Searching for an essay?

Browse the database of more than 3800 essays donated by our community members!

Black Market and The Indian Economy


It is said that black money in India accounts for 20 % of GDP. If this is true, then black money generated every year must be around Rs 400,000 crore or $ 80 billion. This is a huge amount, more than the entire budget of the government at the Centre. We have a government that spends about Rs 350,000 crore a year, most of it on itself, and asks for accounts of every paisa.

On the other side, we have black money worth Rs 400,000 crore every year, which is just guesswork, and there are no accounts. This money goes into the property, which is why real estate prices are so high, and of course five-star hotels. If the government could have all this money or even a small fraction, there would be no need for revenue or fiscal deficits, and no need for huge borrowings to make two ends meet.

Writing service




[Rated 4.9]

Prices start at $12
Min. deadline 6 hours
Writers: ESL
Refund: Yes

Payment methods: VISA, MasterCard, American Express


[Rated 4.8]

Prices start at $11
Min. deadline 3 hours
Writers: ESL, ENL
Refund: Yes

Payment methods: VISA, MasterCard, American Express, Discover


[Rated 4.75]

Prices start at $10
Min. deadline 3 hours
Writers: ESL, ENL
Refund: Yes

Payment methods: VISA, MasterCard, JCB, Discover

How big is $ 100 billion? It is bigger than you think. It is worth Rs 500,000 crore, which makes it bigger than the central budget. It is more than twice our annual exports. It is equivalent to 30 times what Enron is supposed to have invested on its Dabhol project. It is more than what the US government is expected to pay those who have suffered from the September 11th smash. And, if you must know, it is a fifth of our annual GDP, which is itself a big figure.


The CBDT is hopeful of collecting more than Rs 7,000 crore (Rs 70 billion) as income tax area, the target indicated by Finance Minister P Chidambaram for the current financial year. The board has already collected Rs 3,400 crore (Rs 34 billion) during the first six months of the current fiscal year, compared to Rs 2,700 crore (Rs 27 billion) in the same period a year earlier.

Finance Minister P Chidambaram’s Budget speech for 2004-05 shows there were only 27 million taxpayers in the country on the date of the presentation of the Budget. This indicates the tax evasion rampant in the country.

The economy keeps growing and so does the deficit, while the revenues do not increase in the same proportion as the economy grows. There could be a number of reasons for the shortfall, which may vary from year to year like recession in the industrial sector or shortfall in agricultural production. But one factor that has been constant for the last five decades is the tax evasion. There are so many loopholes in the tax system that allows people and organizations to evade taxes with impunity. There are no reliable estimates of the extent of the tax evasion in this country.

But some studies show that the size of black money has grown significantly over the past many years If this tax evasion were checked, the Finance Minister would never be faced with a shortfall in tax collection and would have a very low fiscal deficit. Therefore, the Finance Minister instead of resorting to increasing in tax rates or coming out with amnesty schemes should find other means to increase the revenue collection. One such way is to plug the loopholes, which encourages tax evasion. Most of the tax evasion occurs when transactions are done in cash and never recorded.

This has been the experience of many countries and they have come out with measures that discourage cash transactions and encourage recorded transactions. One such mechanism has been the use of debit and credit cards combined with payment through banking mechanism. The Finance Minister should come out with such a provision, which encourages cashless transaction.

As a first measure, it may be made mandatory that all salaries above Rs 10,000 per month, both in public and in private sectors, be directly credited to individuals’ accounts in their respective banks. Secondly, payments above a certain amount may also be made mandatory through debit/credit cards and through cheque or bank drafts.

With electronic banking gaining importance, transfers through banking mechanism will become as easy as receiving or making payments by cash. In most of the countries, the use of debit and credit cards for making and receiving payments has reached a point that for buying even one small ball pen payment is made through credit/debit card.

Similarly, payments for the sale and purchase of immovable property, various kinds of consumer goods and services beyond a certain stipulated amount should also be made mandatory through banking channels. While doing so, the Finance Minister will not only be plugging one of the biggest loopholes leading to tax evasion but would also reduce the need for ready cash and hence the printing of currency notes on a large scale.

The biggest chunk of black money is invested in real estate and gold. The circulation of black money in the housing sector is beyond imagination. Since the house tax is based on the current purchase price only one-fourth of the money is paid by cheque and the rest in unaccounted cash. Even an honest buyer of flats/houses is forced to pay in black money if he wants to acquire one.


The period 1946-61 was one of the intense creativity. A black or parallel economy emerged both in the wake of the Second World War and the expansion of the economic activity in the post-independence period. Incentives were provided through the taxation laws to promote savings and investment; this made the tax laws more complex.

Then, there was the need for larger revenues to finance the plans of economic development. Thorough investigations were, therefore, conducted into the structure of taxation not only with a view to widen the base of income tax but also to look for new taxes and to prevent tax evasion and avoidance. The Income-tax administration came under heavy strain due to the increase in the volume and complexity of its work.


There are two powerful ethical props for a different view than the one the court has taken.

  1. It is a plain fact that many high-earning persons evade income tax by ruthlessly exploiting the loopholes in the laws. Black money is the outcome of this practice. And neither the income tax department has mounted an effective campaign to hunt out these tax cheats, nor has the court, any court, felt provoked to order a comprehensive crackdown.
  2. The widespread ruse of doling out big money to top executives and others by describing it as reimbursement.

Constituent activities of Black Economy:

  1. Legal activities that are not reported to the tax authorities and the income which goes untaxed and unreported. For instance: it is not illegal to clean someone’s house, to feed people or to drive them. It is, however, illegal to hide the income generated by these activities and not to pay tax on it. In most countries of the world, this is a criminal offence, punishable by years in prison.
  2. Illegal activities, which needless to say, are also not reported to the state (and, therefore, not taxed).
    The money generated by these activities is largely held in foreign exchange outside the banking system or smuggled abroad (even though the local banking system).

How is it formed?

A parallel or a black market is an illegal structure that is created in response to government intervention, which produces excess supply or demand for a product. When the price of foreign currency is set below the market-clearing rate, excess demand is usually generated for acquiring foreign currency.

The government has the choice of either devaluating the currency or maintaining strict controls over the exchange, such as setting quotas on the purchase of foreign exchange. Such currency controls are designed by governments in order to limit the use of foreign exchange in transactions. This parallel economy, or black market, emerges through the manipulation of the economic forces of supply and demand for both currency and commodities.

A black market also emerges when trade and industry create an artificial situation of scarcity or glut, and in the process amass high returns on their investments by profiteering. As a result of profiteering activity, the black market generates unreported income and wealth, which escape detection by official statistics. Much of the strength of the black market can be attributed to the resale of officially allocated foreign exchange holdings and to the incentive to under invoice and smuggle exports. He argues that an increase in the black market rate, given the official exchange rate, creates an incentive for residents abroad to channel their remittances through the black market.

This raises their private receipts in terms of home currency and deprives the central bank of this foreign exchange. Economists studying black market activity in developing countries advocate that it is best to keep the black market premium rate as low as possible. By influencing the determinants of the black market exchange rate, developing counties can keep the black market premium rate low and increase their official foreign exchange currency holdings.

Effects of black money on Indian Economy:

  • Affects public revenues,
  • Degenerates the investable surplus,
  • Delimits the national productivity,
  • Drains the balance of payments,
  • Distorts equity and equality concepts of economic distribution.

HAWALA SCAM — Financing Illegal Trade:

What makes the illegal market prosper is the large amount of black money that is easily accessible to traders. Thus money can be transferred to any country of the world through the illegal money market. The existence of a massive black economy consisting of both domestic and foreign currency makes such trade possible.

Illegal trade is financed either by high value precious metals like gold and silver or by liquid money through a network of unauthorised moneylenders. In the former case gold is smuggled physically and then converted into the desired currency. However gold smuggling is risky and a preferred mode is through the illegal money market. The uniqueness of this system is that there is no physical transfer of currency. This mechanism referred to as the ‘hawala’ in India, the ‘hundi’ in Bangladesh and the ‘chit’ fund in Sri Lanka operates on the same principles.

The black economy has many more important functions:

  • The black economy is a cash economy.
  • It is liquid and fast.
  • It increases the velocity of money.
  • It injects much needed foreign exchange into the economy and inadvertently increases the effective money supply and the resulting money aggregates. In this sense, it defies the dictates of “we know better” institutions such as the IMF.
  • It fosters economic activity and employs people.
  • It encourages labour mobility and international trade. Black economy, in short, is very positive. With the exception of illegal activities, it does everything that the official economy does – and, usually, more efficiently.
  • The black economy is especially important in times of economic hardships. Countries in transition are a private case of emerging economies, which are a private case of developing countries that are called (in less politically correct times) “Third World Countries”. They suffer from all manner of acute economic illnesses. They lose their export markets, they are technologically backward, their unemployment skyrockets, their plant and machinery are dilapidated, their infrastructure decrepit and dysfunctional, they are lethally illiquid, they become immoral societies (obligations not honoured, crime flourishes), their trade deficits and budget deficits balloon and they are conditioned to be dependent on handouts and dictates from various international financial institutions and donor countries.
  • It enhances exports (and competitiveness through imports), it encourages technology transfers, it employs people, it invests in legitimate businesses (or is practiced by them), it adds to the wealth of the nation (black marketers are big spenders, good consumers and build real estate), it injects liquidity to an otherwise dehydrated market.


So, what is morally wrong with the black economy? The answer, in brief:

  • It is exploitative. Other parts of the economy, which are not hidden (though would have liked to be), are penalized for their visibility. They pay taxes. Workers in a factory owned by the state or in the government service cannot avoid paying taxes.
  • The money that the state collects from them is invested, for instance, in infrastructure (roads, phones, electricity) or used to pay for public services (education, defense, policing). The operators of the black economy enjoy these services without paying for them, without bearing the costs and worse: while others bear the costs. This encourages them, in theory to use these resources less efficiently.
  • And all this might be true in a highly efficient, almost ideal market economy. The emphasis is on the word “market”. Unfortunately, we all live in societies, which are regulated by bureaucracies that are controlled (in theory, rarely in practice) by politicians. These elites have a tendency to misuse and to abuse resources and to allocate them in an inefficient manner.

Measures taken by the Government

In a unique drive launched a few days before the presentation of the Union Budget, the CBI has registered 36 cases against 112 government officials and others after search operations across the country in a bid to unearth black money amassed by them. The drive conducted under a team of joint directors of the agency, has reportedly been able to unearth black money amounting to lakhs of rupees, CBI sources said here today. He said simultaneous searches were carried out on 109 official and residential premises of accused or suspected persons.

In these cases 21 accused / suspected persons belonged to the Union Bank of India, the Reserve Bank of India, Sikkim Bank, the United Bank of India and private firms located at Mumbai. These cases pertained to cheating, export fraud, abuse of powers and falsification of records resulting in wrongful loss to the banks and public institutions. Cases taken up for investigation were of the Anti-corruption division, the economic offences Wing and the special crimes division.

Although the stamp duty department maintains a list of rateable value properties in Mumbai, the main concern is that in most of the cases the rates are much higher than the actual transacted rates for the actual property. However, instead of addressing these irregularities, authorities have increased the stamp duty rates!

It is a well-known fact that because of high stamp duty, buyers have been quoting their property much below the actual transacted value. This is mainly because it enables the buyers to save a substantial amount on the stamp duty outgo, since stamp duty is charged on the value of the property.

This practice of undervaluing property is not ethical and moreover it leads to accumulation of black money in the economy, which is not good. For instance, there are cases where builders / sellers ask up to 40 % of the transacted value of the property as black money. This gives a distorted picture of the real estate price, as there is a huge difference in the transacted price and the rate list maintained by the stamp duty authorities.

Why the Policies implemented so far are Ineffective?

Now the Supreme Court has ordered that dearness, house rent and city compensatory allowances are income and attract tax. Theoretically, the ruling covers only the employees of the government and those of public sector undertakings and the two nationalised insurance companies since the original dispute arose from their petition. But the judgement is so general in nature that every salaried individual receiving any allowance of this nature has to pay tax on it if he or she is not already doing so. It is an old demand of those with a regular income that those payments which are compensatory in nature should be tax-free if the underlying idea is not to be perverted.

The government intends to undertake

The government is likely to announce a scheme to channel black money into a dedicated fund, which could be used for funding the government’s social sector programme. The fund, which may be announced in the Budget for 2005-06, could be modeled on the lines of the Prime Minister’s Relief Fund. Government sources said the revenue department was contemplating various other strategies. One option would be to issue bonds to raise funds for infrastructure and social sectors, which would not yield any returns in the initial few years. An official said a scheme on the lines of the Voluntary Disclosure of Income Scheme 1997, launched during P Chidambaram’s previous stint as finance minister, was ruled out.


All citizens should be obliged to file annual, personal tax returns (universal tax returns, like in the USA). This way, discrepancies between personal tax returns and other information can lead to investigations and discoveries of tax evasion and criminal activities.

All citizens should be obliged to file bi-annual declarations of personal wealth and assets (including real estate, vehicles, movables, inventory of business owned or controlled by the individual, financial assets, income from all sources, shares in companies, etc.).

All retail outlets and places of business should be required to install – over a period of 3 years – cash registers with “fiscal brains”. These are cash registers with an embedded chip. The chips are built to save a trail (detailed list) of all the transactions in the place of business. Tax inspectors can pick the chip at random, download its contents to the tax computers and use it to issue tax assessments. The information thus gathered can also be crossed with and compared to information from other sources. This can be done only after the full implementation of the recommendations in the section titled “Databases and Information Gathering”. (While it increases business costs – it is not likely to prevent cash or otherwise unreported transactions).

All registrars should be computerized: land, real estate, motor vehicles, share ownership, companies registration, tax filings, import and export related documentation (customs), VAT, permits and licenses, records of flights abroad, ownership of mobile phones and so on. The tax authorities and the Public Revenue Office (PRO) should have unrestricted access to ALL the registers of all the registrars. Thus, they should be able to find tax evasion easily (ask for sources of wealth- how did you build this house and buy a new car if you are earning 500 DM monthly according to your tax return?) The computer system should constantly compare VAT records and records & statements related to other taxes in order to find discrepancies between them. Gradually, submissions of financial statements, tax returns and wealth declarations should be computerized and done even on a monthly basis (for instance, VAT statements).

Tax inspectors and customs officials should receive police powers and much higher salaries (including a percentage of tax revenues). The salaries of all tax inspectors – regardless of their original place of employment – should be equalized (of course, taking into consideration tenure, education, rank, etc.) Judges should be trained and educated in matters pertaining to the informal economy. Special courts for taxes, for instance, are a good idea. Judges have to be trained in tax laws and the state tax authorities should provide BINDING opinions to entrepreneurs, businessmen and investors regarding the tax implications of their decisions and actions.

All contracts between firms should be registered in the courts and stamped to become valid. Contracts thus evidenced should be accompanied by the registration documents (registrar extract) of the contracting parties. Many “firms” doing business in Macedonia are not even legally registered.

A special inter-ministerial committee with MINISTER-MEMBERS and headed by the PM should be established. Its roles: to reduce bureaucracy, to suggest appropriate new legislation and to investigate corruption.
Bureaucracy should be pared down drastically. The more permits, licenses, tolls, fees and documents needed – the more corruption. Less power to state officials means less corruption. The One Stop Shop concept should be implemented everywhere.

To impose a VAT system. VAT is one the best instruments against the informal economy because it tracks the production process throughout a chain of value added suppliers and manufacturers. The Tax code needs to be simplified. Emphasis should be placed on VAT, consumption taxes, customs and excise taxes, fees and duties. To ensure progress, the government should directly compensate the poor for the excess relative burden.

Special tax courts should be established within the existing courts. They should be staffed by specifically trained judges. Their decisions should be appealed to the Supreme Court. They should render their decisions within 180 days. All other juridical and appeal instances should be cancelled – except for an appeal instance within the PRO. Thus, the process of tax collection should be greatly simplified. A tax assessment should be issued by the tax authorities, appealed internally (within the PRO), taken to a tax court session (by a plaintiff) and, finally, appealed to the Supreme Court (in very rare cases).
White Sugar is often imported as brown sugar. One way to prevent this is to place sugar on the list of LB (import license required) list, to limit the effective period of each license issued, to connect each transaction of imported brown sugar to a transaction of export, to apply the world price of sugar to customs duties, to demand payment of customs duties in the first customs terminal, to demand a forwarder’s as well as an importer’s guarantee and to require a certificate of origin. The same goes for Cooking Oil (which – when it is imported in a package – is often declared as some other good).

Simplicity in tax laws is certainly a desirable objective. US tax laws are 5 times the size of Indian tax laws, in terms of the number of clauses! Yet, the US tax laws are considered simpler than Indian tax laws. There is only one reason – constant change, and lack of continuity, in Indian tax laws, creating uncertainty on the applicability of different tax provisions. Add to that, the multiplicity of inspectors, the voluminous records to be maintained, the limited role of computerisation, the vagueness in wordings of rules and regulations, leading to subjective interpretation, and, thereby, the uncertainties with respect to compliance – and you have a level of complexity beyond what rocket scientists ever encounter!

 Simplicity
 Stability and Continuity
 Certainty
 Reasonable tax rates
 Ease of Compliance

Unfortunately, in the past, for checking evasion, stress had mostly been on legislative measures, forgetting that equal importance is to be given to administrative aspects. In the discussion to follow, some suggestions for checking evasion, through legislation, and for improving compliance to tax laws are being mentioned. As indicated earlier, the problems need to be tackled in two ways — by legislation and taking effective administrative measures. Other measures for checking tax evasion through legislation could be:

 Taxing big and prosperous agriculturists’ incomes and wealth.
 Introducing donee-based gift tax.
 Permitting tax officials to have power of door-to-door survey.
 Claims for losses / expenses relating to undisclosed or illegal incomes should not be recognised for tax assessments while taxing incomes from such sources.

In countries like Belgium, Greece and France, there is provision for confiscation of personal rights like arms or driving license of persons found guilty of dealing with black money or resorting to tax evasion. Similar law should be made in India too. Such persons should also be debarred from holding any elective offices, including directorships in companies.

More emphasis must be laid on these aspects instead of floating amnesty schemes and issuing bearer bonds. It needs to be borne in mind that such schemes merely tackle that too to a very limited extent, the problem relating to ‘stock’ concept in black money and do not provide solutions for checking the onslaught of black money generation — the flop concept.

Among administrative aspects, strict measures can only create impact. Some suggestions in this context are:

 Tax laws should permit wide publicity through media regarding persons found guilty of tax evasion.
 Social conscience needs to be aroused amongst people against tax evasion, for attaching social stigma for tax evaders and to work as sentinels for identifying black marketers and tax dodgers.
 The most important measure for checking evasion is to establish credibility of the government regarding its own integrity before exhorting persons to pay their taxes correctly.

Some other measures, of an administrative nature, could be:
 Disentitling tax evaders / defaulters to avail of the facility of payment of taxes in the installments and getting credit facilities from banks.
 Streamlining procedure for speedy determination of tax disputes. Special courts for this need to be set up.
 Paying special attention towards training for detection of tax frauds, evasion and black money generation, including deputation of IT officers to other countries for training to tackle cross border tax evasion.
 Providing adequate security to tax officials, conducting search and surveys.
 Improving morale of the tax department officials by providing them adequate infrastructure and other facilities, by recognition of their merit and giving them the place that they deserve in the overall government set up.


There had been umpteen talks and voluntary disclosure schemes in the past for checking evasion and black money, but no perceivable results have come. Rather, the quantum of black money in circulation has increased substantially in volume. There is one sure medicine: eliminate the population and both unemployment and inflation will be eliminated. So long as cash transactions continue to be made, tax evasion will be there and black money will continue to be generated.

Cite this page

Choose cite format:
Black Market and The Indian Economy. (2021, Feb 06). Retrieved July 17, 2021, from