Black Money – India

Black Money in India: Meaning, Concept, Magnitude and Measures to Control Black Money!


Black money is both an economic and a social problem. In the latter con­text, it is perceived as a problem with adverse sociological effects on society, like social inequalities, social deprivations, etc.; in the former con­text, it is perceived as a parallel economy, an underground economy or an unofficial economy that is the consequence of the economic policies of the government and has damaging effects on country’s economy and na­tion’s planning development.

While a problem like poverty affects those who are poor, unemployment affects those who are unemployed, alcoholism and drug abuse affect those who consume them, black money is a problem which does not affect those who have black money but it affects the common man in society. No wonder, it has been described as a prob­lem with a difference.

Concept of Black Money:

Black money is tax-evaded income. It can be earned both through legal and illegal means. Its legitimate source is that the income-earners do not reveal their whole income for tax purposes. For example, government doctors earning money by private practice even when they get non-practising allowance; teachers earning money through tuitions, examinations and book royalty and not including it in income-tax returns; advocates charging much higher fee than shown in their account books, and so forth.

Its illegitimate source is bribe, smuggling, black-marketing, selling commodities at prices higher than the controlled prices, taking pugree for house, shop, etc., selling house at a high premium price but showing it at much lower price in the account books, and so on.

It is possible to convert black money into white money and vice versa. For example, when a person manages to get the receipt from the shopkeeper by paying sales-tax for a commodity but does not purchase it actually, he generates black money as reimbursement is made to him against the receipt.

The money not actually paid is the black money in this case. In such case, the shopkeeper sells the same commodity to an­other person without giving him any receipt for it. On the other hand, if a person purchases second-hand car and pays Rs. 90,000 for it out of white money but gets a receipt of only Rs. 60,000, the balance of Rs. 30,000 be­comes black money for the seller. In this case, white money becomes black money.

Magnitude of Black Money:

It is not easy to calculate the magnitude of black money in any society. The economists in the United States, the United Kingdom, Norway, Swe­den and Italy adopted different measures but could not estimate the amount involved in black money.

Norway and Sweden used question­naire method for eliciting answers from persons whether they had participated in illegal activities as buyers or sellers. Italy attempted to esti­mate the underground economy by finding out the difference between the size of the labour-force officially reported and actually employed. This enabled the authorities to determine productivity in the under­ground sector.

The United Kingdom tried to assess parallel economy by comparing the official estimates of the Gross National Product (GNP) made from the consumption side with those made from the income side. In the United States, Guttman assumed that only cash is used in illegal transactions. He tried to find out the difference between currency re­quired for economic transactions in a fixed period and actual currency held outside banks in the same period.

In spite of the varied methods used, it is not possible to estimate the magnitude of black money in a society, even though it is described as a world-wide phenomenon. It is said to be in operation not only in the de­veloping countries but also in the developed countries like the United States, the United Kingdom, Russia, Japan, Canada, France, Germany, etc.

A study conducted by the IMF about a decade and a half back showed that in regard to the size of the underground money, India holds the first rank followed by the United States and Can­ada having the second and the third ranks.

In India, black money or unaccounted wealth estimated by Prof. Kaldor in 1953-54 as Rs. 600 crore was estimated by Wanchoo Committee as Rs. 1,000 crore in 1965-66 and Rs. 1,400 crore in 1969-70. Rangnekar placed the figures of black money at Rs. 1,150 crore for 1961-62, Rs. 2,350 crore for 1964-65, Rs. 2,833 crore for 1968-69, and Rs. 3,080 crore for 1969-70.

Chopra’s estimate (Economic and Political Weekly, Vol. XVII, Nos. 17 & 18, April, 24 and May 1, 1982) showed that black money in 1960-61 was Rs. 916 crore which increased to Rs. 8,098 crore in 1976-77. According to Gupta (Economic and Political Weekly, January 16, 1982:73), the amount of black money in our country was Rs. 3,034 crore in 1967-68 and Rs, 40,867 crore in 1978-79.

According to his estimate, black money which constituted 9.5 per cent of the GNP in 1967-68 swelled to nearly 49 per cent in 1978-79. In 1981, black money was estimated by one source at Rs. 7,500 crore (6.8% of the national income at 1981 prices) and by an other source at Rs. 25,000 crore (22.7% of the national income at 1981 prices).

The National Institute of Public Finance and Policy estimated the quantum of black money in economy in 1985 at around Rs. 1, 00,000 crore or about 20 per cent of the national income. The Planning Commis­sion study, however, estimated it to be in the range of Rs. 70,000 crore. Further, it is generated at the rate of Rs. 50,000 crore per year.

The flight of capital has resulted in an overseas stash which government officials conservatively place at $50 mil­lion (about Rs. 1, 30,000 crore). In 1996, the estimated black money in our country was believed to be more than Rs, 4, 00,000 crore {The Hindustan Times, January, 20, 1997).

Recently, Prof. Arun Kumar of Centre for Eco­nomic Studies, Jawaharlal Nehru University, Delhi has authored a book on black money in India (1999). He holds that black economy is equiva­lent to 40 per cent of the GDP out of which 32 per cent is in the legal sectors (business and professionals like doctors, film-stars, etc.) and 8 per cent in the illegal sector (narcotics, etc.) (The Hindustan Times, September 12, 1999).

Some scholars have pointed out that of the total black money in our society, about one-fourth (26%) is from the tax-evaded income. In the United States, black money is expected to be about 8 per cent of its Gross National Product (GNP). While in India, black money is more from legal sources (about 80%), in the United States too it is more from legal sources (about 75%).

Measures to Control the Black Money:

Over the past 50 years, the government has at various times announced several schemes offering opportunities to bring black money overboard. Some of these schemes are: introducing the scheme of special Bearer Bonds, demonetizing high denomination currency notes, stringent raids, and scheme of voluntary disclosures.

In July 1991, the Union Finance Minister proposed a new scheme—National Housing Bank Scheme—to woo black money back into the legitimate operations of the national economy. The scheme offered possessors of unaccounted money an op­portunity to deposit any amount of money (with a minimum limit of Rs. 10,000) with NHB without disclosing the source of funds.

The offer remained open for seven months and closed on January 31, 1992. It permitted the account holders facility to withdraw 60 per cent of their de­posits from the account while the remaining 40 per cent were impounded to be used for projects such as slum clearance and housing for the poor.

The withdrawals were to be made after stating the purpose for which the money was proposed to be used. These people were taxed at the rate of 40 per cent while the balance amount was channeled back into the open economy. In 1997-98 budget, amnesty was proposed for legitimizing black money by payment of 30 per cent as tax.

Some scholars have maintained that all these measures have touched only the tip of the iceberg. All the schemes have hardly fetched Rs. 5,000 crore over a period of fifty years. The main drawback in these schemes is that they touch the problem of black money already created but they do not go into the root cause of generation of black money and that is why a person is prepared to take the risk of keeping black money despite so many problems.

Unless this problem is tackled, the menace of black money will continue to increase. It has been suggested that the problem of black money and parallel economy can be contained by reducing taxes in some areas, giving incentives for voluntary disclosure of income, over-hauling the economic intelligence unit, curbing administrative corruption at various levels, exempting tax op money spent on house construction, doing away with control policies, and so forth. Isolated attempts may not yield much but a package of mutually reinforcing measures, along with a strong political will and the commitment of political elite may prove to be successful to a large extent.

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