A few days ago Mr. Ramamurthy posted an interesting comment which didn’t actually talk about black money, but I believe that’s what he meant and indeed that’s what a lot of people mean when they talk about corruption in this context.
Here’s his comment for context:
Ramamurthy November 12, 2012 at 8:25 am [edit]
What this shows is that the bulk of government revenues come from taxes, and that’s where black money eats into government revenues.
When someone evades taxes then government revenues decline and this in turn adds to the already massive deficit that the Indian government has.
To finance this deficit, the government has to borrow more money which is one cause of inflation and high prices, so you can say that black money causes strains on the government finances which in turn affects the common in the form of high prices. So, to that extent I feel that even the black money that is not transferred out of India is not merely a transfer and does affect the economy negatively.
However, I do feel that money that is transferred out of India affects the economy even more negatively than the money that’s still within India as long as the money that’s in India gets spent.
If the black money is just lying stashed away in trunks and mattresses then that’s no good, but if people spend it then that stimulates the economy.
If the money gets spent then that works to stimulate the economy and though not as good as trade done in white money is still better than the money not getting spent at all.
Although there is no set definition of black money, I think it’s fair to say that when you talk about black money, you’re usually referring to either money that’s earned doing something illegal like smuggling or stealing or you’re talking about money on which you haven’t paid taxes.
We will not talk about the first type of black money in this post because that’s a criminal activity and at least for this post, I think it will be simpler to just think about the money on which taxes haven’t been paid.
Before I go any further, I’ll refer to the budget post that I wrote earlier this year, and specifically to the chart that showed how the government raises money to run the country.