How is bringing back black money different from printing more money?
We hear a lot of fuss happening about enormous amounts of black money stashed abroad and how bringing it back would supposedly solve most of our economic problems. But how different is it really, from printing in more money? Won't the black money now in market have the same kind of inflationary affect?
Answer by Satadru Das:
The premise of the question is not correct. I will try to explain why.
The black money kept in the foreign banks are in foreign currencies, gold bonds, bonds and other assets. Only a fool will keep their wealth in cash INR in a foreign bank.
So what will happen if that money is brought back to India? There are multiple scenarios which are possible depending on what is done with that cash. But first of all the government will collect a part of it as taxes. So I will divide the money into two parts- taxes and the part remaining after tax.
That extra taxes will allow the government to close a part of the deficit it has or spend more on social sectors like health and education. What the Government probably will do is to create a fund with that money and spend a bit from it every year for the next 10 years or so. What is a Government deficit? A deficit is the gap between revenue and expenditure. So what does the government do when expenditure exceeds revenue? They take loans from the market aka the commercial banks. So most of the deficit the government has is in the form of loans that the government owes to the commercial banks. Now if the government repays a part of the loan it has from the taxes it will collect from the black money then the total amount of loans in the economy falls, right? If you know how money supply works then you will know that whenever someone repays their loans the money multiplier falls. So instead of an increase in money supply it will result in a fall in money supply. I hope I am clear so far. So, repayment of government loans will not cause inflation whatsoever.
The other way in which the government can use the money is by forming a fund from which it can spend bit by bit every year for the next 10 years. That will mean that the government can have a balanced budget or a lower deficit for the next few years. Again, this will have no impact on inflation as the government is only replacing its borrowed money with the money from the fund. We can have higher expenditure on schools and hospitals without worrying about a deficit.
The part remaining after tax
The part that will remain after tax can be used in several ways. The most effective will be to use it as investment. Think about it in terms of foreign investment- someone is bringing dollars from outside the country and investing it in India. India badly needs investment in industries and this can act as a boost for that. Also, another way in which the money may be spent is to pay for oil imports in dollars. India presently has a very large trade deficit and this will help in reducing that. Though this can only be done if the money is somehow channeled to the oil companies here who import the oil which is unlikely to happen. But either way this money will help in growing the economy.
However, there is a catch. It may have a recessionary effect too.
How is that? Not by creating inflation as the question predicts but through a completely different channel. If $200 billion dollars flows into the country from the Swiss Banks think what will happen to the exchange rate. Whether the money is collected as taxes or is invested in the domestic economy the $200 billion has to be first converted into INR! That will create an upward pressure on INR and it will appreciate sharply against dollar and other currencies. When currencies appreciate there is always a downward pressure on exports and upward pressure on imports. So the trade balance will worsen! If the trade balance worsens, GDP falls. But there is a way to get around this. That will be to pay for oil imports with the money which I already mentioned. The Government borrows large sums of money from the state run oil companies all the time. The Government can repay those borrowings with the USD it will collect from the black money as taxes and these oil companies can in turn pay for the oil in that dollar. If that happens then there will be a lesser impact on the currency and we will not have any recession.