Black deals in Rs 500 and Rs 1,000 notes have been stopped by demonetisation. Optimists hope this will end the scourge of black money. Pessimists say no, the new Rs 2,000 notes will soon replace Rs 1,000 notes in black deals.

I prophesy that gold coins will overtake currency notes in financing large black deals. This will hugely increase the demand for imported gold, causing balance of payments strains.

A 5g gold coin today is worth roughly Rs 15,000, and a 10g coin roughly Rs 30,000. So, a briefcase of gold coins will hold several crores, far more than a briefcase of Rs 2,000 notes. Portability and space reduction make gold more convenient for large deals. Bribes are often a percentage of project costs, and as the economy and projects grow bigger, kickbacks will too. Large payments will be done most conveniently in gold or dollars.

Gold is usable anywhere in the world. Not being paper, it can never be demonetised. Cash keeps losing real value because of inflation, but gold prices rise faster than inflation in the long run. If rising demand for gold induces the government to raise the import duty, domestic prices will rise correspondingly, giving a windfall to gold holders.

The value of gold fluctuates daily, creating valuation risks for hoarders. However, holding cash is not riskless either because it depreciates with inflation. Cash only depreciates, whereas gold coins can both depreciate and appreciate, mostly the latter. That’s why the future of black is gold.

Many naïve folk think demonetisation will deal a body blow to black money and shift India towards a clean, cashless economy. Sorry, but the benefits will be limited. Black money is both a stock (that is, a hoard of past untaxed money) and a flow (the constant generation of fresh untaxed income).

As a stock, probably not even 2% of historical black hoards are held in cash—almost all have been converted to gold, real estate and financial investments, some at home and much abroad. Cash yields no interest and loses real value through inflation, so no savvy person holds large hoards. The vast bulk is converted into assets across the world, and much is brought back to India (via Mauritius and other legal routes) to be invested in Indian shares and real estate. The overwhelming stock of black money has been laundered into white ages ago.

As a flow, black money is simply income that escapes taxation. This is not just income from crime, bribes and real estate deals: it includes the income of the vast majority of Indians. Barely 3 crore people file income tax returns, of whom less than two crore pay income tax.

Hundreds of millions of small businessmen, unorganised workers, farmers and self-employed persons should be paying income tax but do not. Rural India (with 70% of the population) is very largely a cash economy with no income tax office in sight.

As India modernises, it must shift hundreds of millions of people from the unorganised and untaxed sector into the organised, taxable sector. Over and above this, a strong police-judicial system is needed to identify and quickly convict big offenders. Neither change looks likely anytime soon. So the generation of fresh black income will barely be touched by demonetisation. So, euphoria is unwarranted.

Those with huge cash hoards will be hit. Most will find ways of laundering big notes into gold, dollars or new notes by paying hefty commissions to middlemen. These middlemen will aggregate the large notes, distribute them through ordinary folk into millions of small bank accounts that escape tax attention, and then recoup the sums in new notes. The gains of the middlemen will, alas, be a new form of black untaxed income.

Cash hoards are held by political parties for operations, by businessmen for paying cash bribes, by rural folk operating entirely in cash, by hawala operators and other middlemen in finance. All will take a partial hit. Real estate deals, which have a large black money component in most states, will also take a hit.

Was the BJP tipped off about demonetisation? Did it convert cash into small notes and gold in advance, leaving other political parties with cash hoards requiring time and large discounts for laundering? Watch out for intense media investigation and speculation on whether the BJP has gained a big cash advantage in the coming state elections.

Correction: Swaminomics had said 3 million Indians filed tax returns and less than 2 million paid income tax. The correct figures are 3 crore and 2 crore.