Surgical strikes on black money in real estate and gold will not be possible

Among the arguments one keeps hearing on TV debates, often not the best places to find economic literacy, is that demonetisation will not make any difference since only 5-6% of black money is in cash. Another criticism is that the government simply did not plan well for the fallout and that millions are queuing up before banks and ATMs, causing needless inconvenience to the ordinary citizen and disrupting everyday cash-based transactions.

The government has rejected the second argument by simply citing the need for secrecy. And it is by and large correct. The only way to be better prepared for a situation in which 80% of your currency will be rendered invalid is to have new notes ready in advance, and by reconfiguring the ATMs in advance. Neither effort could have been kept a secret, for ATMs are serviced by hundreds of engineers, and software and logistics service providers. Printing more ₹500 notes in advance would also have been an option, but scores, if not hundreds of people in the Reserve Bank of India, the finance ministry, and the currency printing presses would have been in the know.

Now, to the larger point raised by critics, that junking high denomination currency is the worst way to attack black money, since cash constitutes only a small fraction of the total stock (and flows) of black money.

Let’s assume that the critics are right about 5% being the likely proportion of black money in the economy. The bulk is in real estate and gold. The flaw in this argument is this: Every illegal real estate deal has a cash component. So 100% of such deals depend on cash.

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