New Delhi: Prime Minister Narendra Modi on Tuesday addressed the nation in New Delhi. In his address, he talked about black money and corruption and how these two can come in the way of a country’s robust economic growth.

“Corruption and black money are the diseases rooted in this country and are the obstacles to the success of the nation. It is something we have fought for immediately after assuming office,” PM Modi had said.

To combat black money, PM Modi announced that currency notes of Rs 500 and Rs 1,000 would no longer be legal tender from Tuesday midnight.

The govt’s decision evoked a mixed response from politicians and economists.

Here is what former Reserve Bank of India Governor Raghuram Rajan once said during a lecture on currency demonetisation.

Rajan: I am not quite sure if what you meant is demonetise the old notes and introduce new notes instead. In the past demonetisation has been thought off as a way of getting black money out of circulation. Because people then have to come and say “how do I have this ten crores in cash sitting in my safe” and they have to explain where they got the money from. It is often cited as a solution. Unfortunately, my sense is the clever find ways around it.

They find ways to divide up their hoard into many smaller pieces. You do find that people, who haven’t thought of a way to convert black to white, throw it into the Hundi in some temples. I think there are ways around demonetization. It is not that easy to flush out the black money. Of course, a fair amount may be in the form of gold, therefore even harder to catch. I would focus more on the incentives to generate and retain black money. A lot of the incentives are on taxes.

My sense is the current tax rate in this country is for the most part reasonable. We have a reasonable tax regime, for example, the maximum tax rate on high-incomes is 33%, in the US it is already 39% plus State taxes, etc., and it takes it to near 50. We are actually lower than many industrial countries. Given that, there is no reason why everybody who should pay taxes, is not paying taxes. I would focus more on tracking data and better tax administration to get at where money is not being declared. I think it is very hard in this modern economy to hide your money that easily.

 

First Published | 10 November 2016 7:43 PM
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