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International BP Spain Holdings news, Preference for cash drives a market without morals

May 21, 2013


As a nation, we are easily outraged. We also think that the scourge of our nation is our politicians, which may be a generalisation. One common underlying cause of the scams we are currently discussing — the expose about banks whitewashing money, the scam of schemes running away with investor's money or the betting scandal that has shocked cricket lovers— is unaccounted cash. It is the bigger villain of the piece.

Economic activity in our country has been horribly skewed by the dominant influence of unaccounted cash. The largest cash racket is the general elections where the Election Commission naively believes that Rs 40 lakh (Rs 16 lakh for assembly constituencies) is adequate amount of expenditure per candidate. But look around; it is hard to miss cash as the preferred mode of transaction.

Private hospital billing counters feature multiple cash counting machines; coaching classes and tutors prefer to be paid in cash and many people attempt to bribe God by dropping obscene amounts of cash into temple hundis. If one excludes the small service providers, such as maids, servants, plumbers and electricians, it is easy to generalise that most others in this cash chain are likely to be tax evaders. The primary objective in their enterprise is to earn in cash and hide it from the taxman. Cash can be cumbersome, and let us see why.

First, seekers of capital in the cash economy pay a high price. They do not find ready lenders. They have to operate in known circles to get funding and are subject to threats and harassment if they default. From anxieties of finding money for crops in small villages to sycophancy in politics and films to keep the moneybags happy, seekers of cash are stressed. Lack of formal funding means rules of the game are drawn by a few, can be inequitable or unfair and good projects may not always find money.

In the informal world of cash that whimsically funds economic projects, superstitions thrive. Players modify film names, seek lucky dates, modify floor maps and doors, and try multiple tricks to succeed. In a system that does not evaluate risk formally, capital is bound to be scarce, idiosyncratic, expensive and exploitative. A poor country cannot be so callous about allocation of capital.

Second, cash economy suffers from poor accounting and management practices. It is an effort for the cash earner to keep multiple books of accounts and manage several business dealings. Invariably a coterie of trusted deputies is formed, informal delegations occur, and controls based on fear, reprimands and expulsion are in place. Not an ideal format for large-scale operations, but cash-based businesses pull through, taking in the frauds and dishonesty in their stride or turning to violence and vendetta for redress.



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