Those who have habitually lived in the brothel, i.e., the traders who have all their lives dealt in cash constitute the $500 billion 'black economy' (about 20-25 per cent of the $2.2 trillion regular economy); its members don't even know where their banks are. At roughly 6 per cent of GDP, profits would be ranging in the region of $30 billion per year on average, whose saved tax collections would be, say, $6 billion per annum.
If 'flow' to 'wealth' is estimated at ten years' income, these people would be having about $300 billion in black-money wealth, now invested across Swiss banks, hawala dollars, real estate and gold, besides those who got caught holding the parcel when the music stopped.
Then, anecdotally, I see around me the businessmen who were holding cash to give as bribes. These are all 'casual cash' holders, some 1.5 per cent of net worth. The big holders must be on the other side, the habitual bribe-takers, who were holding up to 30-80 per cent of their net worth in cash, mostly under the mattress.
The 'clean' part of the economy is you and me. Anecdotally, I was holding less than 0.001 per cent of net worth. I had to take a bus home on November 8 because I had to survive in Mumbai with Rs 470 in my wallet. If I extrapolate my own ratios to the broader 'white economy', the casual 'transactional holdings' of the white $2.2 trillion economy would work out to just Rs 147 crore. Ok, I might be super clean, being in the knowledge economy and a mostly-digital-cash person. So let's put a multiplier to that, say, 100 times that ratio, so about Rs 15,000 cr. Add the cash-to-GDP ratio of the agriculture sector, 25 per cent of 14 per cent (share of GDP) and you get 3.5 per cent of GDP, say, $70 billion. So the 'innocent' holdings of the high-denomination notes would be, say, Rs 4.5 lakh crore. That leaves Rs 10 lakh crore out of the total holdings of Rs 14.5 lakh crore.
Most of this would be 'culpable', stretching from habitual offenders like real estate/jewellers/traders to the casual stork among the cranes, the people who have just sold a property, for example; the lenders in the hundi market, people with savings from unorganised-sector employment who were investing in the informal hundi/chit-fund market; the beggars at the Vasant Vihar red light, some of whom might be holding more than a crore under their mattress; truck drivers, dhaba owners, some of whom had only cash holdings.
I noticed, for example, that my driver, who owns a Rs 7.5 lakh house in the village, had no 'cash' problem. His bank account has some Rs 50,000, and the rest seems pretty safe (his mother's gold jewellery, maybe). This is again anecdotal, but these rather large unorganised-sector employees would add up to, say, Rs 1 lakh crore worth of holdings. This too will be absorbed under the Rs 2.5 lakh scheme, leaving a handful of prominent communities in the net.
The first suspect is the politician-power peddlers, the purveyors of power and authority in India, the 'dacoits' who trade power for money. These will include political parties, criminal gangs, terror chains, hafta collectors, the police and tax officials themselves - right at the heart of the problem, where up to 30-80 per cent of net worth would be in cash. I get gooseflesh at the thought of the IAS officer, now 57 years of age, who has 'parked' some Rs 200 crore in hundies in the Kolkata market, looking forward to a debauched retirement, but who is now unable to even scream. How many of them Modi caught, literally with their pants down, is the question. Since hospital records will only mention a heart attack, we will never find out. That soundless scream can be heard across political parties, the police and bureaucracy, both sitting and retired but this part will never be known.
The part that is visible is the other side of the transaction, which is measurable and amenable to econometrics. The 'entry market' and the costs prevailing, the last I heard is that rates had collapsed from a high of 60 per cent to 40 per cent, the cost of 'converting' cash in the myriad schemes that our CA community took just days to figure out. The steep spike in the $:Rs over these last two days must be the hawala money going out, although I don't understand just now what will happen to the cash given out. But anybody who has access to, say, 500 workers, is paying advance salaries, networks of autorickshaw drivers are suddenly valuable - you get the idea? This is a measurable number, and the income-tax department (and the forensic guys who will be watching the banking flows) will be able to figure this out. A ratio I would use is the ratio of 'cash deposited' after November 8 to the tax paid in the last two years to get a 'cleanliness index' for a particular assessee.
If I were Modi, I wouldn't go after the old taxpayer base, looking for partial concealment of income. I would go after non-taxpayers and look at them and their relatives to see how many are now claiming to have 'zero expenditure' in the last three years. The list of these 'creative accounting' stratagems is very large. I got someone asking me whether a cheque given three years back was declared as expense. When I said it was drawings, I think he decided to show it as cash in hand from the encashment of that cheque. In effect, he is going to claim that he has had no expenses these last three years. These are hardened criminals, a recalcitrant lot who will not come to heel until the country goes cashless.
So one side of this audit trail is very visible, you will see the trader/SME on one side of the transaction. Those with past bribes have got away (for the moment) if they were in anything except cash, i.e., real estate, gold and hawala. But those who were in cash/hundi would have died a silent death. Putting a number to all this is very difficult, but assume that 50 per cent of the stock of black (cash) money will 'leak' out from somewhere or the other: temple trusts which will launder the money, companies with large retail sales in cash, etc. Watch those who show a very buoyant current-year income and mark them out for the coming years - a leopard doesn't change his spots.
A 'rating system' for a tax assessee would be a good way to record all this. Like a CR or a Cibil rating, it tries to predict future behaviour on the basis of past patterns. Such a rating could be displayed publicly, which would be a support to commercial activity, much like the Cibil rating. I am sure I would love to know the tax-compliance record of my clients or my counter-parties. And I will be happy to let them know mine.
Eventually, Mr Modi's body language suggests that he is going to consolidate these gains; it is the first of many salvos to come. Most will lead up to the digitisation of the Indian economy, in the sense of taking it cashless, a long way away from the current near 80 per cent of transactions that have cash on one side. Some of these will be painful for large communities of otherwise poor people, but the general culture of tax compliance seems to be uniform in India, and rising incomes do not seem to lead to rising tax compliance. Indians will need to be driven, kicking and screaming, to the milking machine and cashlessness will be a very big milestone.
With the data that is being captured in payment banks, credit-card expenses, you can collate the 'bump up' in an individuals credit-card usage, to get an estimate of his earlier normal cash burn rate, then see whether it fits into his normal income disclosure. It will be a huge job, but algorithms can be designed to ferret out the right patterns.
This article was originally published on December 27, 2016.
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