Policy measures to be taken to empower the Demonetization decision by India for effective eradication of Black Money - applicable to emerging as well as developed economies
2. Four Types of Economic Activities
1. Innovative & Enterprising: comprising of organised manufacturing & service based industries
compliant with regulatory requirements and account for all transactions. This section
includes the hard working employees & honest entrepreneurs engaged in primary and
secondary trade of goods and services that are accounted for in the National Income (GDP)
2. Informal Economy: small and medium scale manufacturers, service providers, traders who are
hard working but unorganised. Regulatory compliance is low and substituted with bribery and
tax evasion. These transactions are under reported thereby not forming part of GDP.
3. Underground (Corruption) Economy: easy money through corrupt practices by misuse of
regulatory power at all levels and organizations, both public and private. Bribes and speed
money at low and mid levels and kickbacks at policy influencing levels. Illegal activities and
critical element of Black Money.
4. Easy Money via Intellectual (Legalised) Corruption: through creation of policy frameworks
that support misuse of knowledge and information and comprising of high intellectual but
corrupt people. Speculation and misleading marketing of products and services across all
industries including high impact sectors like healthcare, food, pharmaceutical, etc
All money is created through hard work, innovation & enterprise by 90%
people; yet major money is owned by fewer than 10% through corruption
Alternate Approaches
3. Four Types of Economies - Intertwined
o How damaging is Intellectual Corruption (Legalised Manipulative activities)?
o 10% of the Population SUCKS away the wealth created by 90% via money-games!! Frustrating
honest & hard working individuals struggling for survival; nurturing greed for easy money and
destroying genuine wealth creation opportunities
Creation of Wealth (Enterprising Activities)
Transfer of Wealth (Easy-Money via Corruption)
Black
Money
White
Money
Mainstream Good Economy:
Innovative & Enterprising
Equity Investment (stock market)
Tax complaint
Informal Mass Economy:
Hard working & enterprising
but unaccounted
Tax evasion
Underground Black Economy:
Illegal practices leading
to easy money like Bribes &
thefts from public projects
Mainstream Bad Economy:
Speculation (stock market)
Commodity & Currency trade
Misleading marketing &
Malpractices across all sectors
ParallelEconomy
MainstreamEconomy
++
--
S
U
C
T
I
O
N
Alternate Approaches
4. Black Money – the Untold Story!
o Why do we need to differentiate between the “TWO forms of Black Money”? Informal Vis-a-Vis Corruption
o The genesis of Black Money and their impact on the economy are inter linked and hence it is critical to under
stand how black money is created and how it impacts economic growth
Creation of Wealth (Enterprising Activities)
Transfer of Wealth (Easy Money via Corruption )
Black
Money
White
Money
Accounted Money
from enterprising activitiesUnaccounted Money
from enterprising activities
Unaccounted Money
from Corrupt Activities
Flow of Money
Accounted Money
from Intellectual Corruption
Money “created” through
hard work by 90% of
the population
Money “owned” and
“controlled by 10% of
the population, through
Intellectual Corruption
Alternate Approaches
5. Black Money – Flow of Money
o What is the Impact of Black Money pumped back into the economy?
o Money flow is diverted to speculative activities resulting in lack of resources for honest
entrepreneurs for innovative pursuits
o Culture of “easy money” corrupts the social fabric and honest individuals are subtly pushed into
dishonest activities and scuttles hard work and enterprise
Creation of Wealth (Enterprising Activities)
Transfer of Wealth (Easy Money via Corruption)
Black
Money
White
Money
Unaccounted Money
from Corrupt Activities
Accounted Money
from Intellectual Corruption
oBlack Money is invested in Real
Estate as Benami Properties
creating artificial shortage of
housing
o Gains from speculation and
malpractices is invested in real
estate
o Capital gains tax at lower rates is
paid to convert into “White
Money”
o Genuine home buyers are
burdened with high artificial rates
o Honest entrepreneurs face
increased set up costs to start an
enterprise
Alternate Approaches
6. Informal Sector – Backbone of Mass Economy
o Why is black money created in the Informal Sector?
o Corrupt practices like bribes and complex regulatory regime along with high taxation tends to
develop a culture of not accounting for transactions. This leads to embedding of operational
inefficiencies and quality standards adversely impacting global competitiveness in the long run
o The most commonly referred to as Black Money is
“unaccounted money” on which taxes have not been paid
o However, these are unaccounted transactions of
“enterprising” efforts and not corrupt practices
o Small and Medium enterprises deal in an Informal basis
utilising “cash” for “mutual trust” based transactions
o Tax evasion in most cases is due to the “survival” need of
the marginal entrepreneur and not from malafide
intentions
o The entrepreneurs are also burdened by corrupt practices
from regulatory authorities, which adds to the cost of
operations that cannot be accounted for
o Examples: grocery stores, vegetable vendors, local
plumbers and electricians, small restaurants, individual
professionals such as doctors, teachers, accountants, etc.
MSME and SME manufacturers of goods for direct sale in
market or for OEMs, contractors for supply of equipment
and services to municipalities or state governments, etc.
Potential mass employment through
decentralized entrepreneurial pursuits
across Rural and Urban centers
Reverse the flow of resources, money
& talent, to innovation based activities
in the economy
Decrease Increase
Lack of policy support leads to
corrupt practices in order to get
over the immediate issues
leading to deterioration of
culture for improvements &
quality
Marginal Dip Marginal Dip
Intended Change
Alternate Approaches
7. Suggested Policy Interventions – Informal Sector
o Why is the Informal sector important for economic growth?
o Potential for Mass employment would be unlocked by driving Decentralized entrepreneurial
opportunities across rural & urban – create a strong back bone for the economy
o Incentive for Funds to “reverse” flow from Speculation to entrepreneurial ventures
o Support for Knowledge based entrepreneurs to set up innovative enterprises
Creation of Wealth (Enterprising Activities)
Transfer of Wealth (Manipulative Activities)
Black
Money
White
Money
Unaccounted Money
from enterprising activities
Money “created” through
hard work by 90% of
the population
Money “owned” and
“controlled by 10% of
the population, through
Intellectual Corruption
Objective: to empower the 90% of the
population that is hard working and enterprising
o Increase ease of doing business thereby reducing
incentive for corrupt practices
o Stringent penal action on bribery
o Empower quality by providing incentives for best
practices
o Educate about global marketplace and importance
of competitiveness
o Lower Taxation and levies based on industry needs
o Service based charges for infrastructure and
facilities – free is not valued!
o Ecosystem for entrepreneurial activities
o Examples: shared R&D facilities, start up hubs,
venture fund & credit support based on growth
phase, etc.
Key Issues: lack of infrastructure, pressure of costs due to levies
& corruption, poor quality impacting global competitiveness,
inability to attract & retain talent, lack of research capabilities
Alternate Approaches
8. Black Money from Corruption
o How does corruption impact the economy?
o Infanticide of innovative entrepreneurs by creating an unviable business environment
o Breeding and nurturing of manipulators in the garb of entrepreneurs through crony capital
o The genesis of the Black Money syndrome
rests in corrupt practices of the
bureaucracy, politicians and other
regulatory controllers supported by weak
judicial resource
o This money by definition would be
unaccounted for and often referred to as
“speed” or “easy” money as it is
appropriated without any efforts
o The proportion of corrupt people is less but
wield power of policy making/ influencing
o The ill gotten money is often utilised for
speculative activities and abet
criminalisation of society
o Examples: bribes, extortion, kickbacks to
policy makers, etc.
Flow of money for speculation and
mal practices would decline
Support for entrepreneurial efforts
would increase as viable investment
Opportunities
Articificial hurdles like inflated real
estate and commodities would be
under control
Decrease Increase
Decrease Decrease
Money from Bribes and other
corrupt practices finds
investments in “benami”
properties and crony
industrialists setting the
environment for speculation and
other mal practices
Intended Change
Alternate Approaches
9. How to Stop Regeneration of Black Money
o How does Demonetization help in curbing black money?
o Unaccounted money from informal sector would come back into the main stream economy
o Black money from bribes and corrupt practices would be taken off the circulation
o Follow up measures on “benami” properties would turn off the flow of black money
Creation of Wealth (Enterprising Activities)
Transfer of Wealth (Manipulative Activities)
Black
Money
White
Money
Money “created” through
hard work by 90% of
the population
Money “owned” and
“controlled by 10% of
the population, through
Intellectual Corruption
Objective: interventions required to boost the impact of
measures taken like VDS and Demonetization
o Enforce strong action on money flow in the
real estate sector as it is one of primary
conversion points for all black money
o Streamline the stock market mechanism
to support genuine equity investments
and weed out speculation
o Legal reforms to create a conducive
business environment rather than
hurdles
o Speedy trials and conviction of corrupt
officials to instil confidence in the
government institutions
Key Issues: lack of action against a minority of corrupt officials
leading to de-motivation & loss of talent, slow legal system breeds
increased corruption & connivance with policy makers
Alternate Approaches
10. Impact of Intellectual Corruption – legalized Malpractices
o What is the Impact of Intellectual Corruption on Society and Economic Development?
o Unproductive and undesirable economic activities
o Diversion of money flow & substantial human resources creating stress on majority of population for survival
o Attitudinal degeneration & Criminalization of social fabric due to easy money (drug abuse, cheating, petty crimes etc)
o The most damaging of all practices is that of Intellectual
Corruption – its like the “Wolf in a Sheep’s Clothing!
o Speculative activities are legalised through policy
frameworks influenced by corrupt lobbies and hence
these activities are “accounted” for while causing
immense damage to economic growth
o Equity markets are hijacked making capital raising for
new entrepreneurial activities difficult & costly
o Commodity markets are rigged making input costs
expensive for industry and driving inflation in agri
commodities and food products
o The most powerful of the lot is however, the currency
markets which multiply the negative impact of all
speculative actions on a global scale (loss of purchasing
power of the nation due to devaluation of currency)
o Examples: misuse of derivative instruments, policies
supporting manipulative practices, abetment of unrest to
support arms, misleading marketing, healthcare
malpractices, etc.
Reforms in the Financial & Regulatory
Systems would curb the menace of
Speculation across markets
Provide positive reinforcement for
Innovation driven economic growth
through diversion of funds and other
resources to entrepreneurial activities
Speculative forces have been
introduced across equity,
commodity and currency markets
through complex derivative
instruments that help in rigging the
markets and benefit a few through
legalized Zero Sum Money Games
Decrease Increase
Decrease Decrease
Alternate Approaches
Intended Change
11. Global Regulatory Interventions
o Who can lead the change in the Global Financial Architecture?
o Established economic models of developed countries have failed in the last 30 years
o Intellectual Corruption aggravated beyond tolerable limits from late 1970’s onward
o India with its strong knowledge base and cultural anchorage is poised to provide a strong
alternative, provided corrective measures are taken to empower the subdued but honest
Creation of Wealth (Enterprising Activities)
Transfer of Wealth (Manipulative Activities)
Black
Money
White
Money
Unaccounted Money
from enterprising activities
Money “created” through
hard work by 90% of
the population
Money “owned” and
“controlled by 10% of
the population, through
Intellectual Corruption
Objective: to dampen speculative activities & set
stage for innovation driven global economic environment
o Global market mechanisms have to be
weeded of speculative forces and empower
honest enterprise
o Realistic prices for commodities and
resources to motivate knowledge
entrepreneurs
o Negotiated Bi-lateral currency rates and
trade agreements to ensure equitable
markets
o Technology & other innovations on
collaborative basis to ensure peaceful
utilization
Key Issues: inequality and unemployment within developed &
under developed economies and across countries is leading to social
Unrest and growth of wealth destructive activities like arms & drug abuse
Alternate Approaches
12. Requirement of Policy Interventions
o Informal Sector focused:
1. Potential for Massive employment generation through Decentralized ‘entrepreneurial-drive’
2. Weed out existing black money with hand-holding rather than penal action: VDS scheme along with
Demonetization to help in this process.
3. Supportive tax & regulatory framework to help organise the unorganised sector. Follow up of above action by
policy reinforcements to limit generation of fresh black money
o Corrupt Practices Focussed:
1. Legal reforms to prosecute corrupt practitioners through speedy trials would provide positive impetus
2. Transparent dispute resolution mechanisms to limit incentives for bribery
o Intellectual Corruption: these practices have been globalised through the existing Financial Architecture and needs
global leadership to address the same. India is in a unique position to provide a “Third Way” to the failed models of
Capitalism and Communism.
1. Enter into Bi-lateral Exchange Rate mechanism to limit speculation and empower Enterprise
2. Align local and global regulatory environment for stock markets and commodity exchanges in order to weed out
“regulatory” arbitrage opportunities
3. Promote global innovation through competitive collaboration instead of restrictive practices that give rise to &
strengthen manipulative forces
4. Decentralised economic development to ensure “basic survival” is not endangered across countries through bi-
lateral agreements
India with its strong growth potential and rejuvenated knowledge base can play a key role in
Bringing NEW order in the chaotic global marketplace for sustainable economic development
Alternate Approaches
13. Shift in Economy - Survival to Abundance
Creation of Wealth
Transfer of Wealth
Black
Money
White
Money
Motivation for Value Creation
Stock markets for innovation
driven enterprise
Attract and retain knowledge
for entrepreneurial activities
Basic survival of all and
Technology driven
productivity
Marginalized Disruptive Forces
Reform Global Architecture
Derivative & other financial
innovation is limited to risk
management of genuine
Enterprise and not speculation
Deterrents & Disincentives
Conducive legal environment for
speedy dispute resolution
Transparent and confidence
building governance
Time bound prosecution
Incentive to get Organized
Simplified regulatory that
supports business
Incentive for quality &
building competencies
Backbone of economic
growth with high
employment potential
Restricting corruption (black & legalized) to minimal levels, will pave the way for Creation
of Abundance Economy with wealth and opportunities for all hard working and honest people
Alternate Approaches