Thursday, August 14, 2014

Black Money: How it is Generated in India? How Can it Be Eliminated?

Black money is essentially that money which is set aside and transacted without proper documentation or account book entries for purposes other than for normal day-to-day living of individuals. Most often such transactions are of high amounts.Since the transaction is unaccounted, the money goes out of the taxation system and the government loses tax revenue due to it.

Very often black money transactions take place in hard cash and such cash is stacked in the custody of individuals, instead of the place where it should genuinely be lying-the banking system.Black money transactions drain out the currency circulation and place greater stress on the government to print and issue more and more currency notes than actually required.

Black money is often generated in transactions that are illegal, such as gambling, bribes, smuggling, drug trafficking, human trafficking and by a variety of other such acts. Large scale black money transactions also take place in commodity trades, labor contracts, election campaigns, mining, scrap trades, used vehicle trades, gems and jewelry trade, etc.

Money which one gains by illegal means without proper accounting is, therefore, black money. Money paid and received for unfair benefits is also black money, which is sometimes called corruption money.

Black money generates black wealth and black economy which runs parallel to the legal economy monitored by the government. The high presence of black economy transactions cause the formal economy weak and ineffective. It causes a few individuals to have enormous purchasing power as compared to the majority citizens which creates higher levels of economic inequality.

Now let us consider some manner in which black money is generated. Let us take the case of a school or a college which has some good reputation. The reputation causes more and more parents aspiring to have their wards admitted in such schools or colleges. A very glaring example is the private medical colleges in India. Now there is a big demand for their courses and seats. Suppose that the government has fixed a small percentage of seats to be allotted at the discretion of the management or the persons who are in the decision making positions even while having a publicly known fee structure. This causes some seats to be allotted to some students on the basis of corruption money that they pay to influence the decision makers. Since this money cannot be accounted by the legally accepted accounting system, the money, the moment it is paid becomes illegal or black. It is common knowledge that some private medical colleges in India allots some seats by taking a couple of million rupees in black. Since, it is not normally possible for people who have legitimate incomes to pay such huge amounts for just getting their not-so-bright wards admitted for a medical degree course or a reputed school such black money payments are often made by those who have black money cash stacked with them. This black money in hard cash then get transacted and moved from one custodian to another in return for a small favor. If the money is not so large, the person who got it slowly pumps it in to the main economy and make it white. Usually, he or she spends such easy money  lavishly for parties, purchase of expensive white goods such as cameras, mobiles, i-pads, ornaments, gems and during luxury travels. He or she may use it for lavishly furnishing or constructing expensive homes. 

Contractors who are dealing with large numbers of daily wagers have to transact huge cash on a daily basis. They may show individuals payments higher in the books while making lower payments to the individuals. This way they create large sums of cash which is unaccounted which they use for illegal transactions later.

When large scale purchases take place, many companies are willing to pay some percentage of the transaction as commissions to the people who have helped them to settle the deals. While such commissions are legal for private-to-private transactions, for governmental or public transactions they are illegal. If in the latter case commissions are paid, it has to be illegal and therefore out of corruption. It becomes then black money.

There are hundreds of such methods by which black money transactions routinely take place. While black money is common through out the world, its impact and quantum is more in under developed or developing countries like India.

It is almost impossible to eliminate corruption and black money in a country, so long as there are people who are dishonest, greedy or unscrupulous with lower maturity levels. Yet, its impact and prevalence could be controlled to a greater extent by better methods of governance. However, better governance is not always possible when the people in key positions of governance are themselves are without competency, character, courage and compassion. 

One of the easiest method to control black money is the strict imposition of restrictions on hard cash transactions. It is not very difficult with banking becoming almost computerized and online. I have written about some aspects of it earlier.

Black money economy has to be curtailed if India wants to have progress and development that is beneficial to everyone. If greed and insecurity feelings are removed from the minds of the people, this social evil might start declining of its own.

Every right thinking Indian should give a serious thought about it.

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