If instead, the government, as Mr Advani perhaps envisages, borrows against the sum brought in, it would unleash huge economic peril. All that would do would be to push excess liquidity into the eco-nomy from the banks and from the government’s own spending on assorted social development programmes. Real variables would hardly be affected; the net impact of the spending would therefore drive inflation up in the economy, hardly an efficient thing to do.

The other possible use of the money is as “helicopter money” — direct subsidies — perhaps the more popular understanding of the subject. If Mr Advani were to do that, the immediate impact of the measure on the economy would be to raise food price inflation. The rush to the local grocer would just raise the prices, presumably presenting the grocer with the problem of how to handle his newfound riches, and therefore create another Indian entrant to the ranks of numbered Swiss bank accounts.

The key problem glossed over in the zeal for black money “return” is that, unlike an oil well or something equally tangible, cash recovered from abroad has no intrinsic value. The total amount of cash in the economy at all times must bear a proportionate relationship with the total stock of goods and services produced. Unless the sum is sequestered in the RBI, releasing any of it into the economy would be totally counter-productive, as we have seen.

What Mr Advani has not conjectured is that a large part of the black money has, in any case, already returned to the Indian economy, as our growth rates have accelerated. This has happened very simply. As an analogy one should look at the foreign investment that for instance comes into India through the “Mauritius route”. The route was set up in 1984, but all statistics from the ministry of commerce show that it became big only when liberalisation took hold. Investors in the economy from abroad, either through the share markets or through foreign direct investment, put money in as they felt their returns would be substantial. Despite the recent downturn, that confidence has not ebbed. Except in October 2008, the total FII outflow has been very thin; it has now turned positive again.

... contd.