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 Siddharth Ravikumar:
Indian black money stashed away internationally is stored in foreign currencies, not in rupees. Bringing it back would transfer the value stored in foreign currencies back into rupees without increasing rupee supply, thereby increasing the value of the rupee. Whereas, printing more money would increase rupee supply without a corresponding increase in the total value stored in rupees, thereby decreasing the value of the rupee.
The longer answer:
Indian black money is currently stored in foreign currencies like Swiss franks and USD, not in INR. So there was no INR taken away from circulation to be stashed in the first place, all the black rupees probably entered the black market for currency exchange and then got laundered and re-injected into the economy. So if the black money is brought back, it would all be in foreign currencies and there would be no extra supply of Indian rupees. These foreign currencies will be added to our forex reserves and the owners of the money will be paid in rupees by the Reserve Bank of India. Unless the RBI pays these people with rupees that were hitherto not in circulation, there won't be a sudden flood of new money in the economy.
Additionally, the value of all existing rupees will increase. Let's do a back of the envelope calculation. India had forex reserves of $290 billion as of Feb 2013 (). The total black money stashed away overseas is estimated to be about 23 – 26% of our GDP ( ). This would amount to around $450 billion. So forex reserves will increase to $740 billion. The RBI would then pay the owners of the money Rs. 17 trillion ($450 billion minus 30% tax at today's exchange rate). Now, this huge windfall in foreign reserves would cause the rupee to appreciate dramatically and this would make imports such as oil and gold cheaper, reducing inflation significantly.
As opposed to that, when the RBI prints a lot of money and releases it without a significant growth in the GDP, it leads to higher money supply without increase in the supply of goods and services that can be bought with this money, which leads to inflation.