As most of the banned high-value currency notes made their way to the banking system, whether legally or illegally, industry body Assocham has now come out slamming bureaucrats who were the brains behind the government's demonetisation for failing to foresee the loopholes in the implementation of the note ban.

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Tendering high-value currency notes illegal cannot prevent the future generation of unaccounted money and can do little about the ill-gotten wealth converted into assets like gold and real estate, the chamber said in a study on currency demonetisation.

"Ironically, several of our laws are badly drafted and framed, leaving scope for official discretion. The problem in a way starts here," Assocham said, adding that a strong political will would be required to deal with this issue. "Bureaucrats drafting the proposed legislations should be clearly instructed not to leave any grey areas." 

According to most recent indications, most of the scrapped currency notes may have returned to the banking system, implying that demonetisation may not even fully wipe out the existing stock of ill-gotten cash. 

India demonetisation

"Invalidating existing high-denomination notes addresses the stock of black money but little to address future flows. Eliminating such flows will require further reforms like lowering stamp duty on property transactions, electronic registration of real estate etc.," according to the study.

Additionally, it is expected that the tax authorities may not be able to trace the money laundered through different accounts, given the resource constraints. Further, much of conspicuous consumption is paid for in unaccounted money, which, in the hand of the recipients, can again become perfectly legal income. At the same time, benami deals in real estate and commodity markets make it difficult to trace the transactions to the ultimate buyer or seller.

"It is very difficult to separate black money from white money because the distinction is not once-and-for-all. White money used to purchase something becomes black if the shopkeeper does not pay sales tax..." 

"Even if the existing stock of illegal currency is wiped out by demonetisation, it will be soon replaced as long as such points of contact exist between legitimate and illegitimate deals," the study said.