called welfare and administration) that have to be done for which money is needed. This is possible if the country doesn't know how much it has in its "fridge" how much more they have to borrow. So more the money that is there, which is invisible, more the nation has to borrow not knowing what it actually has. This gives a great incentive for the nation to chase this missing money. Even more dangerous is when this money that is not being traced is showing up in the wrong hands at the wrong time. For instance, I would want that extra dosa that Amma wouldn't give me. I promise to give you a secret hidden candy behind the large vessel that Amma doesn't know so that you ask Amma for a dosa and pass it on to me. Like wise people who would like to terrorise us will be paid with these black money. It could also be used to pay for buying other favours too.
With this secondary market, state doesn't know how well off it is. It is like we have many packets of candies in the fridge but it is shoved behind a large vessel and you have to beg Amma for a candy concession to treat that sweet tooth. Similarly nations have so many things (called welfare and administration) that have to be done for which money is needed. This is possible if the country doesn't know how much it has in its "fridge" how much more they have to borrow. So more the money that is there, which is invisible, more the nation has to borrow not knowing what it actually has. This gives a great incentive for the nation to chase this missing money. Even more dangerous is when this money that is not being traced is showing up in the wrong hands at the wrong time. For instance, I would want that extra dosa that Amma wouldn't give me. I promise to give you a secret hidden candy behind the large vessel that Amma doesn't know so that you ask Amma for a dosa and pass it on to me. Like wise people who would like to terrorise us will be paid with these black money. It could also be used to pay for buying other favours too.
How can it be hidden?
It is not easy to hide money from the Govt. It takes a lot of effort to hide it and people have to be creative to hide it. Keeping it as just cash will not put the money to use therefore will not be useful in the long run. This has to be converted to buy things (assets) such as Gold, real estate, etc. Sometime there is so much of it that it has to be used to buy things that are not within the shores of the country.
It is not easy to hide money from the Govt. It takes a lot of effort to hide it and people have to be creative to hide it. Keeping it as just cash will not put the money to use therefore will not be useful in the long run. This has to be converted to buy things (assets) such as Gold, real estate, etc. Sometime there is so much of it that it has to be used to buy things that are not within the shores of the country.
How do we get it back?
Off the three, money outside is very difficult to get as it is a slippery snake to catch. Too many ways to hide exists and too many people with different agendas have to be convinced to bring it back. This is like the chocolate that you see behind a glass shelf. You know you can get it, but you will have many difficulties getting to it. You also run a risk that it may not even be a chocolate but just a board!
Off the three, money outside is very difficult to get as it is a slippery snake to catch. Too many ways to hide exists and too many people with different agendas have to be convinced to bring it back. This is like the chocolate that you see behind a glass shelf. You know you can get it, but you will have many difficulties getting to it. You also run a risk that it may not even be a chocolate but just a board!
So what happened in India?
Black money was getting to be a big pain and people wanted it back. The current government told the people we will get it back. They made getting back a priority agenda. For common people it appeared that nothing was happening. In fact the Govt was taunted for getting that 15 Lakh to each household, which it claimed as the black money in Indian system. Instead of an instant solution and promises that we are used to, Govt took a long term view and started addressing the problem by fixing the fundamentals. They split the black money as internal and external. Different strategies were adopted for both of them with a commonality of mapping the money and the person. Free floating cash was stalled and Govt helped all citizens to open a bank account, give an unique identification or Aadhar or UIDAI. Gave a long time to come clean for its citizen with stern warning of dire consequences.
Black money was getting to be a big pain and people wanted it back. The current government told the people we will get it back. They made getting back a priority agenda. For common people it appeared that nothing was happening. In fact the Govt was taunted for getting that 15 Lakh to each household, which it claimed as the black money in Indian system. Instead of an instant solution and promises that we are used to, Govt took a long term view and started addressing the problem by fixing the fundamentals. They split the black money as internal and external. Different strategies were adopted for both of them with a commonality of mapping the money and the person. Free floating cash was stalled and Govt helped all citizens to open a bank account, give an unique identification or Aadhar or UIDAI. Gave a long time to come clean for its citizen with stern warning of dire consequences.
And what is big about the Strike?
In a quick, secretive and decisive move Govt took out the largest denomination of currency, as some say about 86%, in Rs 500 and Rs 1000. This forces people to come clean. For majority of the population, it is hardship. Hard because you have to give your 500/1000 in bank to get new 500/2000. There is also a brief period when not adequate cash may be around. While there are other instruments like cheque, cards that can be used in most cases, it still is difficult for many. For those who are volitionally hiding black money it is difficult because they will have to give it in bank and pay a tax plus penalty for holding black money. But for this difficulty, they will be back in business. It will be a disaster for those who have been holding money that can't be declared cause it was made in illegal ways or it will destroy reputation (like politician or businessmen or Govt Servant). As a farmer does, to grow a good crop one has to remove all the weeds, Govt is doing now.
In a quick, secretive and decisive move Govt took out the largest denomination of currency, as some say about 86%, in Rs 500 and Rs 1000. This forces people to come clean. For majority of the population, it is hardship. Hard because you have to give your 500/1000 in bank to get new 500/2000. There is also a brief period when not adequate cash may be around. While there are other instruments like cheque, cards that can be used in most cases, it still is difficult for many. For those who are volitionally hiding black money it is difficult because they will have to give it in bank and pay a tax plus penalty for holding black money. But for this difficulty, they will be back in business. It will be a disaster for those who have been holding money that can't be declared cause it was made in illegal ways or it will destroy reputation (like politician or businessmen or Govt Servant). As a farmer does, to grow a good crop one has to remove all the weeds, Govt is doing now.
Is that the end?
Most certainly not. There will be a small cottage industry that will now start to clean up black money. People who may loose all of it will choose to loose some of it instead and use this cottage industry. Financial wizards will be coming up with ways to beat the system. People for whom it is a disaster will fight back. Lots more to watch and learn ....
Most certainly not. There will be a small cottage industry that will now start to clean up black money. People who may loose all of it will choose to loose some of it instead and use this cottage industry. Financial wizards will be coming up with ways to beat the system. People for whom it is a disaster will fight back. Lots more to watch and learn ....
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