Will the government ever recover black money?

Wed, 7 Oct Pre-Open

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Recently, the Indian government initiated steps to bring back black money. A scheme was introduced wherein a person could voluntarily disclose unaccounted holdings of foreign assets. The disclosure had to be made by 30th September. However the scheme received a dismal response. The amount of money disclosed was just Rs 37.7 bn. The amount disclosed this time is way less than the '1997 Disclosure Scheme' in which the sum of Rs 330 bn was disclosed. In any case, both these amounts are miniscule to what Finance Minister Arun Jaitley was targeting (in foreign assets) to what P. Chidambaram's scheme was targeting in the domestic market.

So should Mr. Jaitley be targeting domestic black money too?

Mr. Jaitley's responded by stating that the people who didn't declare their unaccounted foreign assets will face consequences.

A huge chunk of the black money is invested in the Participatory Notes (P-Notes). According to the data provided in First Post, US$ 43 bn was invested in P-notes as of last June. Second preferred asset class is real estate, which too attracts huge sums of black money.

If the government is able to crack down on both these sources, the black money saga can be curbed substantially.

With this however, the government seems to have put itself in a catch-22 situation.

It wants to raise money through the disinvestment route. And in case of a ban on P-notes, Indian stocks would decline substantially. This could possibly dilute the equity value of its holdings.

A quick flash back…

It was in 2007 that P notes had been cracked down upon. What followed was a correction of 10% in the markets within a matter of minutes that led to a halt in trading. A lot has changed since then. The share of P-notes in foreign holdings has come down from over 50% to about 10% now (both equity and derivative). Regulations have become tighter. However, the notes are still transferable which makes it difficult to track the final beneficiary; thus making the markets susceptible to their misuse.

From the government's perspective this would not seem to be a viable solution, however short terms its implications may be.

Coming to real estate, majority of the schemes are funded by a political party or politicians. This is the prime reason why the real estate rates have not tanked. The politicians will not let the prices fall in order to protect their own unseen net worth. Vivek Kaul the editor of 'The Daily Reckoning' is also of the opinion that unless real estate prices falls, home sales won't pick up. Further, he also states that the real estate prices have not declined mainly on account of ill-gotten wealth of politicians and their cronies has found its way into the sector through 'benami' means over the years. Further, any sudden crash will also rock the public sector banks. The banks have huge exposure to real estate. And if the realty sector crashes, their bad loans are likely to pile up.

The government will have to come up with a revised plan in order to target the foreign illegal assets and the domestic black money. However, it needs to take some serious steps in order to keep the black money in check. Some of the remedies as mentioned in the article published in First Post are to demand Permanent Account Numbers (PAN) for all transactions above Rs 10,000 and encourage the use of plastic and mobile money.