Why A Government Think Tank Says Notes Ban May Not End Black Money Menace

New Delhi: Three years ago, the National institute of Public Finance and Policy (NIPFP), a think tank under the Finance Ministry, prepared a report for the government on the scale of black or untaxed money in the Indian economy.

It estimated the amount was huge, almost 70% of India's Gross Domestic Product or GDP.

But the government's move last week to demonetise high value currency as a way of snuffing out unaccounted wealth has left the economists at the think tank unimpressed.

A position paper by NIPFP on the demonetisation decision authored by an economist at the Institute, Kavita Rao, says it is foolhardy to assume that getting rid of Rs 1000 and Rs 500 notes will extinguish black money.

She told NDTV that "unfortunately there is no evidence one way or the other that black money is purely held in cash or largely held in cash. There seems to be a lot of evidence that black money is held in other assets like gold, real estate. And there is also evidence that suggests that it is invested in sectors like education and health. I think it would be wrong to say that black money would be extinguished, if we demonetized. What it does do is put some sand in the wind. so things can slow down, so in the interim you dial a shock in the system."

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Ms Rao has called the decision a risky step, saying that it "rattles not just the black economy, but the entire economy by doing this. I guess it sort of conforms to this spirit of big reforms but it doesn't necessarily mean successful reforms."

The hardest hit, she said, will be India's informal economy, which, "will be...incapacitated because they don't have cash to work with for a good two years before the money supply increases again, or they find other ways of transacting."

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Prime Minister Narendra Modi's radical move to abolish high value notes has been largely praised by financial experts, who predict long term gains. Most opposition parties have said they do not oppose the ban, but the manner in which it was implemented, causing hardship to the common man amid a massive cash crunch.   

The government has said that the demonetisation was announced abruptly and only hours before the old notes were banned because it was essential to ensure that those with black money did not get time to convert untaxed cash into gold or property.