Without black money, India can be $9 tn economy

by Adrija Bose Sep 5, 2011 #Arun Kumar #Black economy #GDP #Inflation #ToWhatEffectPrint EmailShare inShare923 Comments

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It may seem like an unpalatable truth to the powers that be in the country, but the fact is the unholy nexus between politicians, bureaucrats and businessmen has ensured that a black economy continues to thrive in India. At least $70-80 billion goes out every year. The cost of Indias black economy is 5 percent of GDP growth sacrificed every year since the mid-70s. But for this, Indias size of the economy would have been $ 9 trillion, says Prof. Arun Kumar, professor of economics at the Jawaharlal Nehru University (JNU) and author of the book Black Money in India.

As much as Rs 32 to 35 lakh crore is generated in this parallel economy every year. Reuters

According to an article by Prof. Arun Kumar in The Hindu, India could have grown faster by about 5 per cent since the 1970s if it did not have a black or parallel economy. Consequently, the Indian economy could have been the second-largest in the world. Per

capita income could have been seven times larger; India would then have been a middleincome country and not one of the poorest, he argues. The professor says that over the years, India has been witnessing unprecedented growth in its black economy, now estimated to constitute an alarming 50 percent of the countrys GDP. The government reckons that there are no reliable estimates of black money inside or outside the country. As much as Rs 32 to 35 lakh crore is generated in this parallel economy every year, Kumar says. Failed Policies Because of the existence of a substantial parallel economy, planning, monetary and fiscal policies frequently do not achieve the desired results, both at the macro- and micro- level. The black economy is largely responsible for the inequality in the country. Although black income is concentrated in 3 percent of Indian households, Kumar estimates that 97 percent of people have been affected. The economy does not lack resources but faces resource shortage, he adds. A large portion of investments goes into wasteful and unproductive channels, like holding gold or real estate abroad. Targets for education, health and drinking water are, therefore, not achieved. So, while a large part of the nation takes pride in sending their children to videsh, which in most cases means the city, it is not unusual for people like Hasan Ali to have huge assets including Swiss Bank accounts. The parallel economy also results in higher-than-required costs for the economy raising the rate of inflation. If capital is over-invoiced by a project to earn more profits, the cost of setting up industry is higher. If poor-quality grain is sold in the public distribution system, people tend to buy it from the market, where the price is higher. If children need tuitions because of poor teaching, the familys cost of education increases. So what does that lost $9 trillion mean to India? The black economy, which has caused India to lose 5 percent of its GDP over the last 30 years, is also the opportunity cost of not having India become the worlds second-largest economy, just after the US.

Supporters of Anna Hazare, pose with fake rupee notes signifying corruption. AFP

With the additional money, India could have provided enhanced social infrastructure with better health care services, larger educational facilities and employment opportunities. We could have had the potential to feed 90 percent of the hungry mouths in the country. It means every family could have had a home, and we probably wouldnt have to witness the distressing sight of a half-clothed child getting drenched in the rain. At the social level, the parallel economy has made people lose faith in society. Its persistent existence is today compelling the aam-admi to angrily ask: What the hell is happening? Perhaps without it, we would have a far more transparent and technologically efficient economic system. We could have edged ahead of the US and China together in terms of production vis-a-vis consumption. Instead, we now have a generation that is primarily consumption-driven, partly production-driven and wholly caught up in corruption. More importantly, we would not have had to witness the Anna Hazare movement to root out corruption if we didnt have a black economy.

Why do we call it Black money?

JUGULAR VEIN/JUG SURAIYA, Mar 12, 2005, 11.39pm IST

Why black? That's what I can't figure out. For Indians, at least for those of us who can afford the luxury of choice, the preferred colour of most things - skin, sugar, bread, you name it - is white. So how come we call it black money? All countries, to a greater or smaller percentage, have what is known as a parallel, or cash, economy that operates outside the legitimate loop. But India's parallel economy is unparalleled, in that by many guesstimates it is not only as big as the legit economy but in fact a couple of times bigger. And we have a unique name for it. Black money. Also known as No.2.
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Call Now!www.sapphiresystems.com SBI Salary AccountSwitch to SBI Corporate Salary Account & Enjoy a World of Benefitswww.sbicorporatesalary.com Black money is not a synonym for the cash economy. For instance, there are several transactions which have to be carried out in cash: Municipal tax, passport fees, purchase of government stamp paper, opening a bank account. Is the money that you perforce have to use in such dealings, which often involve the sarkar, black money? God forbid. Or, better still, Chidambaram forbid.
The origins and current disposition of black money are as mysterious as its name. No one that you and I know has ever had, or indeed would ever have, any truck with black money, of course. I wouldn't touch the damn thing with a double-length bargepole. And you say you wouldn't either. Honest Injuns, both. As is everyone else you and I know. So how come the darn thing is everywhere? In media reports, scams, defence deals, buying and selling property, funding elections, making Bollywood movies. It weighs heavily on the minds of ministers, and not just finance ministers but all sorts of ministers, including those without portfolio, but with suitcase. More than on their minds, it sometimes weighs even more heavily in their mattresses. What do you mean the damn thing is stuffed with bank notes? How should I know how they got there? I tell you, I ordered a coir mattress, not a cash mattress. I'm a victim of sharp practice. I'll take it up with Common Cause. I'll take it up with the appropriate ministry. What's that? I am the appropriate ministry? You don't say. How did the first black money become black? Like all money, it started life in a sarkari mint, all spruced up and spiffy. Face and knees well scrubbed, shoes shined, laces knotted neatly, it got a valedictory pat on the head from the RBI governor and was sent out to make its way in the world. So where and how, after this immaculate conception, did it suddenly become black? Nagarwala? Bofors? Sukh Ram? Who dat? There's another problem with black money. It's like a chameleon. It keeps changing colour. Suppose X, who has black money, goes and spends some of it having a meal at a 5-star eatery. All at once, X's black money becomes the eatery's white money. Better than Fair & Lovely.

This changeability of complexion suggests that, at some point, all the money in supply was or will be black, and vice versa. So is the only way to get rid of black money to get rid of all money and replace it with cheques and credit cards? The next time you flog a year's collection of old STOIs to the raddiwala ask for payment via Amex. There is a cautionary children's tale of the two Unclejis. One Uncleji was poor, and morose, and ulcerous and suffered from insomnia. He was the Uncleji who not only paid his taxes but also paid taxes on his taxes and couldn't sleep at night because he was afraid they might put a tax on that as well.
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PlanPolicyBazaar.com/2012_Investments Government Job VacanciesFind 1000's of Jobs in your City. Connect with Employers. Apply Now!Quikr.com/Government-Jobs The other Uncleji was prosperous, and jolly, and had the digestion of an army mule and slept the sleep of the just and righteous, even though his bed was lumpy thanks to all the boodle shoved inside it. Which Uncleji would be the sensible child's role model? Maybe that's why they call it black money. Because black's the colour of the ink they use on the credit side of the ledger.

Black money is generated due to the following reasons: The people do not pay their taxes. Even if they pay taxes, they are not in correct proportions to their incomes. The tax evasions by corporate and industrial houses are to the tune of billions of rupees. These firms are able to make clever usage of the income tax rules and hence, they save taxes. This tax evasion leads to the generation of black money. The black money is earned by gifts, hawala transactions and illegal foreign exchange deals. These deals are not scrutinized by the government simply because these are without any documentary evidences. The procedures of over billing or under billing and exaggeration of expenses lead to the generation of black money. The sale and purchase of assets also lead to the generation of black money. The value of the property is shown to be very low in the documents whereas it has a very high value in the actual transaction. The businesses are conducted in other sectors of economy in the same manner and non-billed amounts are retained by the individuals and the firms as black money. Black money is harming our national economy and we have achieved an economic growth rate of five percent per annum whereas the economy should have grown at the rate of eight percent in order to make up for the rising population pressures and infrastructural development requirements. Black money is the chief inhibiting factor in the process of national economic development. The menace of black money has also increased the rich poor divide. The poor families are unable to afford even the square meals whereas the rich and the neo-rich are enjoying the luxuries of life. The Indian society has become poorer. Only the few sections of the society, which account for fifteen percent of the total population, have been able to enjoy the highest standards of living in this subcontinent. Therefore, the real poverty has increased and not decreased over a period of fifty years. The black money menace started during the seventies and it is now at its peak and the masses have suffered due to rising prices, inflation in business, poor exports and industrial recession. The rich few, however, have not felt the heat and continue to lead luxurious lives at the cost of their poor countrymen. It has connotation for which you have to exercise care and caution by utilizing your brain for converting a portion of black money or the entire money by converting into white money on a piece meal basis. In this form, you will be able to avoid the rigors of economic measures including taxation. Black money could be curbed only through the strict efforts of the state and this is for the benefit of the masses as well. We should disclose our real incomes and must pay taxes regularly. We should avoid unhealthy means of making money. The nation must get out of the evil net of black money. Only the honest Indians could save the nation. Problems of Black Money Even after 40 years of independence, our country is faced with poverty and numerous economic ills. Even though socialistic pattern of society has been accepted in the constitution, our country is far away from socialism and her economy is in the grip of private enterprises. In fact, India has unlicensed economy which has given birth to corruption, inflation and black money. The concept of mixed economy has been harmful to both private and public enterprises. It has jeopardized our economy and hit the common man below the belt. The poor man has been becoming poorer and rich richer just because of the economic ills like inflation and black money. Black money which runs a parallel currency in wealth which is made overnight in violation of the rules and provisions stipulated by the state and a collusion with the state officials does not go unchecked. This kind of money is earned setting aside all human and moral values.

There are many sources of black money. Chief among these areas follows: Import licenses. Selling of cement licenses, steel and iron. Transactions in heavy industries. Transaction in public sector. Release of industrial licenses. Government and commercial transactions. Forged and face currency.

Today the making of black money has become factor in our society because palatial houses, and cars, and in arranging cocktail parties and recreations in big hotels. Moreover, it helps a person getting everything done in time and to his best satisfaction. There are many causes of converting genuine profit into black money. The chief among them are: Inflation. General and mid-term election. Tax evasion. The government itself is responsible for the creation of black money. The exorbitant rates of taxation on income, sales, wealth production and revenue inevitably lead to tax-evasion. The taxes on income and wealth are so high that an honest person will be left with little after he pays his due taxes. Many taxes on income and wealth are so high that an honest person will be left are encouraged by the governments taxation policy to look for loopholes in order to refrain from reporting their income. Thus, the money earned as profit remains unaccounted for an unreported and is converted into white money by investing it in big houses, luxury items, gold ornaments, and showy marriages. The government has full knowledge about the quantum of black money which is pumped into our economy every year, but the government measures to check the growth and increase of unaccounted wealth has been ineffective. The missing element has been the will to strike at the root of the evil. That has been the sad story all these years. The customary ritual of declaring war on tax evasion at conferences of income-tax commissioners is faithfully performed every year. The public is told as usual that black money will be unearthed and evaders duly punished. Some operations of the incometax department get wide popularity. The income-tax officials put themselves on news when the flat of a film star is auctioned or legal action taken against an industrial tycoon. But the problem of black money cannot be solved in this manner. The political system itself breeds black money. The democratic system which means unlicensed freedom is largely responsible for the growth of corruption and black money. When political parties accept unaccounted money for election campaigns they not only heap generate black money but also protect the hoarders of ill-gotten wealth. It will be a major blow against the parallel economy, if it is made mandatory to audit the books of political parties. Such financing of elections could be also considered. The drive against the parallel economy will never be effective unless the nexus between politics and black money is broken. The inflationary pressure also threatens our economy and gives birth to black money, which plays a decisive role in inflation and price responsible for inflation and black money. The inflation rate at present is above fifty percent of what has already taken place since twenty years back. In other words, we have become high cost economy with prices averaging fifty percent above what they had been in the country and the lowering of the common man. Unless some strict measures are taken to counter inflation and check high cost economy, the problem of black money cannot be solved. Black

money, however, should be dealt with strict application of penal provisions and devaluation of our currency. Thus, black money is growing unabated and it has become almost a parallel economy. People hoarding black money are trying to convert it into white money and thus causing inflationary pressure and high cost economy. One school of thought is of the view that the parallel economy has come to stay and it need not be disturbed because it plays a useful role. Condemnation of what is illegal goes against the grain of good administration and no government will be justified in pampering black marketers and tax evaders.

works and these tenders are awarded by the bureaucracy in consultation with the political bosses.Th us, a symbiotic

relationship develops between the contractors, bureaucracy and the politicians and by a large number of devices costs are artificially escalated and

black moneyis generated by underhand deals. Instability of the political system has given a further momentum to this process. Since the ministers

are not sure of their tenure and in a majorityof cases, the tenure is very short, the principle Make hey while the sun shines is adopted bymost of them. The larger

numbers of scandals that are unearthed by the Opposition onlysupport the contention that huge investment in the public sector is a big potential

source for black money generation. In this process, bureaucrats act as brokers for political leaders andthus the nexus between business, bureaucracy and

politicians promotes the generation of black money.

6

) Ceiling on depreciation and

other business expenses Government has imposed restriction. It has also circumscribed expenses on advertisement,ente rtainment, guest

houses, and payment of perquisites to directors. The purpose of theserestrictions is to protect the shareholders and consumers from

the unscrupulous action of businessmen. But businessmen feel that these restrictions are unjustified. They take themaximum advantage of these

provisions but do not like to part with the remaining part of byvarious clandestine devices; they convert it into black money and use it either

for conspicuous production to satisfy the wants of the rich and elite sections of society.
7

Lack of infrastructure Rise of black money particularly in developing countries is due to shortage situation of industries and

insufficient capacity.
A

relevant example would be the cement black market inIndia over 1961-82, when the country

suffered from chronic cement shortage owing to theregime of controls that was in place then. Estimates have put the amount of black

moneygenerated during this period by the cement sector alone as high as 7.85 billion.

IMPACT OF BLACK MONEY

The circulation of black money has adversely affected the Indian economy in several ways. Itwould be of interest to study the impact of

black money on the Indian economic and socialsystem.1 ) It leads to the misdirection of precious national resources.

part of black money is kept in aform that contributes nil/Little to productive activities.2 )

It has enormously worsened the incomedistribution, and has thereby undermined the fabricof the fixed income salary class finds itself

ever be the lower rung of the incomeladder.They pay taxes. Quite a number among them, though not l the corrupt activities of

getting bribes / commissions, etc. But in general they are not able to catch up with the people in business, or in professions, or many of those employed. Many

in these categories make black activities. Many high placed official and honest employees earn much less than an averagesmall shopkeeper in big

cities like Bombay and Delhi.3 ) The existence of a big-sized unreported segment of the economy is a- big handicap in

makinga correct analysis and formulation of right policies for it. For example it is not possible tocalculate accurately the vital indicators of

progress like saving-income ratio, sectorialcompositi on of national income, etc. Nor is it possible to monitor the developments in

theeconomy with precision. Much of these estimates / monitoring of the economy are bound to be guesswork. No wonder the governments

policies cannot be firm in their perception anddeal weak data base.4 ) Black money results in transfer of funds from India to foreign

countries through clandestinechannel s. Such transfers are made possible by violations exchange regulations through thedevice of under

invoicing of exports and overinvoicing of imports thus finds itself in a paradoxical situation, where capital and more particularly

foreign exchange resources arescarce, (the country) becomes a de facto lender of aid and capital to economically advancedand wealthier nations,

with the concealed outflow of funds. The situation has worsenedfurther over the years.5 ) Black money requires for its

protection, proliferation and expansion of a service organisationcompo sed of musclemen, touts and brokers to combat the forces of law and

order on the onehand and on the other hand, there are income t ax advisers, or chartered accountants in the pay of black money operators.

Then there are contact men, better known as liaison officers

who negotiate favors from top bureaucracy and political bosses through bribes of black money. This has developed a new black money culture in

the business world.6 ) Last but not the least; black money has corrupted our political system in a most viciousmanner.

t various levels, ML
A

s, MPs, Ministers, party functionaries openly andshamelessly go on collecting

funds.The politics of black money thus has corroded the moral fiber of Indian polity. Ministers doleout favors of crores by accepting black money donations

of a few lakhs from businessmen.Musc lemen and criminals are fed by political parties to capture booths and thus elections are becoming

more and more of a farce. National policies are, therefore, being bent in favor of the big business under the pressure of black money. Thus, it is the

parallel economy whichdoes the backseat driving, while the political leadership only acts as the mouthpiece of big business to justify the

abolition of controls or introduction of a dual system of prices in thename of productivity or national interests. It was due to the pernicious impact

of black moneyon the Indian economy and polity that the concluded: It is, therefore,no exaggeration to say that black

Wanchoo Committee

money is like a cancerous growth in the countrys economywhich, if not checked in time, is sure to lead to its ruinatio