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Sunday, October 1, 2023

Four Pillars Of Black Money In Bharat

It is estimated that of the currency notes that were in circulation, around 2,300 crore pieces were Rs.500 and Rs.1,000 notes that constitute 85% value and 24% of the total volume of the notes ( 9,027 notes)  in circulation. The recent move by the government of Bharat to demonetize Rs.500 and Rs.1,000 notes is primarily aimed at curbing the black money currently existing within the country as well as addressing the menace of fake currency being dumped into our country from abroad, to fund terrorist activities to disturb the law and order in our country.

Proportion of bank money to currency money ratio

U.K 19.54
New Zealand   7.44
Japan   5.91
China   4.80
Euro Zone   4.65
Australia   4.44
Singapore   4.37
South Korea   2.58
U S A   1.17
Bharat   0.66

( Source:

However, completely banning the large value currency overnight may not be possible in Bharat since majority of the population continue to transact their economic dealings still in cash (that’s why the government has come up with new notes of bigger currency). That partly explains the reason for proportion of bank money to currency money in Bharat being just 0.66, as indicated in the above data. Another major reason for this excessive cash transactions is lack of banking penetration across the length and breadth of the country, particularly in rural areas.

Bank branches per 10,000 adult population in 2014.

Japan 33.9
USA 32.4
New Zealand 29.6
Australia 29.2
South Korea 17.4
Bharat 13.0
Singapore   9.4
China   8.1


India has 6,40,867 villages ( 2011 census) whereas out of the total bank branches of 1,34,014, only 50,421 branches are located in villages. However, Bhartiya Post has 1,54,939 offices across the country and majority of the offices are in villages. 97% of the Bhartiya villages are with population of less than 5,000 and the road connectivity of Bhartiya villages is also very poor. When rapid bank branches expansion took place post nationalization of banks in 1969, there were several instances of rural branches being opened in locations where the post offices and police stations were also not available. Though the situation has reasonably improved in the last four decades, the rural Bharat still lacks proper road connectivity. Bottlenecks in core infrastructure have been one of the main impediments for expansion of bank branch network in rural places.

Majority of the people in Bharat prefer to invest in physical assets like- land and gold, rather than in financial assets like bank deposits, debentures, bonds and shares. Lack of access to banking facility is one of the reasons for more currency transactions and large investment in land and gold. There is greater scope for black money generation in the land dealings and gold investment. Therefore, demonetizing Rs.500 and Rs.1,000 currency notes may perhaps partially succeed in curbing black money that is stacked in these two denominations. However, there are other major factors like- black money hoarded abroad, benami land dealings and investment in gold. According to the Global Financial Report, during 1948-2008 around $. 213 billion of Bhartiya money is stashed abroad and its market value in 2008 is expected to be $. 463 billion!!!

Four major statutory measures

Bharat has introduced Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, and The Benami Transactions (Prohibition) Amendment Act, 2016 which is an amendment of the older Benami Transactions (Prohibition) Act 1988. Bharat has also amended the Prevention of Money Laundering Act and Foreign Exchange Management Act in 2015, that now include a major clause whereby the government can seize and confiscate equivalent asset in Bharat where the asset located abroad cannot be forfeited. Consequent to the passing of these acts, the Bhartiya government had opened a window of opportunity to voluntarily declare the undisclosed incomes under Income Declaration Scheme (IDS) from 1st June, 2016 to 30th September, 2016. This IDS was not an amnesty scheme as it did not give tax exemption but levied applicable tax deductions.

On 8th November, 2016 late evening, the government announced demonetization of Rs.500 and Rs.1,000 notes and initially gave time up to 14th November, 2016 for the people to exchange their Rs.500 and Rs.1,000 notes which is extended now up to 24th November, 2016. On 13th November, 2016 the banks received cash deposits to the tune of Rs.1.5 Lakh Crores post demonetization of Rs.500 and Rs.1,000 currency. RBI has released Rs.2,000 notes into the market after demonetizing Rs.500 and Rs.1,000 notes. Critics have argued that release of Rs.2,000 will defeat the very purpose of demonetization since people can now explore the possibility of stacking black money in Rs.2,000 notes in the days to come. However, accumulation of black money in Rs.2000 notes will take some time and in the meanwhile, the Income Tax department is expected to crack its whip on the people who have black money and are exposed post demonetization of Rs.500 and Rs.1,000 notes. Therefore, it is most unlikely that the people will immediately resort to hoarding black money in Rs.2000 notes.

Moreover, the demonetization has already caused a cash crunch in the economy and the notorious parallel economy is seriously affected. Therefore, the government has to strike hard soon before the parallel economy is revived, to nab the culprits who have been exposed post demonetization. If one goes by the recent developments, one can infer that the government is serious about this black money menace and safely conclude that the demonetization is the first surprise and few more surprises are most likely to follow.

Total Financial Inclusion a myth or reality?

As long as the people in the country predominantly use currency for their economic transactions, there is greater scope for tax evasion as well as hoarding of black money. Therefore, unless the people are habituated to route majority of their economic transactions through banks, one cannot expect to get a long term solution for curbing the black money. As the banking penetration in Bharat in general, and particularly in rural places is far below the global acceptable standards, large section of the population are compelled to conduct their transactions in cash. According to the estimates around 23.3 crore unbanked population still exists in Bharat. It may take not less than a decade or two to achieve the milestone of total financial inclusion under the brick and mortar model of banking expansion or the extended model of banking correspondents / micro finance companies.

If the government’s intention is not only to unearth the existing black money but also find a long term solution, then waiting for a decade or two to achieve total financial inclusion will not be a fruitful exercise. In December 2012, RBI has permitted the banks to issue co branded debit cards and co branded prepaid cards without its prior approval. These prepaid cards offer the facility of making all utility payments, travel, online shopping and purchases at select merchant outlets up to an overall limit of Rs.50,000. One can avail this prepaid card facility even without holding any bank account provided he or she is above 18 years and has the necessary KYC documents like proof of identity and address. This prepaid card can be used as an effective supplementary instrument for total financial inclusion. Government and RBI have to take necessary measures to aggressively expand the reach of the prepaid card usage more particularly in the less banked and unbanked regions of the country in a lesser time span, say three to five years.

Along with the leading /major merchant outlets medium and small outlets also need to be covered under this prepaid card segment so that the need for carrying currency by the people can be drastically reduced. Simultaneously ,the government can initiate the steps to withdraw RS.2,000 and Rs.500 currency notes in a phased manner. Total financial inclusion mentioned as above and confining the currency to the denominations of Rs.1, Rs.2, Rs.5, Rs.10, Rs.20, Rs.50 and Rs.100 will bring a significant and positive shift in the banking habits of the people. This will also reduce the scope for hoarding black money in cash.

Other three pillars of black money

While the Benami Transactions (Prohibition) Amendment Act, 2016 can be used to trace black money investments in properties (real estate) another major area of concern is hoarding of gold. Government has started linking the properties of the owners with their Aadhar cards and this can become handy in identifying benami owners. The Benami Transactions (prohibition) Amendment Act that has come into effect on 1st November,2016 will empower the government to even seize and confiscate the properties of benami owners. Government has imposed excise duty on gold and made PAN as mandatory for transactions over Rs.2 Lakhs in order to track the large value investments in gold. This measure is expected to reduce the black money invested in gold.

Additionally, government has also introduced Gold Monetization scheme in order to mobilize the gold lying with the people and sell it to the jewelers after converting the same into bullion bars. However, the success of this Gold Monetization scheme can be enhanced provided the government modifies this scheme by keeping the gold deposited by the people intact without converting the same into bullion bars. This can be made possible by designing a derivative gold bond that is fully collateralized by gold deposited by the people. These derivative gold bonds can be floated in the debt market to raise long term funds which in turn can be used to fund long term infrastructure projects that are of national importance. It is estimated that around 22,000 tonnes of gold is lying in India though the official gold reserves are only less than 600 tonnes !!!. Therefore, the derivative gold bonds will have huge market potential and also offer greater scope for monetizing the gold in India. (The author has published a detailed article titled-“Monetizing Gold” in The Indian Banker, April, 2016 , Volume III, Issue 9, A  monthly journal of The Indian Banks’ Association, ISSN 2349-7483).

Yet another major source of black money is funding of political parties and election expenditure. The existing laws in this regard are not giving the desired effect due to the vested interests. Major reforms are needed in making this whole process highly transparent with greater public accountability by bringing stringent disclosure norms in submission of the financial statements of political parties, apart from stipulating severe penalties for the violation of the same.

All said and done, laws can only introduce norms to punish the culprits. Systems and procedures can prevent or reduce the opportunity to commit crimes. However, enforcement of laws and implementation of the systems and procedures are ultimately in the hands of the people. Honest people will always try to follow the law whereas culprits will always try to find out ways to violate the law. Therefore, enforcement of the laws to punish the culprits without inordinate delay is very crucial as the adage goes ‘justice delayed is justice denied’. The question that is now intriguing the common man in India after 8th November, 2016 is whether the four pillars of black money- High value currencies, real estate, gold and election expenditure will collapse like pack of cards?

Well, the common man who has patiently waited for nearly seven decades has to continue his patience for another 50 days to see how the things are emerging. Let us hope the four lions will eliminate the four monsters and the common man can finally smile with the words- Satyameva Jayate.


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Dr. B.N.V. Parthasarathi
Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 16 years of teaching, research and consulting. 200 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 38 short stories 50 articles and 2 novels published in Telugu. Email id: [email protected]


  1. Completely agree sir ! Recent moves (1% VAT on gold, PAN declaration, demonetization) should put a curb on gold part of the pillar. However, the real estate pillar will break down only if we have Aadhar/PAN linked database of properties and titles.

  2. The governing administration first must increase efficiency through reforms and change of mindset – that they serve the public. All government employees are in the government database and known to government. They should cease outside activity for profit and must provide their personal financial accounts including that of the spouse for monitoring. Holding secret financial accounts and undeclared assets should be punishable including fines and loss/reduction of retirement benefits.
    Targeting black money with small business people who take risks as well as mostly operate without much government help in the form of education, infrastructure etc. is not ideal. The state/local governments do collect their taxes – property, water and sales taxes. Enforce laws to the extant it can be – with the resources available – a form of limitation of governmental power – and punish them. Whom you cannot catch are rightfully theirs taking risks! Obviously too much resources cannot be devoted to tax compliance – and that is a limit on power of government. The economic activity generated indirectly comes a potential tax base in the form of organized sector for the government. In addition to defense and national security which could be argued as a benefit for all – Organized sector does consume governmental services in the form of education – mostly public funded, land and water resources , transportation and law enforcement resources etc. Growing the organized sector through culture of innovation and creating a tax base is a better solution than going after unorganized economic activity which does generate indirect benefit to the economy and many times will need the financial cushion that organized sector which enjoys the economies of scale cushion and takes loans from banks , does not need.


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