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Indian Economy

Tackling the Menace of Black Money

  • 27 Jul 2021
  • 5 min read

Why in News

Recently, the Union Minister of State for Finance has stated in Lok Sabha that the government's black money law has helped detect several instances where Indians have been found stashing undisclosed income overseas.

Key Points

  • Black Money:
    • There is no official definition of black money in economic theory, with several different terms such as parallel economy, black money, black incomes, unaccounted economy, illegal economy and irregular economy all being used more or less synonymously.
    • The simplest definition of black money could possibly be money that is hidden from tax authorities.
    • It can come from two broad categories:
      • Illegal Activity:
        • Money that is earned through illegal activity is obviously not reported to the tax authorities, and so is black.
      • Legal but Unreported Activity:
        • The second category comprises income from legal activity that is not reported to the tax authorities.
  • Impacts:
    • Loss of Revenue:
      • Black money eats up a part of the tax and, thus, the government’s deficit increases.
      • The government has to balance this deficit by increasing taxes, decreasing subsidies and increasing borrowings.
      • Borrowing leads to a further increase in the government’s debt due to interest burden. If the government is unable to balance the deficit, it has to decrease spending, which affects development.
    • Money Circulation:
      • People generally tend to keep black money in the form of gold, immovable property and other secret manners.
      • Such money does not become part of the main economy and, therefore, remains generally out of circulation.
      • The black money keeps circulating among the wealthy and creates more opportunities for them.
    • Higher Inflation:
      • The infusion of unaccounted black money in the economy leads to higher inflation, which obviously hits the poor the most.
      • It also increases the disparity between the rich and the poor.
  • Government’s Initiatives:

Way Forward

Since, black money menace is still untamed, therefore a lot more needs to be done to tackle it. Some of the strengthening steps that can be taken are:

  • Appropriate legislative framework related to: Public Procurement, Prevention of Bribery of foreign officials, citizens grievance redressal, whistleblower protection, UID Aadhar.
  • Setting up and strengthening institutions dealing with illicit money: Directorate of Criminal Investigation Cell for Exchange of Information, Income Tax Overseas Units- ITOUs at Mauritius and Singapore have been very useful, Strengthening the Foreign TAX, Tax Research and Investigation Division of the CBDT.
  • Electoral Reforms: Elections are one of the biggest channels to utilize the black money. Appropriate reforms to reduce money power in elections.
  • Imparting skills to personnel for effective action: Both domestic and international training pertaining to the concerned area. For instance, the Financial Intelligence Unit-India makes proactive efforts to regularly upgrade the skills of its employees by providing them opportunities for training on anti-money laundering, terrorist financing, and related economic issues.

Source: PIB

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