Insights into Editorial: Does black money boost economic growth?

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Does black money boost economic growth?


 

Summary:

Economic experts say the magnitude of the global economic crisis at times is not felt in India because of strong (parallel) economy of black money.

 

What is black money?

Black money in economic terms means ‘unrecorded gains’. In other words, it is income which has escaped taxation. It may be hoarded in cash, but eventually gets itself converted into various assets like property, jewellery and durable consumer goods.

black-money demonetization

Black-money arises due to various reasons. Some of those reasons are:

  • The main cause of black-money is unrealistically high rates of taxes which strain human nature. India is today one of “the highest taxed nation”, one eminent authority put it, “in so far as the rates of taxes are concerned, because no country in the world penalizes honest work and endeavour as ruthlessly as India does.”
  • Tax-laws in country are so complicated that a layman fails to understand it. Even honest assesses are unable to file correct returns. This encourages people to evade tax.
  • Corruption prevailing in the tax collection department is also one of the causes of generation of black money. The high rates of taxes induce businessmen to falsify their accounts and they are successful in doing so by bribing the concerned authorities.
  • Another cause of black-money is numerous controls, licenses and other governmental regulations. It is no exaggeration to say that the controls, licensing and permit system has made black money indispensable to businessmen.
  • Black money also arises from political activities such as elections where candidates spend well above the ceiling prescribed by the Election Commission. There is a growing tendency of funding of political parties with the help of black money. Big business houses are donating a huge amount of black money to the political parties, especially the ruling party with the sole intention to tame the political leadership for deriving benefits by manipulating policy decision.
  • Black money also arises from illegal activities like smuggling, drug-peddling and Government is still not in a position to control it.
  • Black money also arises from illegal activities like smuggling, drug-peddling and Government is still not in a position to control it.
  • Another factor responsible for widespread growth of black money is urban real estate transactions. As we all know that no property can be purchased without making the payment in black money.
  • The reluctance to bring agricultural earnings in the realm of income tax has also contributed to creation of black money. Big industrial houses, over the past few decades have entered the agriculture sector in a big way by acquiring big farms. The black money accrued from other sources is sought to be transformed into white by viewing it on the agricultural returns account.
  • Black-money multiplies at a fantastic rate. Returns on black-money investments are often to the order of 200 to 300%. Since money thus generated is re-invested in such activities as hoarding and smuggling, it fetches still higher returns.

 

Why is black money good for any economy?

Black money is known to play a major role in sectors such as real estate. Hence, it could be argued that a clampdown on black incomes would lead to reduced activity in the sector and hence adversely affect employment generation in the construction sector, which has been a major employment generation sector in recent times.

 

Why is black money not good for the economy?

  • Black money means a substantial loss in revenue for the government, which could be used for augmenting economic growth.
  • Attempts to meet the shortfall created by black money by resorting to raise more indirect taxes leads to a higher incidence of tax on the poor and consequently erodes mass demand.
  • Black money encourages investment in precious stones and jewellery. This has adverse effects on growth via its demonstration effect.
  • Black money has encouraged diversion of resources in the purchases of real estate and investment in luxurious housing and lot of black money is made white. This has also pushed up prices of land to astronomical heights. As consequences, the middle classes are priced out in the purchase of land for house.
  • Black money results in transfer of funds from India to foreign countries through clandestine channels. Such transfers are made possible by violations of foreign exchange regulations through the device of under invoicing of exports and over invoicing of imports. The country thus finds itself in a paradoxical situation.
  • Black money has also corrupted our political system in a most vicious manner and at various levels. Party functionaries openly go on collecting funds. At the local levels, the local leaders receive money from small traders and businessmen.
  • Black income has also been causing underestimation of GDP in India as an enormous volume of income is diverted to this unaccounted sector resulting in growing continuation of parallel economy of the country.
  • A part of the black incomes is held in cash and as a result there is abundance of liquidity which becomes available through the addition of savings held in the form of cash, bullion, gold, silver, etc.

 

Why worry about this?

Black money, also described as tainted money, has seeped into every walk of life and is posing a great threat to the stability of our real economy. The most unfortunate aspect is that it has come to be accepted as normal act of life. It also has pernicious effect on the moral value of our society which puts a premium on dishonesty and shatters the faith of the common man in the dignity of honest labour and lawful living.

 

Way ahead:

Various measures including voluntary disclosure scheme and demonetisation have been taken by the government to curb the menace of black money. However, this is not sufficient. Many more measures need to be taken by the government for the smooth functioning of the economy. Demonetisation will only solve part of the riddle, the government will have to carry out many other steps, such as checking tax evasion, implementing anti-graft laws and checking crime, to rid the country of black money. To check the parallel economy, the government also needs to first tackle the generation of unaccounted wealth, then stop the conversion of black money into white, and lastly, clean up sectors, wherein black money is parked.    

 

Conclusion:

The problem of black money cannot merely be looked upon as an anti-social activity or an unlawful activity. It is rather, like a cancer in the country’s economy which, if not checked in time, will ruin the country’s economy. The short point is, black money at best can act as a steroid which gives temporary boost to economic growth. Prolonged dependence on it can leave damaging effects on a nation and its people.