Effects of black money on Indian economy

by Manshu on November 19, 2012

in Economy

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]

Lot of talk is going on with corruption in India.Corruption is of 2 kinds.Major and Minor.Major is the corrupt money earned by the politicians etc running into several crores which normally is kept in foreign banks.The minor is in smaller sums small time officials receive money for favours rendered.
What happens to the money received and what are the consequent effects on the Indian economy?.I feel the Major corruption money which gets transferred to foreign countries and which do NOT come back to india is a loss to Indian economy.What remains in India is not a loss.It just means a mere transfer of Indian rupees from one pocket to another.Am I right?
Please dont assume I am advocating corruption. It is very bad as the consequences need not be always economical.

 

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.

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.

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{ 6 comments… read them below or add one }

Lucky November 19, 2012 at 10:52 am

Yes it is true that reducing black money is of paramount importance for our economy. The government is not taking necessary steps in this direction. People talk of bringing black money back from foreign lands. But what is the point in reducing black money, if its regeneration does not stop. You give amnesty, catch some corrupt people or take other steps, but black money again gets regenerated and the problem still remains.

I wonder if we the people, on our own, can take some small steps to reduce its regeneration , as honest citizens?

We may not give or take bribes, pay our taxes religiously. Is it enough?
Sale of property in India generates black money to the maximum. How can we stop it.
As an example a friend of mine has been trying to resell his single storey house for last several years. Market value is 8 Cr. He is prepared to sell it for a lesser/reasonable amount if no black money is involved. He is prepared to pay all taxes/capital gains and stamp duties etc. in full. But unfortunately there are no takers. No one has that kind of money and it is difficult to get a bank loan. Only Builders would buy it for rebuilding into 4 apartmens and resell them. But they always pay only circuit rates which is only 1.5 crores and rest 6.5 cr in black!

Is the system making honest people become dishonest or is there some remedy? How can he sell his property without taking any black money? Any practical suggestions?

Reply

Manshu November 19, 2012 at 5:41 pm

I’m sorry Lucky, but I don’t have any ideas on this situation.

Reply

Mihir Naik November 19, 2012 at 5:04 pm

Good Post :)
One Question comes to my Mind is, How they transfer their NonTaxed money to Foreign Banks ? If it is done by Bank than Government can trace it?

Can you please help on this? I would like to read some of ur old post also, if available, on this topic?

Thanks

Reply

Manshu November 19, 2012 at 5:24 pm

Don’t know how they do it, there must be unofficial channels that can be used and are difficult to trace.

Reply

ramamurthy July 7, 2013 at 4:03 pm

Problem,Manshu, is how the Govt will spend the money which I gave them as Income Tax.
What is happening is this money partly ends up in the pocket of some politician/Govt Official and partly spent on all sorts of subsidies.Very little is used for creating assets.

Reply

Manshu July 8, 2013 at 8:45 pm

You are right sir, unfortunately, that is the situation right now.

Reply

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