If Modi Wants to Eliminate Black Money, He Needs to Clean Up Political Funding


In November 8, 2016, prime minister Narendra Modi made the announcement to demonetise Rs 500 and Rs 1,000 notes. Up until December 30, 2016, the old notes can be deposited in banks and post offices. They can also be exchanged for new ones.

While presenting these notes at the bank or the post office a proof of identity needs to be shown. Right now, I have around Rs 3,500 in old Rs 500 notes. As and when I go the bank I must show my PAN card, passport etc.

This is the correct way of going about things because one of the aims of demonetisation is to eliminate black money, “which casts a long shadow of parallel economy on our real economy”. i And in order eliminate black money an accounting trail needs to be established.

While individuals are supposed to show their PAN cards while depositing money into banks, the same does not apply to political parties. And this is the basic issue I will discuss in this column.

The decision to demonetise Rs 500 and Rs 1,000 notes essentially hits at the stock of black money. People who have hoarded on to black money in the form of cash and are unable to get it exchanged for new notes or gold or any other physical asset, will end up with useless pieces of paper.

At this point of time, it is difficult to estimate what portion of the stock of black money is likely to be destroyed. The only thing that can be said with some certainty is that some of the black money which has been accumulated in the form of notes or cash, over the years, will not make it back to the financial system.

Also, after this demonetisation move, people who are wont to holding black money in the form of cash are unlikely to do the same, at least, not to the same extent.

The demonetisation though does not stop people from starting to accumulate black money all over again. Along with new notes of Rs 500 and Rs 2,000 which have been introduced, a new note of Rs 1,000 is also on its way. Once these new notes are there in the market, they can be used to start accumulating black money all over again.

Given this, the demonetisation move is unlikely to hurt the flow of black money i.e., it’s further accumulation. If the government wants to do that, one of the things that it needs to do is to reform the financing of political parties.

If as a citizen I need to show my identity card while depositing my old notes to the bank, people making donations to political parties should also be made to do the same. This will make the accounts of political parties completely auditable.

Now that is something that does not happen as of now. I had discussed this point in the September 30, 2016, edition of the Vivek Kaul Letter (subscription required). Given the situation as it has evolved, the points are worth repeating here.

An analysis carried out by the National Election Watch and Association of Democratic Reforms reveals that during the period 2004-05 and 2011-12, the total income of the national political parties was Rs 4,899.46 crores. ii

There are six national political parties. These are Indian National Congress, Bhartiya Janata Party, Nationalist Congress Party, Bahujan Samaj Party, Communist Party of India and Communist Party of India(Marxist).

The Congress party declared the highest income of Rs 2,365.02 crores. This is hardly surprising given that it was the Congress led United Progressive Alliance was in power in Delhi throughout this period. It was followed by the Bhartiya Janata Party which declared an income of Rs 1,304.22 crores, and was the principal opposition party during the period. (See Figure 1)

Figure 1:


Between 2004-05 and 2011-12, there were two Lok Sabha elections (in 2004 and 2009) and multiple state assembly elections. It doesn’t take rocket science to conclude that the incomes declared by the political parties were clearly not enough to fight so many elections.

And how did things look in the 2014 Lok Sabha elections? Look at Figure 2.

Figure 2:


As per Figure 2, the six national political parties spent Rs 2,453.98 crore in the last three Lok Sabha elections. Of this around Rs 1,308.73 crore was spent in the 2014 Lok Sabha elections.

Now compare this to an estimate made by the Centre for Media Studies in March 2014. It estimated that around Rs 30,000 crore would be spent during the 16th Lok Sabha elections which happened in April and May 2014. Of this amount, the central government would spend around Rs 7,000-8,000 crore to conduct the elections. The remaining amount of around Rs 22,000-23,000 crore would be spent by the candidates for wooing the voters and fighting the elections.

Of course, national political parties are not the only parties fighting elections. Nevertheless, the difference between the officially declared expenditure and the ‘real’ expenditure to fight elections, is huge. Where does this money come from?

As Sandip Sukhtankar and Milan Vaishnav write in a research paper titled Corruption in India: Bridging Research Evidence and Policy Options: “On the expenditure side, candidates face strict limits on spending once elections have been announced, but election authorities struggle to properly verify their reported expenditure since a substantial portion typically occurs “in the black.”” Hence, it can be deduced that it is black money which mostly finances political parties and in the process elections in India.

The laws are also structured to help this. As Sukhtankar and Vaishnav point out: “For instance, corporations and parties are only legally required to publicly disclose political contributions in excess of Rs 20,000. This rule allows contributors to package unlimited political contributions just below this threshold value completely free of disclosure. Indeed, in 2014 the Association for Democratic Reforms (ADR) reported that 75 percent of the income of India’s six major parties comes from undocumented sources.”

Take the case of the Bahujan Samaj Party. For 2014-2015, the party “claims not having received any donation above Rs 20,000 hence no donations details of the party are in public domain.” iii

As mentioned earlier there are limits to the total amount of money that a candidate can spend during Lok Sabha elections. For bigger states like Bihar, Uttar Pradesh, Madhya Pradesh, etc., this limit is set at Rs 70 lakh. But for smaller states, like Goa, Sikkim and Arunachal Pradesh, this limit is set at Rs 54 lakh. Nevertheless, there is a loophole here which helps parties spend much more money than the prescribed limits. As Sukhtankar and Vaishnav write: “Under existing statute, the Election Commission of India(ECI) lacks clear powers to take follow-up action in the event a candidate files false or misleading declarations. An even bigger problem lies with a loophole in the law that allows candidates to keep secret party and supporter expenditures on behalf of their campaigns that are spent propagating the party programme rather than endorsing the specific candidate in question.”

All these loopholes allow political parties to spend black money in their campaigning. Any government which is serious about cracking down on black money should be addressing these loopholes with utmost seriousness.

Another important observation that needs to be made here is regarding bringing political parties under the Right to Information Act. In an affidavit submitted to the Supreme Court in August 2015, the Modi government said: “If political parties are held to be public authorities under RTI Act, it would hamper their smooth internal working, which is not the objective of the RTI Act and was not envisaged by Parliament. Further, it is apprehended that political rivals might file RTI applications with malicious intentions, adversely affecting their political functioning.” iv

In fact, the Congress Party has argued along similar lines against the 2013 order of the Central Information Commission to bring the six national parties under the ambit of the Right to Information Act. In June 2016, it argued before the commission: “Declaring a political party as public authority under the RTI Act would hamper its smooth internal working, which is not the objective of the RTI Act.” v

The Congress Party had further said that if political parties were brought under RTI, rivals would maliciously file many RTIs and adversely impact the functioning of the political parties. This is a pretty ridiculous argument given that if some party decides to do this with the Congress, the Congress can do the same with that political party. Hence, there is already a sense of balance in the system.

If the political parties are brought under the ambit of RTI, they will have to function in a much more transparent way in comparison to what they do now. This would mean keeping proper records of where the funds to finance them are coming from. Also, cash donations to political parties need to stop. Payments need to made through cheques or the various digital alternatives that are available.

In fact, Modi and the Bhartiya Janata Party can take a step forward on this front and promote the usage the recently launched of United Payment Interface for the small donations that are made to a political party.

To conclude, real estate companies or builders are major financiers of political parties, at least at the state level. There is some very good research evidence to suggest that builders do finance politicians before elections. In a paper titled Quid Pro Quo: Builders, Politicians, and Election Finance in India, authors Devesh Kapur and Milan Vaishnav, look at the cement consumption of builders to show how extensively builders have to feed the politicians.

All construction requires cement. When it comes to cement demand, the real estate sector accounts for a major part of the demand in India. When the construction activity carried out by the real estate sector goes up, the demand for cement increases. If the real estate companies are key financiers of politicians, as they are assumed to be, then just before the elections, they will need money to finance the electoral campaign of politicians.

If the real estate companies pay the politicians, it would mean that they will have lesser money to carry out their own activities. This would mean a slowdown in construction activity. And a slowdown in construction activity should lead to a fall in cement consumption.

Hence, cement consumption can be tracked to figure out whether real estate companies are financing politicians. Kapur and Vaishnav looked at elections in seventeen Indian states between 1995 and 2010. They found a “contraction in cement consumption (representing a 12 to 15 percent decline) during the month of state assembly elections”. What this clearly tells us is that real estate companies do finance state level politicians, as is commonly inferred.

In fact, the authors even offer some anecdotal evidence. A builder constructing a hotel in Mumbai was told by the government it would issue permits required, if there was a quid pro quo. And what was the quid pro quo? It wasn’t cash but a stake of five per cent in the hotel in the name of a firm connected to a local politician. vi

Hence, if the political parties are brought under the ambit of RTI and are forced to declare where their donations are coming from in a timely manner, the nexus between politicians and builders will come under proper scrutiny. This will mean a big attack on the black economy and will slow down the generation of black money in the economy.

The decision to demonetise high-denomination bank notes only attacks the current stock of black money. It doesn’t do anything about its flow or future generation. Let’s see if Modi gets around to doing this. That will be a real victory over black money.

The column originally appeared in Vivek Kaul’s Diary on Equitymaster on November 15, 2016

Of Bhakts, Jhollawallahs and Demonetisation

rupee(This is a spoof)

It was early in the morning. Delhi was smoggy as usual. And I had stepped out to buy milk.

At the milk booth, I ran into a bhakt and a jhollawallah.

The bhakt did not have a red tilak on his forehead and the jhollawallah wasn’t carrying a jhollah. He was wearing Nike shoes though and not the kolhapuri chappals that he used to, until a few years back. Also, he hadn’t studied at JNU.

And I immediately asked him? “What Sir, how come you are wearing Nike shoes? One of the most famous brands of unabashed American capitalism.”

“Oh, Nike, is now Made in China, you see,” he replied.

“But how does that matter?”

“China, is still run by the Party. And anything run by the Party is communist enough for me.”

“Oh, yes. The biggest capitalist enterprise in the world, the Chinese Communist party,” I replied.

The bhakt decided this was a good time to butt into the conversation and started to shout “Modi, Modi,” soon to realise that it was early in the morning, the road was deserted and there was no one out there watching his performance.

“What a fantastic decision Modi ji has taken to ban Rs 500 and Rs 1,000 notes. All the black money wallahs will now have a tough time,” he said.

Arre what are you saying? Look at my maid. She has run out cash. She doesn’t have money to buy food and the banks are giving Rs 2,000 notes only. She has never withdrawn money from an ATM. How is she supposed to live? Did Mr Modi think about this?” the jhollawallah asked, suddenly having developed great compassion for the maid.

“What your maid doesn’t have Paytm?” the bhakt asked, with a great degree of surprise.

“But why don’t you just take her to an ATM and help her withdraw that money. I mean, she will get used to the idea if you show it to her once,” I said. “It isn’t rocket science exactly.”

“I don’t have the time for that,” the jhollawallah replied.

“And my maid’s sister, she had saved Rs 25,000 in Rs 500 and Rs 1,000 notes, away from her alcoholic and abusive husband. She doesn’t have a bank account, what is she supposed to do with that money now?” he continued.

“Oh, even she doesn’t have Paytm?” the bhakt asked, doubly surprised.

“But don’t the Chinese have a big investment in Paytm?” I asked innocently. “And until last week weren’t we supposed to boycott Chinese goods and services?”

The bhakt ignored my remark.

“And look at all the lines that have cropped up outside ATMs. People are wasting so much time to withdraw their own money,” the jhollawallah remarked swinging his Rahul Roy hair, to one side. “And I had heard that Rs 15 lakh will be deposited into every account. Now I have to stand in line to withdraw my own money. What rubbish is this?”

“Lines?” screamed the bhakt. “Did you complain when you stood in a line to buy cricket match tickets? Did you complain when you stood in a line to buy movie tickets?” he asked. This was a performance which was straight out of Amitabh Bachchan’s Deewar. “Jao pehle us aadmi ka sign lekar aao,” I was suddenly muttering.

But I soon got back on track. “Well, the last time I stood in a line was to watch the first day first show of Raja Babu at the Sujata Cinema in Ranchi. These days I Paytm,” I explained.

“Ah, Raja Babu,” said the jhollawallah. “Thinking of Karishma gyrating to sarkaye liyo khatiya jaada laga still gives me the Goosebumps.”

The memories of Karishma Kapoor led to a pause and gave me an opportunity to ask a question. “So what do you think of this new Rs 2,000 note? Looks kinda sexy,” I said.

“It’s a conspiracy against the masses,” the jhollawallah screamed.

“They could have done better,” said the bhakt.

And this had me surprised. How could the bhakt and the jhollawallah agree on something.


“Because it’s pink,” both blurted out at the same time.

“So?” I asked.

“Pink is like saffron.” “Pink is like red,” said the jhollawallah and the bhakt, almost at the same time.  And I thought Pink was Bachchan all the way.

“So how do you think the new Rs 2,000 note will stop the generation of black money?” I asked.

“The new Rs 2,000 note will have a nano chip built into it,” said the Bhakt. “I read it on WhatsApp. With the built-in chip, the note can be tracked over a computer at any point of time.”

“And how will that help?” asked the jhollawallah.

“At any point of time the government will know where each note is,” the bhakt explained confidently.

“So?” I asked.

“So the government will come to know when the note reaches in the hands of a bad man.”

“Oh. Does the note have a camera built in as well?” I humbly asked. “And the government will employ one individual with every note, so that he or she can keep tracking it all the time.”


“And when some man with the Rs 2,000 note tries to do a dishonest thing, the Mahatma himself will come out of the note and ask him not to do it,” I said, with a loud laugh.

“You are hurting my feelings,” said the Bhakt.

“Oh, that was just a WhatsApp forward that I just received,” I said. “And in bhakt land, everything received on WhatsApp is true.”

Before I could say any further, the milk booth owner had arrived and opened the shutters. The jhollawallah pulled out a Rs 500 note and asked for milk. The bhakt had no cash and wanted to pay through Paytm.

I took out a hundred-rupee note bought two litres of milk, collected the change and walked off.

The column originally appeared in Vivek Kaul’s Diary on November 14, 2016

Will the Great Indian Real Estate Bubble Finally Burst? It’s for the Modi Govt to Decide


In a surprise late evening move yesterday, prime minister Narendra Modi told the nation in a TV address, that come midnight, Rs 500 and Rs 1,000 notes will no longer be legal tender.

As I explained in a column published earlier today, one reason for doing this is to tackle the menace of fake notes. The second reason for doing this is to tackle black money.

As I mentioned in the earlier column, the move seems to be inspired from the American dollar as well as the British pound. In the United States, the highest denomination bank note is $100. When it comes to the United Kingdom, the highest denomination bank note issued by the Bank of England is £ 50. In the United States as well as the United Kingdom, the highest denomination note is essentially 50 times the smallest denomination note of one dollar or one pound.

In India, up until now the highest denomination note was Rs. 1,000 and this was 1,000 times the smallest denomination note of Re 1, issued by the ministry of finance. When a currency has notes of higher denomination, it is easier to launder money i.e. store black money, as it takes less space and weighs less as well.

As Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital wrote in a recent research note: “For instance, the weight of Rs 1 crore in the form of hard cash rises from 12kgs to 100kgs if the denomination of the sum is changed from 1,000-Rupee notes to 100-Rupee notes.”

Also, Rs 500 and Rs 1,000 form the bulk of the total amount currency notes in the Indian financial system. As per the Reserve Bank of India, the total amount of paper notes in circulation in 2015-2016 amounted to Rs 16.4 lakh crore. Of this, the high denomination notes of Rs 500 and Rs 1,000 amounted to Rs 14.2 lakh crore or a little over 86 per cent. The Rs 500 notes amounted to Rs 7.9 lakh crore whereas Rs 1,000 notes amounted to Rs 6.3 lakh crore.

This basically means that anyone who has black money stored in the form of currency notes is more than likely to have it in the form of Rs 500 and Rs 1,000 notes. Black money is basically money which has been earned and on which taxes have not been paid. As Mukherjee and Shekhar write: “Given that 48% and 39% of the total value of currency in India is in the form of Rs 500 and Rs 1000 notes respectively, discontinuing usage of either of these notes can increase the physical costs and risks of holding black money significantly.”

Given this, anyone who has these notes, must go deposit this money in a bank account or in a post office account. And if the money being deposited is black money then questions are likely to be asked by the income tax department. Hence, that is unlikely to happen, at least not in a direct way.

One repercussion of this move that is being widely talked about is that it will lead to a fall in real estate prices. Typically, real estate throughout the length and breadth of India is bought using black money. A significant part of the payment is made in cash. Either this is black money being used or it is white money being converted into black. Experts are of the view, that the Modi government’s crackdown on black money is likely to lead to real estate prices coming down significantly.

The logic is that with Rs 500 and Rs 1,000 no longer being legal tender, it will become difficult to make the black component of the payment using currency notes. With the cash component becoming difficult to pay, it is expected that the real estate companies and builders will have to cut prices.

Further, the government plans to launch new Rs 500 and Rs 2,000 notes. It will not be so straightforward to exchange the old Rs 500 and Rs 1,000 notes with these new notes, at least that is the feeling that currently prevails.

This is the logic being offered by experts who are forecasting a fall in real estate prices. As Yashwant Dalal, president of the Estate Agents Association of India told The Economic Times: “Property markets will see around 30% correction in prices…Apart from big property markets, tier II and III cities will be worst affected.” Property prices in tier II and tier III cities will fall more because the black component while buying a home is higher in these cities.

Further, as Anuj Puri, chairman and country head, JLL India, told Mint: “We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry…The effects will be far-reaching and immediate, and shake up the sector in no uncertain way.” Rajiv Talwar, CEO of DLF, was a little more direct than Puri when he told The Economic Times: “There is bound to be a downward pressure on prices of everything including real estate.”

How do I see the situation? Given that I have been bearish on real estate for as long as I have been, it would be easy for me to say that prices will crash. But the past data (whatever limited data we have on real estate) doesn’t suggest the same.

So, my feeling is that real estate prices will fall, but whether they will crash or not, depends on how the government reacts to the situation. Allow me to explain.

This is something I had written in the last edition of The Vivek Kaul Letter, but it is worth repeating here. The current financial crisis that the world is dealing with, essentially started once the investment bank Lehman Brothers declared bankruptcy in mid-September 2008. Real estate prices fell across large parts of the world. But India beat the trend.

The question is why did this happen. Why did real estate prices in India not crash? How did India manage to beat a global trend? The answer lies in Figure 1.

                                Figure 1: Bank lending to commercial real estate (in Rs. Crore) Bank lending to commercial real estate (in Rs. Crore)

The Figure 1, plots the total loans given by banks to commercial real estate, essentially, builders or real estate companies, which make and sell homes, in the period following the start of the financial crisis in late 2008 and early 2009. In the aftermath of the financial crisis, real estate companies in India were also under a lot of pressure. Loans had to be repaid. At the same time the buyers had simply disappeared from the market.

To attract buyers, builders did start to cut prices. Nevertheless, that soon came to a stop. Look at Figure 1. There is a huge jump in lending between January 2009 and February 2009. In January 2009, the total bank lending to commercial real estate stood at Rs. 78,401 crore. At the end of February 2009, the total bank lending to commercial real estate stood at Rs. 90,765 crore. During the period of just one month, lending to real estate went up by Rs. 12,364 crore or 15.8 per cent.

This, when the total lending by banks (non-food credit) between January 2009 and February 2009 went up by Rs. 26,380 crore. Hence, lending to commercial real estate by banks, formed close to 47 per cent of the total lending carried out by banks during the month.

This was a huge anomaly. It is safe to say that this was a bank-sponsored bailout of the real estate sector. If this bailout had not been carried out real estate companies would have had to cut prices majorly to sell homes, to be able to earn enough money to repay the bank loans that they had taken on. Chances are they would have defaulted on some of these loans as well.

The Indian banks managed to avoid this scenario by lending fresh money to real estate companies. The fresh loans were used by the real estate companies to repay their old loans. If these fresh loans hadn’t come through then the real estate companies would have had to cut home prices, so as to be able to sell homes and earn enough money to repay those loans. And India’s real estate bubble would have ended in 2009.

Look at Figure 2. It basically plots the growth in bank lending to commercial real estate over the years. So, in June 2011, the growth rate was at 23.2 per cent. This means that the growth in bank lending to real estate companies between June 2010 and June 2011, stood at 23.2 per cent. All other data points have been plotted in a similar way.

                              Figure 2: Growth in lending to commercial real estate (in %)Growth in lending to commercial real estate (in %)

It is clear from Figure 2 that the growth in bank lending to real estate companies simply exploded in the aftermath of the financial crisis. In fact, it just went up vertically. Zoom!

And this explains, why the real estate prices in India did not fall in the aftermath of the financial crisis. Further, this also tells us why India beat the global trend of falling real estate prices. Of course, perpetual reasons like black money finding its way into real estate, were also there.

Further, the law of demand does not work in the real estate market. In a normal market, when prices go up, people buy less of that thing. In the real estate market, as prices go up, more and more people enter the market (as is the case with the stock market as well). This is what happened post 2009 in India. Rising real estate prices brought the buyers back into the market and the real estate bubble got a new lease of life.

In fact, it is clear from Figure 2, that the growth in bank lending to real estate companies goes through some sort of a cycle. Are these lending cycles linked to the rate of increase of real estate prices? The trouble is that there is very little data available on real estate prices in India. One of the real estate indices that one can look at is the Reserve Bank of India (RBI)House Price Index. Look at Figure 3. It shows one- year returns in real estate per the RBI House Price Index, since June 2011.

                                                      Figure 3: Real estate returns (in %)Real estate returns (in %)

What is clear from Figure 3 is that the annual real estate returns have come down over the years. Now what happens when we plot Figure 2 and Figure 3 together. Look at Figure 4.

                                                                   Figure 4: Comparison Comparisonn

The Figure 4 shows that every time the real estate prices start to correct (i.e. the rate of growth in real estate prices starts to fall), lending from banks to real estate companies starts to pick up. Of course, the mapping isn’t exactly one to one. But there is a clear correlation.

There are two possible reasons for this. One is that banks do not want real estate prices to fall. This is because they feel that if real estate prices fall, the real estate companies won’t be able to repay their loans. Given this banks give fresh loans to real estate companies, so that they don’t have to cut their prices. This keeps the real estate bubble going.

The second possible reason is that the government (I don’t mean just the current government here but any government) does not want real estate prices to fall. This stems from the fact that the ill-gotten wealth of politicians is largely invested in real estate and they work towards protecting its value. Also, real estate builders are major financiers of political parties at local and state levels.

How is all this relevant in the current context? Real estate prices will start falling for sure. The trouble is that this is also likely to lead to default of bank loans from real estate companies. As of August 2016, the total lending carried out by banks to real estate companies stood at Rs 1,81,700 crore. If home loan borrowers also start to default, then there will be a bigger problem.

In this scenario, will banks come to the rescue of real estate companies again? Will public sector banks be forced to give fresh loans to real estate companies? On these questions, your guess is as good as mine. I don’t have clear cut answers to these questions. If banks do give fresh loans to real estate companies, as they have done in the past, then the real estate prices may not fall by as much as they are currently expected to. Nevertheless, it is safe to say, that whether real estate prices will crash, is actually in the hands of the Modi government.

Also, it is worth pointing out here that public sector banks are currently in a mess because of corporates defaulting on loans. Will they be able to take on real estate companies defaulting on their loans as well? What will the government do in this situation?

To conclude, I must say this that if the Modi government does allow real estate prices to come down dramatically, it will improve the affordability of homes. This will allow many people who cannot currently buy homes to buy homes. Also, lower prices will spur demand, which is currently more or less dead. Higher demand will lead to the creation of many low-skilled and unskilled jobs, which the country badly needs, with one million individuals entering the workforce every month. It will also lead to a multiplier effect in industries which directly depend on real estate for their demand.

All I can say with confidence right now is: Watch this space.

The column originally appeared in Vivek Kaul’s Diary on November 9, 2016.

Why Mumbaikars bought gold all night long on a weekday

goldGold is money.

It has always been money.

Nobody knows this better than us Indians. Our love for the yellow metal comes out in the way we hoard it. And this faith in gold was at display all night long yesterday in Mumbai.

The question is what brought out Mumbaikars to buy gold on a non-festive day? The answer is Narendra Modi.

In a late evening TV address to the nation prime minister Narendra Modi banned the use of Rs 500 and Rs 1,000 as legal tender. This essentially made a little more than 86 per cent of notes practically useless overnight.

Anyone who has Rs 500 and Rs 1,000 notes can deposit them in his or her bank account or post office account, up until December 30, 2016. This money will be
credited into the bank or post office account.

Nevertheless, these notes can be exchanged only up to a total of Rs 4,000 as cash. This limit has been set for a period of 15 days and it will be reviewed after that. People who have always declared their income and paid taxes on time, have nothing to worry about. All they need to do is just go to a bank or post office and deposit the Rs 500 and Rs 1000 notes they have. The money will be credited into their accounts, which they can later withdraw through ATMs/cheques.

Nevertheless, this move of the Modi government, has created trouble for those who have black money in the form of cash or notes. Black money is essentially unaccounted money which has been earned but on which tax has not been paid. If the holders of black money were to deposit it in their bank account, it would probably lead to questions from the income tax department regarding the origin of the money.

If they were to continue to keep it under their mattresses, the money would become useless overnight. Hence, the next best thing to do was to convert that money into a physical asset, which would continue to hold value. Of course, physical assets like land or flats or paintings cannot be bought overnight.

But there are no such problems in buying gold. It is practically available everywhere in the city. All one needs to do is to step out and buy it. And this precisely what Mumbaikars who had black money in the form of cash did late last night.

They exchanged their Rs 500 and Rs 1,000 notes for gold and ensured that their black money continued to hold value. Also, no identification documents need to be shown for gold purchases of up to Rs 2 lakh. This makes converting black money into gold an easy proposition. Further, those with black money always have the option of buying gold from multiple jewellers in order to avoid showing identification documents. Hence, people were essentially busy converting their black money into gold.

As per the government notification Rs 500 and Rs 1,000 were not supposed to be a legal tender post-midnight. But the city jewellers seemed to have overlooked this technicality and carried on with brisk business late into the night. This was a good opportunity for them to earn some money, in what has been an otherwise slow year for them.

Of course, the money that they earned during the night and all the Rs 500 and Rs 1,000 notes that they managed to accumulate, must be deposited into their bank accounts, to make sure that it continues to hold value. If they don’t do that they will essentially end up holding worthless pieces of paper.

And once the money is deposited into a bank account, it will essentially mean that the black money of Mumbaikars will be converted into white money of the jewellers on which an income tax will have to be paid. This in a rather circuitous way will be a good thing to happen.

The column originally appeared in the Midday on November 9, 2016