What are the effects of Black Money on Economy?

What are the effects of Black money?

Black money is a socioeconomic evil. The existence of rapidly growing black money in our economy has grave and disastrous consequences. The major effects of black money are discussed below:

Effects of Black Money on Economy
Effects of Black Money on Economy

1. Dual Economy

The increase in the amount of black money in India over a period of time lead to the perpetual growth of economic dualism which consists of Parallel economy (black money economy) operating side by side with the Official or Reported economy on the country.

The black economy represents not less than one fifth of the aggregate economic transactions. There is also interaction between the reported and unreported activities such that it is difficult to identify black money from the white money economy. Such a Parallel Economy will ruin the entire economic development of the country.

2. Under-estimation

A large underground economy and growth of black income lead to under-estimation of the true size and incorrect picture of the economy by the officially complied national income data.

Since unreported economy is apparently excluded from the official records of the Gross National Product, the estimates of savings and consumption of nations to the national income and measurement of other macroeconomic variables would be biased and misleading for accurate policy making and planning considerations.

3. Loss of Revenue to the Government

Black money is largely attributed to tax evasion. Its direct impact is the loss of the Government revenue. Since the Government fails to get sufficient tax revenue due to large-scale tax evasion, it is forced to resort to high taxation and deficit financing which again carry their ill-economic effects.

4. Undermining the Equity

When the Government resorts to progressive direct taxation to maintain equity in the distribution of the tax burden, the tax evasion and growth of black money affect the very concept of social justice by not allowing the desirable reduction in inequalities of incomes. Again, when underground activities like smuggling etc. could not be taxed, the Government will impose higher taxes on officially sanctioned activities.

Further, the tax evasion will also equally enjoy the public services without paying the due contribution; to that extent also social enquiry is undermined. The honest have to bear high tax burden to make up for the deficit in revenue caused by the tax evasion of black money makers.

5. Widening the Gap between the Rich and the Poor

Growth of the black economy causes regressive distribution of income in the society. When the black money grows faster, rich becomes richer and the poor become poorer. By way of concentration of income and wealth in few hands, the black money widens the gap between the rich and the poor.

6. Lavish Consumption Spending

Black money is disposed off by lavish spending on travels and tours, entertainment, ostentatious articles, financing of extravagant elections etc. This has also lead to many social evils and deteriorated the values of life of the common people.

7. Distortion of Production Pattern

The black money has altered the choice coefficients in the market in favor of luxuries, which lead to the diversification of productive resources from essential goods to the non-essential goods.

8. Distribution of Scarce Resources

Black money holders are always in a position to put their prior claim over the scarce goods in the market due to their readiness and ability to pay more, thereby depriving the honest and poor people from their legitimate share. This obviously reduces the net economic welfare of the Indian society at large.

9. Deteriorate the General Moral Standards of the Society

Black money is largely responsible for the deterioration of general moral standards of the society. Black income generation implies a deviation from the accepted norms in society and from the point of view of the society is unethical.

Socially, we can say that the structure and ethos of a society undergoes a massive change. Social values of honesty, hard work, thrift and simplicity get eroded. Even the political institutions and organizations lose their credibility as they also gradually become a part of the entire system of black income generation.

10. Average Effect on Production

As a consequence, the consumption pattern is titled in favor of the rich and elite, at the cost of encouraging production of articles of mass consumption. A rise in overall consumption leaves fewer resources for investment in priority areas, having an adverse effect on production.


From the above discussion, the exact effect of black money on any economy shall be summarized as follows.

  1. Growth of economic dualism,
  2. Under-estimation of the true size of the economy,
  3. Tax evasion, thereby loss of revenue to Government,
  4. Undermining equity,
  5. Widening Gap between the Rich and Poor,
  6. Lavish Consumption Spending,
  7. Distortion of Production Pattern,
  8. Distribution of Scarce Resources,
  9. Deterioration of General Moral Standards of the Society,
  10. Effects on Production.