Date of

Submission March 13, 2021

PRACTICAL NO. 06
Aim: Write essay on Black money and Indian Economy.

Black Money & Indian Economy

By the term parallel economy we mean working of an unofficial or
unsanctioned economy parallel to the parent economy of the country. The objectives
of such unsanctioned or black economy run parallel to that of the parent economy but
in contradiction with the declared social objective. This type of economy is also
known as ‘black economy’, ‘illegal economy’, ‘unaccounted economy’, ‘unreported
economy’, ‘subterranean economy’, ‘unsanctioned economy’ etc. According to Prof.
J.C. Sandesara, “in popular parlance, the unofficial economy goes by the name of
black money and the official, of white money. Black and white is also variously
substituted by number two and number one, unaccounted and accounted, unreported
and reported, unrecorded and recorded and so on.”
Multi-dimensional problems are experienced under parallel economy. This
type of economy has political, commercial, legal, industrial, social and ethical
aspects. There are wide confrontations between the objectives of the legitimate and
illegitimate sectors under parallel economy.The basic objectives of economic
planning in India, i.e. establishment of socialistic pattern of society are very much
disturbed with the existence of parallel economy. This parallel or black economy
started to operate during the Second World War when the country had to experience a
serious shortage in essential items and the Government resorted to system of controls
and rationing of these items. With the growth of the economy in the post-
independence period the extent of the parallel or black economy has been magnified
and now it is playing a dominant role in determining the trend of economic activities
as well as to mould the national policies, to change the composition and structure of
the output and also to promote a powerful class having huge black money.
D.R. Pendse is of the opinion that there are two possible sources of black
money. Firstly it may originate from illegitimate source of income arising out of
illegal gratification such as payment of ‘Selami or Pagri’ or income from smuggling,
bribery etc.Secondly, it may originate from legitimate and legal sources of income but
concealed from tax authorities out of tax evasion. In big towns and cities,
professionals like Doctors, Engineers, Chartered Accountants, and Pleaders etc.
usually conceal a large amount of their income, although they earn their income from
legitimate sourcesUnder various situations, this black money is converted into white
money or white money is also converted into black money. This problem of black
money is quite mixed and vexed issue which is very difficult to isolate. In order to
understand the impact of black economy, it is quite important to estimate the extent of
black income over a definite time period.

In India, the extent of black money is quite significant. In the mean time,
various attempts have been made for the estimation of black money in India. There
are two different approaches which are mostly followed in the estimation of black
money.These are:
 Date of
Submission March 13, 2021

(a) Kaldor’s approach of estimating non-salary incomes above the income tax
exemption limit and

(b) Edger L. Feige’s method estimating transaction income on the basis of currency
deposit ratio.

The estimates of black money made by NIPFP are the last official estimate. Since
then no official study has been conducted by either Planning Commission, or Finance
Ministry or any other research institute. Despite economic reforms bringing in their
wake a simplified taxation structure, unaccounted money in the economy has risen
sharply. According to an unofficial estimate made by R.N. Lakotia, the amount of
black money in India had doubled since the last study was made. The quantum of
black money circulating in the Indian economy is at least 6.6 per cent of the GDP
which now would be in the range of Rs 70,000 corer. Recently the Supreme Court of
India asked the government to take black money as a serious issue. Accordingly, in
2011-12, the Centre has initiated the task of making a statistical study of the quantum
of black money in economy and of negotiating with various tax-haven countries like
Switzerland to unearth unaccounted black money parked outside India. The statistical
study also includes subjects like tax havens, tax treaties, and the trends adopted by tax
evaders within the country as also around the world. Though it is quite difficult to
estimate the quantum of black money with accuracy but many attempts have so far
been made in India for quantifying it and in most of the cases the findings appear to
be far from reality. However, most of such studies undertaken in our country in recent
years put the quantum of black money in the neighbourhood of 40 per cent of gross
domestic product (GDP).

Accordingly, Indian Institute of Public Finance and Policy (IIPFP) finds that
out of the total amount of black money, 48 per cent is generated from evasion of
personal income tax alone, 28 per cent from under-reporting of production and 18 per
cent from under- registration of immovable property so that these three main
components exhaust about 94 per cent illegal income generation.Various factors are
equally responsible for the growing generation of black income in India.
(i) Higher Rates of Taxes:
One of the important reasons behind the generation of black income is the prevalence
of higher rates of taxes both in direct and indirect taxes. Higher rates of taxes have
resulted in a growing tendency of tax evasion among the tax payers. Dr. K.N. Kabra’s
estimate shows that the estimated amount of evasion of income tax increased from Rs
1890 core in 1971-72 to ?5305 crore in 1978-79.
(ii) Divergence between Expected Rate of Return and Permissible Rate of Return:
In India, individuals expect a higher rate of return than the legally permissible rate of
return. The divergence between these two rates is mostly resulted from higher rates of
taxation. At one time, the marginal rate of income tax was set as high as 97.5 per cent.

(iii) System of Control Permits and Licenses:

The system of control, permits, licences and quotas associated with mal-distribution
of scarce commodities breeds grounds for increasing volume of corruption and
generation of black money.
 Date of
Submission March 13, 2021

Conclusion
Black money severely affects the progress of a nation and generate economic and
social imbalance. Money earned by illegal means slowly corrupts the whole system. It
leaves a nation in a state of economic and social disturbance. It is a fight that no
government can fight alone. The people also must be cooperative and vigilant to fight
against any kind of financial fraud or illegal activities. Also, it is the duty of the people
to immediately report any information about any kind of illegal transactions to the
concerned authorities.