Black Money and Special Bearer Bonds Scheme

Summary

Black Money and Special Bearer Bonds Scheme bundles two short pieces issued by the Forum of Free Enterprise to oppose the Special Bearer Bonds Scheme of 1991 on classical-liberal grounds. Vadilal Dagli, editor of Commerce and chairman of the Dagli Committee on Controls and Subsidies, opens with the polemic ‘Respectability for Black Money’, casting the bonds as the fifth and most cynical official attempt since 1951 to absorb unaccounted money, and argues that the scheme grants the black-money baron a tax-free premium and statutory immunity while leaving the underlying flow untouched. Economist D. R. Pendse follows with ‘The Problem of Black Money’, a structured analytical essay that distinguishes illegal-source from tax-evaded legal-source income, surveys magnitude estimates and international comparisons, and begins a seven-point catalogue of underlying causes — controls, scarcities, high tax rates, changing social attitudes, interference with traditional values, low salaries of government servants, and election finance. Together the pamphlet advances the Forum’s standing argument that black money is a man-made consequence of controls, inflation and politicised election finance rather than an inevitable feature of Indian commerce.

Essays

Respectability for Black Money

By Vadilal Dagli

Vadilal Dagli treats the Special Bearer Bonds Scheme of 1991 as the fifth and most damaging in a sequence of official attempts to flush out black money since 1951, behind the voluntary disclosure schemes of 1951, 1965 and 1975 and the 1978 demonetisation. He charges that the new bonds — by promising a 20 per cent maturity premium free of income, wealth, gift and capital-gains tax, immunity from prosecution under the Indian Penal Code, and access to bank credit on the bonds as collateral — confer respectability on the very holders who had refused every earlier amnesty, chiefly the politicians, bureaucrats, professionals and bribe-takers who finance Indian public life. Citing Finance Minister R. Venkataraman’s own earlier warning to Parliament against legitimising black money, Dagli asks whether ‘the forces that finance political power in this country [are] more powerful than the Finance Minister’.

He closes with a four-point national consensus: cap annual money-supply growth at 3–4 per cent above real national income; sunset all statutory controls older than three years unless re-justified to Parliament; legislate West-German and US-style public financing of recognised parties paired with audited annual party accounts; and cut the top marginal personal income tax rate from 66 to 50 per cent. None of these, he argues, is revolutionary — what is missing is ‘a modicum of political honesty’ from a ruling class whose foresight alone can curb black-money power and forestall ‘political convulsions’.

• Black money operates from the centre, not the periphery, of Indian economic and political life, making the black-money baron more powerful than Prime Minister, Chief Minister or industrialist.
• The Special Bearer Bonds Scheme of 1991 is the fifth official attempt to surface unaccounted money — after voluntary disclosure schemes in 1951, 1965 and 1975, and the demonetisation of January 1978.
• Unlike earlier schemes, the new bonds offer a tax-free 20 per cent maturity premium, no question on source, immunity from prosecution and bank credit against the bonds — thereby rewarding the holdouts of every previous amnesty.
• The chief beneficiaries are politicians, officials and bribe-collecting professionals whose unaccounted funds had previously been parked in commodity hoarding or construction.
• A four-point reform package: money-supply growth capped a few points above real income growth; automatic sunset of controls older than three years; legislated public financing of parties with audited accounts; and a 50 per cent ceiling on personal income tax.

The Problem of Black Money

By D. R. Pendse

D. R. Pendse, in a piece reproduced from The Economic Times of 19–20 March 1981, presents black money as ‘the cancer of the economy’ and works through definition, magnitude, international comparison and underlying causes. He distinguishes illegal-source black money — pugri, smuggling, matka, foreign-exchange fiddles, bribes — from legal-source-but-undisclosed income earned by professionals such as lawyers and doctors, and rejects the common ‘parallel economy’ image: black and white money, he argues, are ‘perpetually inter-locked’ through transactions like under-receipted flat sales and lavish unrecorded hotel spending.

Drawing on Dr D. K. Rangnekar’s Wanchoo-committee formula (Rs. 7,500 crores, 6.8 per cent of national income) and other estimates running up to 22.7 per cent (Rs. 25,000 crores), Pendse settles on a working figure of about 10 per cent of national income, or Rs. 11,000 crores — equivalent to Rs. 1.25 crores per hour, and an annual flow exceeding the income of 125,000 honest top-slab taxpayers. He invokes Vito Tanzi on the United States ($135 bn in 1976, eight per cent of GNP), James Cook’s ‘The Invisible Enterprise’, and observations on the UK and USSR to show the phenomenon is not uniquely Indian. He then opens a catalogue of underlying causes; the rendered pages cover seven — (1) controls, with Gandhiji’s 1947 prayer-meeting warning and NCAER’s Rs. 840-crore estimate from just six price-controlled commodities; (2) scarcities and abundance; (3) high tax rates, illustrated by a 97.75 per cent marginal rate driving an honest surgeon to evasion; (4) changing social attitudes; (5) interference with traditional values via socialist-style penal taxation; (6) low salaries of government servants, citing Nicholas Kaldor’s 1956 Indian Tax Reform report; and (7) election laws and party finance, beginning with the Rs. 35,000-per-candidate ceiling in the 1980 Lok Sabha contest. The chunk ends mid-discussion of cause (7); the remedy section and any further argument lie in pages not rendered here.

• Defines two categories of black money — illegal-source (smuggling, pugri, matka, bribes) and legal-source income concealed for tax purposes, with theft and robbery deliberately excluded.
• Rejects the ‘parallel economy’ metaphor: black and white money are continuously inter-converted, e.g. under-receipted property sales or hotel bills paid in cash.
• Working magnitude estimate: roughly 10 per cent of national income, about Rs. 11,000 crores — Rs. 1.25 crores per hour around the clock — exceeding the annual income of 125,000 honest top-slab taxpayers.
• Cross-country comparisons drawn from Vito Tanzi on the US ($135 bn in 1976, ~8 per cent of GNP) and James Cook’s ‘The Invisible Enterprise’; UK debate on ‘fraud Government ignores’; under-the-counter trade in the USSR.
• Catalogues seven causes — controls, scarcities/abundance, high tax rates, changing social attitudes, interference with traditional values, low official salaries, and election finance — illustrated by NCAER’s Rs. 840-crore estimate from six price-controlled commodities and a 97.75 per cent marginal-tax surgeon example.