Why Jaitley's threats won't work: All black money is in stock markets & real estate, too risky to touch

The failure of the NDA government’s black money compliance window - widely predicted due to its excessively high penal provisions and lack of trust in the finance ministry’s assurances of confidentiality - offers a good reason to try again with a better scheme, this time targeting domestic money. Finance Minister Arun Jaitley was right to challenge comparisons with P Chidambaram’s highly successful voluntary disclosure scheme of 1997, which elicited declarations of over Rs 33,000 crore against this year’s measly Rs 3,770 crore, for the simple reason that Jaitley was targeting foreign assets while Chidambaram’s scheme was about domestic black money. [caption id=“attachment_2454762” align=“alignleft” width=“380”]  PTI[/caption] However, while this is a fair point, it is not entirely true. Reason: unlike 1997, when there were fewer linkages between domestic and foreign asset holdings, today this is not the case. The sheer volume of investment in participatory notes (P-notes, estimated at around $43 billion last June) and private equity money flowing into real estate ($1.3 bn in January-June this year) suggests that illegal money held abroad may actually be substantially invested here. The line separating foreign from domestic assets is arbitrary and thin. In any case, the two cannot be segregated unless we know the full identities of investors in P-notes and private equity funds, especially those getting into real estate. Real estate is where the bulk of the illegal domestic moolah is parked. Moreover, it is obvious that only the small fish were frightened by the government’s threats to root out black money. Some 638 people declared illegal foreign assets/incomes of Rs 3,770 crore, which means the average declaration was chickenfeed - just around Rs 6 crore. Clearly, the big fish are not biting and by refusing to declare their assets when the compliance window closed on 30 September, they were essentially telling the government “do your worst.” So Jaitley’s quiet threat - that those who didn’t declare will face “consequences” - is an empty one. The only way he can prove he means business is by targeting domestic black money where it is actually being held - in the stock markets and in real estate. If Jaitley goes after these two receptacles of illegal wealth, he would have proven a point. This means banning anonymous P-note investments and tightening the disclosure norms for private equity in real estate, not to speak of benami property holdings. Additionally, his taxman should hit the real estate sector when it is down - by legislating the right to pre-emptive acquisition of undervalued property, and by asking state governments to dramatically expand the floor space index to end the urban land shortage. Politicians and businessmen should not be allowed to collect huge rents from benami holdings by artificially constricting the supply of land for housing. Real estate is overvalued and due for a serious correction, and it is only political control of supply that prevents this healthy correction. But, of course, no such measures seem likely because the government itself will be worried about the “consequences”. A stock market crash following a crackdown on P-notes is the last thing a government with disinvestment on its mind wants; and no businessman, builder or politician wants a real estate crash for this is where they hold their illegal wealth. They won’t want to damage their own unseen net worth. Moreover, any sudden realty crash will rock public sector banks the most - as their bad loans will spiral out of control. They are already reeling under the burden of huge infra loans gone bad. The government should also be under no illusion that unleashing the tax hound on businessmen and the rich is going to bear rich dividends. The truth is the super-rich have steadily seceded from India. Since 2000, over 61,000 high net worth individuals - all dollar millionaires - have relocated outside India, a Knight Frank wealth report noted earlier this year. Jaitley’s chances of getting them back with threats are nil. The millionaires who left India vastly outnumber the number of people declaring incomes above Rs 1 crore annually - just about 43,000. Given the real economy “consequences” of a genuine pursuit of black money, Jaitley needs to try again. He needs to come up with a better scheme targeting domestic black money. The chances are he will still be targeting the same tax evaders who failed to bite the bait on foreign illegal assets. So what this means is simple: opt for a genuine amnesty scheme to get revenues from domestic asset and income declarations. It is, of course, perfectly logical to target cash drawals, encourage the use of plastic and mobile money, and generally demand Pan card numbers for all transactions above Rs 10,000. The economic intelligence network should also be strengthened. These are better than empty threats of “consequences.” Carrots will work better when the stick the government wields is broken and will take time to mend or replace.