REASONS FOR GROWTH OF BLACK
MONEY
There are several factors responsible for the
emergence of black money.
a) Controls and licensing system:
The system of controls, permits, quotas and
licenses which are associated with
misdistributions of the commodities in short
supply results in the generation of black money.
Since considerable discretionary powers lays in
the hands of those who administered controls
this provided them with a scope for corruption –
‘speed money’ for turning a blind eye to the
violation of controls. All this gave rise to trading
in permits, quotas and licenses, malpractices in
distribution and in the process; it generated
sizeable sums of black money.
Price and distribution controls have in the
past led to the generation of black money on a
significant scale. Any price control without any
adequate machinery of distribution and speedy
arrangement for increasing supplies is
potentially a source of black money generation.
Similarly, the system of licenses requires large
number of inspectors for completing various
formalities and thus good amount of hush money
has to be paid. Where controls are not
implementable, they have led to harassment and
black money generation.
b) Tax structure:
High tax rates and defective tax structure
have also been responsible for the existence of
black money to a large extent. Till recently the
tax on income and on wealth was very high to
invite evasion. The marginal rate of income tax
was as high as 75 per cent. And when it was
combined with the tax on wealth, it was still
higher. This was the situation in respect of
personal taxation until a decade ago. The
corporate tax rate too was very high. In these
circumstances the temptation/gain from tax
evasion was substantial.
Tax-laws in country are so complicated that
a layman fails to understand it. Even honest
assesses are unable to file cor-rect returns. This
encourages people to evade tax.
c) Donation to political parties:
Black money also arises from political
activities such as elections where candidates
spend well above the ceiling prescribed by the
Election Commission. This huge expense in turn
makes them corrupt.
The Government has decided to ban
donations to political parties in 1968; it prompted
businessmen to fund political parties, especially
the ruling party, with the help of black money.
Ostensibly, this decision was taken to reduce the
influence of big business on the electoral process,
but in practice what happened was precisely the
opposite. Businessmen everywhere have by now
learnt that they should pay a certain charge out
of the black money to the coffers of political
parties and then be sure that the political leaders
will only bark but not bite. Big business, in the
process, has been able to tame the political
leadership. This is evidenced by the relaxation
of various controls, permitting business houses
to enter areas reserved for the public sector,
putting a large number of banned items on the
Open General License list etc.
d) Generation of black money in the public
sector:
Every successive five-year plan is planned for
a larger size of investment in the public sector.
The projects undertaken by the public sector have
to be monitored by the bureaucrats in Government
departments and public sector undertakings.
Tenders are invited for the various works and
these tenders are awarded by the bureaucracy in
consultation with the political bosses.
Thus, a symbiotic relationship develops
between the contractors, bureaucracy and the
politicians and by a large number of devices costs
‘are artificially escalated and black money is
generated by underhand deals. Instability of the
political system has given a further momentum
to this process. Since the ministers are not sure
of their tenure and in a majority of cases, the
tenure is very short, the principle ‘Make hey
while the sun shines’ is adopted by most of them.
The larger number of scandals that are unearthed
by the Opposition only support the contention
that huge investment in the public sector is a big
potential source for black money generation. In
this process, bureaucrats act as brokers for
political leaders and thus the nexus between
business, bureaucracy and politicians promotes
the generation of black money.
e) Deterioration in the moral and civic
standards:
The most important reason of tax-evasion
andblack-money is the genera deterioration in the
moral and civic standards of our people.
Our businessmen employ very ingenious
methods to generate black-money. Large
amounts of black-money can be generated
through the sale of fixed assets and scrap.
Sometimes influential firms obtain quotas or
import licenses in excess of their actual
requirements and sell them at cash premiums.
Industrial manufac-turing licenses are similarly
obtained through influences and sold to a second
party at an enhanced value. Purchase bills ore
over-invoiced or dummy bills are prepared.
Large-scale smuggling of gold and various luxury
items is an important source of black-money.
Sometimes, relatives whose income is not taxable
are kept on the payrolls of a company; they are
paid their salary which is taken back in the forms
of black-money.
IMPACT OF BLACK MONEY
The economic impact of corruption is a
powerful one. The circulation of black money has
adversely affected the Indian economy in several
ways.
In India, the black economy has resulted in
an immense loss of tax revenue. If it accounted
for 40% of GDP in 1998-99, the loss of direct
tax revenue at the prevailing rate would amount
to at least Rs. 200,000 crore, or 47.5 billion U.S.
Dollars (Kumar 1999). According to the BBC
(2004), only 2 million of India's billion people
pay taxes, just 2% of the population. The
government therefore suffers a perennial
shortage of funds and public services languish.
Because of the growing black economy,
policies fail both at the macro-level and the
micro-level. Planning or monetary policy or
fiscal policies do not achieve the desired results
because of the existence of a substantial black
economy. Targets for education, health, drinking
water and so on are not achieved because
“expenditures do not mean outcomes.” The
economy does not lack resources but faces
resource shortage. Much investment goes into
wasteful and unproductive channels, like
holding gold or real estate abroad. The flight of
capital lowers the employment potential and
the level of output in the economy. Capital sent
abroad does not generate output in India but
does so where it goes. A country that is
considered capital-short has been exporting
capital. A nation that gives concessions to
multinational corporations to bring in capital
loses more capital than it gets, and that too at
a high cost, from foreign institutional
investments or foreign direct investment. India's
policies are open to the dictates of international
capital because the country's businessmen and
politicians have taken capital out in large doses
since Independence. The costs are huge.
The direct and indirect costs are of policy
failures, unproductive investments, slower
development, higher inequity, environmental
destruction and a lower rate of growth of the
economy than would have been possible. It has
enormously worsened the income-distribution,
and has thereby undermined the fabric of the
fixed income salary class finds itself ever be the
lower rung of the income-ladder.
The inflation rises while the black money
circulates in the market. The price of eatable
/others goods are increased to supply of that
black money and less production of things
in the market. So people which have that
money they offer more price in the market.
As compared from other person in the
market.
At the social level, the cost is a loss of faith
in society and its functioning. At the political
level there is fragmentation, with States
demanding their own packages because the
belief that the nation as a whole can deliver
has been dented. The demand for smaller States
is a corollary because the bigger States neglect
the less vocal regions. Each caste, community
and region now wants to have its own party to
represent its narrow interest, leading to the
proliferation of smaller parties.
In the absence of Black Money India could
have been growing faster, by about 5 per cent
since the 1970s if it did not have the black
economy. Consequently, India could have been
an $8-trillion economy, the second largest in
the world. Per capita income could have been
seven times larger; India would then have been
a middle-income country and not one of the
poorest.
