Why black money scheme was a superflop, and what Modi can do to redeem it

How does one explain this paradox? Under Narendra Modi, it is grudgingly admitted that corruption and cronyism in the central ministries has fallen dramatically compared to the loot-and-scoot regime of UPA’s crony socialism. And yet, the very first scheme to bring back black money stashed abroad – the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 - whose compliance window closed on 30 September, is not just a flop, but a super-flop.

According to reports today  (2 October), total disclosures under the scheme were an underwhelming Rs 3,770 crore, and since only 60 percent of that will come in as tax revenues (30 percent tax, plus 30 percent penalty), the government’s coffers will be richer to the paltry level of Rs 2,262 crore. That, in fact, ought to have been the amount realisable from just one big businessman or crooked politician.

This is a huge political and economic defeat for a government that pledged not only to reduce corruption, but bring back the substantial amounts of the black money hoards held abroad – and the opposition is already crowing. How did Modi and Arun Jaitley get this so wrong?

First, let us understand why this scheme is a superflop and not just a flop. In 1997, when P Chidambaram unveiled an amnesty scheme for black money holders, he got declarations of around Rs 33,000 crore and collected taxes of more than Rs 10,000 crore. Today, given that the money value of the Indian economy is nearly 10 times greater, Jaitley should have got declarations of a magnitude 10 times larger than what Chidambaram got in 1997. This means declarations should have been of the order of more than Rs 3 lakh crore, and tax collections of around Rs 2 lakh crore – assuming the tax penalty was the same 60 percent. A more sensible amnesty scheme with lower penalties would have generated over Rs 1 lakh crore.

Put simply, the NDA government just bid goodbye to resources of the magnitude of Rs 1,00,000 crore by going after black money in a daft way. A sensible amnesty scheme was what was required, not a hamhanded one. To add insult to injury, the government also has egg on its political face.

The reasons for the superflop have been explained here in an earlier article where this writer had predicted just this outcome. Put simply, it made no sense for black money hoarders to give up 60 percent of their money when there was a good chance that the Indian taxman will not be able to get their hands on the money even if they kept it concealed – as has been the case so far. Most big black wealth holders would be happy to take their chances with the law as tax consultants and shady tax havens would have helped them keep their money concealed and/or move it to different locations. This Economic Times story explains how black money holders have already found ways not to declare.

The only question left now for the NDA now is to figure out how can it retrieve lost political and economic ground based on the promises made by Narendra Modi during the Lok Sabha election campaign

Two obvious routes are apparent.

First, it must tell citizens that the current Black Money law was only a first step, and in keeping with his promise of returning black wealth to the citizens of the country, the government will transfer all of the Rs 2,262 crore received as tax from the current disclosures will be transferred to all zero-balance accounts in the Jan Dhan banking inclusion scheme. This will end up giving around Rs 100-200 per account, depending on which accounts are credited with the money. Now this is not a big sum, but merely putting money in the accounts of the poor will have a huge psychological impact, especially when more is promised in future.

The Jan Dhan scheme and the direct cash transfer of subsidies are Modi’s biggest economic reforms to date. But 41 percent of the Jan Dhan accounts are zero-balance ones, and seeding them with some cash will make it possible to prime the pump for increased usage by the poor. If the government says its is crediting Rs 200 in every zero-balance account and spends the next six months explaining how the aam aurat can use mobiles and RuPay cards for operating these accounts by launching a crash course in financial literacy, it will have started a revolution. Not only that, if simultaneously kerosene and food subsidies, not to speak of NREGA wage payments, also end up in these accounts, Modi would have achieved what the UPA could not – real financial inclusion.

Second, the NDA must, after the December deadline for tax compliance under the Black Money law is over, announce another scheme – this time couched not as a Black Money penalty scheme, but as a scheme to tap black money for social and infrastructure investment. This is how it could work. If the next budget presents two bond schemes – one whose proceeds would go entirely for building rural and urban infrastructure, and another for financing subsidies to the poor – a lot of black money can be reeled in. The key features of these bond schemes should be amnesty for black money holders, normal tax collection on the amounts declared (say 30 percent with 5-10 percent penalty, or 30 percent tax with the balance payable in zero-interest perpetual bonds that will be listed on the stock market), and the promise of stronger action against tax evaders in future. A well-designed amnesty scheme with perpetual bonds will not only bring in tax income but additional long-term resources that cost zero interest for investment in infrastructure. The attraction for black money holders is that it will give them immunity from prosecution, and allow them to use the tradable bonds to regularise their illegal cash flows. Regularising these illegal amounts will help restart the investment cycle as earlier bank loans can be repaid. It will start a virtuous cycle of growth and reinvestment, helping the banking system too.

Moralists may not like this, but this is the most sensible way to bring black money back, help the poor and bring in resources for growth.

Of course, we still need measures to deter the creation of future black money and make businesses become legit, but that needs changes in election funding, real estate reforms, etc. That is what needs to be done in the long term, and we need legislation for them. The amnesty scheme is needed now to tap the stock of black money accumulated abroad (and in India) for the greater good. It is time we stopped fooling ourselves that harsh measures alone will do the trick. They won’t. As the superflop Black Money scheme of the finance minister proved.