Playing white

Raising revenues for the country involves not merely innovative voluntary disclosure schemes that pull in some old black money, whenever a scheme is announced, but a concerted effort to create institutions, markets and incentives for a white economy. In the old India, cash was fundamental in buying or selling real estate, bribing to get a phone, bribing an official to cheat on taxes, making a political contribution, buying raw materials that had evaded taxes, bribing a tout who got you a railway ticket, and so on.

Today, in many sectors, we are now increasingly seeing a new white economy emerging. In the ’90s, Manmohan Singh and P. Chidambaram killed one big chunk of smuggling operations by removing restrictions on the import of gold. Most of the impetus for smuggling other things (like electronic goods) went away with liberalisation. The railway reservation system, a product of nation wide computerisation, has solved the problem of railway reservations. The end of the government monopoly on telephony put an end to the bribes paid for telephone connections. Stock market transactions went fully electronic, thanks to the computerisation of NSE, BSE and NSDL. This gives an audit trail which has made it harder for incomes to be hidden away.

This effort needs to be carried through. All over the world the informal sector is plagued with black money. It is very difficult to make people pay a service tax. Whenever there is a cash economy it becomes easy for both parties to hide the transaction and escape paying taxes. The way out is to increase the share of the formal sector and reduce the component of the cash economy. While a local doctor does not give a receipt, when we consult him at a private hospital, the cashier immediately issues a receipt for us. While the local shop does not provide a receipt, the supermarket does. The entry of FDI in retail is one step which will bring trade into the white economy. Today wholesale plus retail trade constitute 14 per cent of GDP. This can be a significant source of tax revenue for the government. The same will be true if hospitals, law firms and others fall in line. Efficiencies offered by foreign companies will help put pressure, reduce prices and improve services which will enable the organised sector to win over the unorganised sector.