Recently, my Arts Editor and I spoke with an emigre from India, who told us about India’s decision to be rid of certain denominations of currency as those denominations are used to implement various corrupt practices. They are known as black money. Now LinkedIn publishes a column by Subodh Mathur, an economics professor, who suggests this particular choice may turn nasty for India:
In the meantime, there is a serious risk that demonetization will lead to a decline in the GDP. While we could analyze this policy intervention from a theoretical perspective, it is simpler to look at it from a common sense perspective.
The starting point is that many people will simply not declare the full amount of the black money that they have. Such a declaration would run the risk of further investigations by the Government about how the money was acquired in the first place. As a result, they will have less money to spend.
A considerable part of the black money is used to pay for luxury-type goods and services, such as weddings, vacations, eating out, jewelry, and expensive clothes. Consider the lavish expenditures on weddings – specially important because the wedding season is just ahead. Much of the expenditures on food, saris, jewelry, invitation cards, decorations, cars, etc. is paid for by black money.
And the ripples continue.
It’s an interesting commentary on the perceived size of the illicit markets – not illegal products, but untaxed. So, assuming this does happen, what’s driving this? A few years ago I read a fascinating book named Being Indian, by Pavan Varma, a former diplomat who had spent a lot of time outside the country, and as a result gained an interesting viewpoint on his own society. I don’t have it handy, but I do recall noting that the myths of India do not encourage following the rules. I’m still a little astounded at the size of the black economy implied.
