Arthakranti

A couple of weeks ago, I attended a seminar by Prof Bokil of Arthakranti.org where he presented an interesting perspective on the size and nature of corruption and the fueling of the parallel economy in the country. One of the startling take-aways for me was a new metric he presented: the ratio of the Per Capita Income in a country to the largest currency note in circulation in that country.

In most developed nations, that ratio is at or near 500:1  e.g. Per Capita Income of the USA is USD 54000 per annum, the largest currency note in circulation is USD 100.

For India, we have a nominal Per Capita Income of Rs 74 000 and our largest currency note in circulation is Rs 1000, a ratio of only 74:1

To compound matters further, Arthakranti claims, the quantum of currency notes in circulation as a percentage of  M1 money supply in the country is far higher in India than in other developed nations.In most other countries currency notes in circulation account for less than 1/5 of M1, whereas in India, currency notes account for more than 60% of M1.

Even more interesting is the proportion of value held in higher denomination currency notes.
33% of all value in currency notes is held in the Rs 1000 denomination, another 49% in Rs 500 and 13% in Rs 100 notes. The total % of value held in Rs 50, Rs 20, Rs 10 and Rs 5 notes is a grand total of 5%.  Sure enough, there is a parallel economy running in cash and this parallel economy is being fuelled by printing currency notes.

With the new government scheme encouraging people to open bank accounts seeing some success, perhaps the next move should be to stop printing Rs 500 and Rs 1000 notes, thus making it extremely inconvenient to transact in cash. You cannot carry sackfuls of Rs 50 notes to buy something.

Another more radical proposal from Arthakranti is to abolish all taxes in lieu of a Bank Transaction Tax of about 0.5%~1% charged to the recipients account, to be shared by Central, State and Local governments in a pre-decided ratio.

Arthakranti presented a number of 68 Lakh Crores as the total volume of money being moved in RTGS Transactions per month in India today. This page on the RBI website corroborates this number.

1% of this number would yield 68000 crores in tax every month ie. about 8 Lakh crores per annum.  This is about half of the union budget for 2013-2014.

So there you have it then - the solution to Black money in the country. Take away the incentive to evade taxes and take away the ability to transact in cash.

You can download the complete Arthakranti presentation at arthakranti.org/downloads