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Black Money Economy
Black Money Economy
Tags: Gig Economy Economy WTO WTO Public Stockholding MSP Economic Growth Masala Bond Environmental Performance Index Forecast of Economic Growth Functions of the Finance Commission
There is a massive Black Money Economy that is prevalent within the country and the unaccounted money is mostly accumulated by tax evaders, smugglers and criminals. Black money is mostly held in foreign banks to avoid detection by national law enforcement agencies. Some Indian corporations resort to transfer mispricing to over-invoice their imports and under-invoice the exports from tax haven countries like Hong Kong, Singapore, etc. Foreign Direct Investment (FDI) from these countries may come from Indian residents by concealing real identities. Investing in the stock market through Overseas Derivative Instruments (ODI) or Participatory Notes (PN) also promotes the generation of black money.
Apart from them, gold imports, smuggling and fictitious high-value round trip transactions are also responsible for black money generation. Thus, black money cases in India have witnessed a steep rise through the years because the economic boom of the late 1990s and early 2000s also gave rise to many businesses that dealt in cash and they could easily be hidden from tax authorities. To put it in perspective, the Central Bureau of Investigation (CBI) estimated that about Rs. 25 Lakh Crores worth of black money may be in circulation whereas the International Monetary Fund (IMF) maintains that black money within the country may constitute about 50 percent of the Gross Domestic Product (GDP)!
Looking at these figures, the effects of black money can be massive. First of all, black money is largely due to tax evasion and it results in a loss of revenue for the government. It also widens the gap between the rich and the poor through the concentration of wealth and income in a few hands. The distribution of scarce resources also becomes uneven as black money holders can pay more compared to honest and poor people and that reduces the economic welfare of citizens. And finally, a large underground economy may lead to under-estimation of the correct size of the economy and thus planning and policymaking may not be correct.
Moreover black money causes inflation as a tremendous growth in it leads to a growth of unaccounted money within the system which in turn will lead to more demand for goods and hence a price rise of the present limited goods. On a large scale, the central bank may at times, may not be able to control the money supply causing higher inflation.