But Where's The Cash?

To seek the answer, understand the psychology of an average declarant, Ashok Yadav, who is part of a 4.7-lakh-strong mass of people who answered finance minister P. Chidambaram's call to turn clean. Make no mistake, the money Yadav has declared was already his; only the colour has changed. Didn't make much difference though: it was invested largely in land and bullion. Come amnesty in the form of VDIS 1997, and this parallel income and benami assets become part of the GDP statistics, allowing him to use it as he pleases, when he wants to—without wasting thought on revenue secretary N.K. Singh's gang of income tax (IT) sleuths.

The colour of the declarations: But Yadav's no fool—black or white, making money needs intelligence. The assets he's declared are largely undervalued. So, the gold that Yadav declared was not on last year's high prices but based on the price prevailing a couple of decades ago. Rs 1 crore of gold, therefore, has been valued at, say, Rs 10 lakh. Having declared this, Yadav paid a 30 per cent tax, or Rs 3 lakh, to the IT department. On the real value of the declared gold, therefore, the effective tax rate works out to a piffling 3 per cent. Which is far lower than the 10-15 per cent cost being charged by hawala operators.

For him, therefore, it was more sound economics than any real effort to turn clean. Which is probably why his sources of black income generation—receiving bribes as a customs officer, not declaring the sale of ancestral property (half of it in cash) and making money doing property deals on the side—are as strong as ever before. Says Abusaleh Shariff, associate director, National Council of Applied Economic Research: "By opting for VDIS, a declarant has abolished his guilt, and will now do more illegal activities. He has paid for it, hasn't he?"

 A point there. But the chartered accountants have left him way behind. One such creative accountant and tax consultant helped his client declare. The man stated that he wanted to convert Rs 1 crore (not the real number) into white. Only, there was nothing to declare. He has deposited this money so that the Rs 70 lakh worth of black income he generates in future—which already exists in his books today—can safely be put in the bank as clean money.

Or, as stockbrokers, trapped in the SEBI-lighted financial pressure cooker, are doing. Finding it hard to maintain the mandatory capital adequacy ratio for being in business, some brokers have declared fictitious silver and gold under VDIS. By doing this, the brokers have included the value of their declaration in their capital. Says U.R. Bhatt, chief investment officer, Jardine Fleming India: "By paying 30 per cent of the amount, they have been able to increase their capital on paper." This then will become a white front for the stockbrokers to keep generating black income.

VDIS and the Sensex:As far as the movement of the newly white money into the stock-markets is concerned, all talk of a bull run is just that: bull. The percentage of illiquid assets—land, gold, jewellery—declared is much, much higher than cash declarations. They have only legalised these assets. Says M.G. Damani, president, Bombay Stock Exchange: "The tax applicable on these assets will have to be paid out of their liquid, legal assets. Some of these assets will have to be cashed in order to pay taxes on the declarations." Echoes Bhatt: "Over time, it might start a bear run instead of a bull run." 

The bottomline is that there really isn't  too much money available for investment or spending. As V. Prakash, New Delhi branch manager of ICICI Bank says: "The money that has been declared was already in circulation. Black money is not kept in cash, and fresh money might not be as high as one would imagine." The crucial question is: where's the cash? Estimates vary—5 to 8 per cent of total declarations, or roughly between Rs 1,100 crore and Rs 1,800 crore—but the cash component of all declarations has been very low. This is not the kind of money that can fuel a long-term bull run.

And even if it were the case, the VDIS has been in operation for the last six months. Even if 70 per cent of all declarations came in December, a not so insignificant sum has been in circulation for some time. "What has happened in the last six months?" asks Kohli. Nothing. One thing that could happen though is that the land deals—probably the highest contributions to VDIS have come from here—would become "more transparent".

White money and real estate: What's happening is this. Five years ago, Raghav Menon bought a Rs 10-lakh plot of land and showed its worth as Rs 3 lakh. Today, the price has tripled to Rs 30 lakh. He declares his earlier purchase as Rs 10 lakh. Today, when he sells this to buy a larger plot of land—by adding some cash—he can do so without batting an eye. The same black-white ratio remains, but the worth of his white money has gone up. Meanwhile, his black income generation continues. Says investment consultant Ravi Kohli, managing director, Blue Chip Capital Services: "Real estate could be the largest chunk of assets declared. By making his real estate white, any property owner can and will now think of buying a better property."

Economist Surjeet S. Bhalla, president, Oxus Research & Investments differs. Says he: "Land is a bubble that still has to fall before it bursts. There's going to be more property for sale than ever before." And as gold is on its way down—touching an 18-year low last week—the only other investment option is the stockmarket. According to Bha-lla, the ideal investment options for these people are an equal balance between stocks and fixed return instruments. "No other vehicle gives you matching returns." Vikas Seth, director, My Money Securities, agrees: "The stockmarkets give you the highest returns today. They are very liquid too. You can get your money within 17 days.

Lots of new projects? " By far, the>most logical movement of this white money will be in business. As businessmen have probably been the largest subscribers to the VDIS, this money will help them in their projects. Rs 1 crore of white money coming in as the promoter's contribution in the equity of the company could get another Rs 1 crore from other investors, and move the funds-flush and eager-to-lend banks and financial institutions to pitch in Rs 4 crore (on a conservative debt-equity ratio of 2:1) to the company. Thus, the capacity of the promoter to set up a larger project increases significantly: he puts in Rs 1 crore, and sets up a project worth Rs 6 crore.

A smaller businessman could buy a new machine, expand into a new assembly line or computerise. An even smaller trader aging director of an infrastructure company says: "Finally, the money will go into productive work, and will definitely find its way into the market. My question is: what is the government doing with their share of the money?"

And what happens to the tax money?Much of the money that the government has raised will be used to balance the fiscal deficit. The states, which are supposed to receive 77.5 per cent of this moolah, will get it only in fiscal 1998-99, since sending the money to the states will need a constitutional amendment possible only in the next Lok Sabha. Much of the 22.5 per cent that remains at the Centre could end up being used to pay government employees as per the Fifth Pay Commission report.

And that's causing much resentment. Says a textile company vice-president: "I have been paying my taxes regularly at 40 per cent. For these people, even the 30 per cent tax rate works out to an effective payout of just 10 per cent. And the government is using the money to pay salaries. This is most unfair."

Of course, VDIS has been stunningly successful, but maybe not as spectacularly as a glance at the mere numbers may indicate. Early last year, Pierre Helg, deputy chef de mission of the Swiss Embassy, estimated that Indian businessmen and politicians have cash deposits of more than $80 billion (Rs 312,000 crore) neatly stacked away in Swiss banks. Had that come out.... Or maybe it's just that we Indians are just plain impossible to please.