Black money has two components in India – Domestic Black Money and International Black Money. These two are interlinked at some level but can be tackled separately. In India domestic black money is large and it creates havoc with our economy by de-stabilizing many government policies.
Two suggestions can be considered about dealing with Domestic Black Money.

1. Black Money generation – It is important to note that all corruption/ bribery leads to black money but all black money is not due to corruption. You visit a doctor and pay him in cash and he may not report all his cash income. In a sense you have generated black money but not due to any corruption. Same is the purchase of say Petrol and you pay in cash and do not collect bills.By and large Black Money is transacted in cash. It is also used to bribe voters during elections. During last Assembly elections in Tamil Nadu, the election commission caught a large number of vehicles including Ambulances transporting cash for bribing voters. At poll time, money needs to be shifted/ transported from one location to another, sometimes over a long distance. In that case larger denomination notes like ₹1000 is useful compared to ₹10 or ₹100 since larger denominations can be accommodated in boxes comfortable even for large values.

   In many countries the minimum and maximum transaction currency is 1 to 100. In India it is 1 to 1000. This should also to be taken into consideration. By abolishing or demonetizing ₹500 and ₹1000 notes no one will lose their assets. A window of say 6 months can be given for people to exchange the current ones to ₹100 notes through any of the banks. This can be done without asking any questions since idea is to make black money get into the banking system. This will significantly reduce the higher denomination black money and also make transporting funds in cash form more difficult.

2. Limit cash holdings – The other is regarding making it a crime to hold cash beyond a specified limit by individuals/ partnership firms etc. In India holding any amount of cash is not a crime—that gentleman Sukh Ram—former Telecom minister under Congress regime- had it stuffed in his pillows! Our focus has always been about transactions. For transactions above ₹20,000 one is expected to use banking channels etc. But focus needs to shift to “holding” of cash.

It is required for one –if caught –to explain that it is not disproportionate to the known sources of his income. But a much better procedure would be to make holding cash say beyond a threshold of ₹20,00,000 ($30,000) a crime. Interestingly the White Paper on black money published in May 2012 by the Ministry of Finance under Pranab Mukherjee mentions in page 55 about the need for such a law:

As of now there are no legal restrictions to keeping very large amounts of cash with oneself or transporting it from one place to another. One is neither required to report it nor provide any explanation for it. There have been suggestions that the government may consider amending existing laws, including the Coinage Act 2011, The Reserve Bank of India Act 1934, FEMA, and the Indian Penal Code, or enacting an entirely new statute aimed at regulating the possession and transportation of cash above a particular threshold limit. This may include creating a limitation on cash holdings for private use, as well as provisions for confiscation of cash held beyond such prescribed limits. However, such laws need a broader political consensus to emerge for their acceptance in Parliament

In many developed countries there are restrictions about holding cash but due to electronic cards etc. such restrictions are not used mush. In USA it is known that cash transactions are more common in drug/ prostitution etc. type activities.

Now is the time for Government to bring such a law and also observe if opposition is going to cooperate for this.

Hence these two mechanisms may not eliminate domestic black money but may reduce the generation and use of it. Even developed countries have not completely abolished black money but have taken steps to reduce its generation and usage.

The author is Professor of Finance at IIM Bangalore. The views are personal