What are the Causes of Black Money in India?

Causes of Black Money in India

Black money is always an evil for any economy. There are various reasons for the generation of Black money. 13 such reasons are listed below.

Causes of Black Money in India
Image: Causes of Black Money in India

1. Prohibition causes black money

Certain activities are usually forbidden by law such as gambling, production of illicit liquor, smuggling, trafficking illegal drugs, lending at exorbitant interest charges, money lending without proper license etc. When some individuals wish to undertake these activities, these will apparently go unreported and incomes so earned would be totally black.

2. Public Expenditure

The NIPFP Report mentions that the Government itself lives in the Glass House, as the rapid growth of its spending over the last two decades has been a major contributory factor in generating black money.

Due to the rapid rise of public spending for multiple Governmental programmes and activities, the unscrupulous elements in public service and public life could find ample opportunities for amazing black income and wealth by dubious methods

3. Political Funding encourages black money

Political funding in India also causes a significant amount of black income. Our election laws and behavior of political parties are primarily responsible for this. Today contesting of elections has become a very costly affair.

The candidate has to spend much in excess of the officially sanctioned amount. This has to be arranged somehow in black money. The politicians largely resort to industrialists and trading community for the help — the funds are raised in terms of black money.

The NIPFP Report thus holds that “a close relation between political funding and black incomes is extremely dangerous as it places public policy on the auctioneer’s block”. But in recent elections, such political funding is considerably reduced.

4. Inflation leads to black money

The genesis of black money can also be found in the persistent inflation in the country, which has enhanced incentives and opportunities to earn such incomes.

According to Dr. Brahmananda, inflation inevitably leads to growth of parallel markets and strengthens propensities to hide incomes and to evade taxes. Since inflation causes capital erosion, there is always a temptation to maintain dual accounts for tax evasion by Diverting portion of inventories and output from white channels to black channels of deployment.

As the matter of fact, inflation is both the cause as well as consequence of the growth of black money in the Indian economy.

5. Deficiencies of the Tax System pays way for black money

There are various lacunae in the tax system that encourages generation of black income. First, high personal Income Tax Rates cause people to try and evade taxes, and thus lead to generation of black income. The dilemma for the Government is that even efforts at lowering tax rates do not lead to larger payments of income tax by the higher income groups.

Although there are a number of tax laws pertaining to income tax, sales tax, stamp duties, excise duties etc. enforcement is weak due to widespread corruption in these departments.

6. Quotas, Controls and Licences generates black money

The “License, Quota, Permit Raj” that has dominated the Indian system of controls has often led to the initiation of various ways of escaping these and thus, the generation of black income.

7. Generation of Black Income in the Public Sector

There are huge investments marked for the public sector in every five-year plan. The usage of these has to be monitored by the bureaucrats in Government and public sector undertakings. A symbolic relationship often develops between the contractors, bureaucrats and politicians. Costs are often artificially escalated and underhand deals generate black money.

8. Inadequacy of Powers creates black money

The inadequacy of the powers given to the tax enforcing authorities is another important cause for black money.

9. Weak Deterrence encourages black money

Despite of adequate legal provisions to curb the growth of black economy in India, it has persisted because of weak deterrence against tax evasion in practice. No serious action has been taken against detected cases of tax evaders. Till recently, too trivial penalties were imposed, too few prosecutions have been launched and even fewer have been convicted.

10. Ineffective Enforcement of Tax Laws gives way for black money

Ineffective enforcement of tax laws is also a cause for black money. Lack of proper training and inefficiency of the department people led to the creation of black money.

11. Lack of Publicity leads to black money

Another reason for wide spread black money is said to be the secret provision of direct tax laws. At present, the department is statutorily prohibited from disclosing any information relating to a person’s assessment. Thus, even if a person is caught and penalized for keeping black money, he can keep it as secret from every one.

12. Deteriorated Public Morality causes black money

Moral values and social attitudes of people in India have declined during recent years. In today’s society, black marketers, smugglers, corrupt politicians, public officials and tax evaders are not condemned, but rather admired and envied for possessing black money power.

13. Demonstration Effect causes black money

The conspicuous consumption and luxurious life style of black moneyed people have created a sort of demonstration effect on many others to inspire for such consumption patterns.