BLACKMONEY – Should there be a
policy to convert black money to white ?
Sourav Agarwal 07927803
07927816 Ramesh Thamotharan
ENVIRONMENTAL ECONOMICS AND POLICY
What is Black Money ?
• How does it flow in the Economy ?
Why Black Money is Generated ?
1. Tendency of people to increase Purchasing Power.
2. Conducting Transaction illegal in nature.
6. Perception about Government.
Government, Its Policy, and
Government is a expected to function for
maximum good of all.
Not possible !!
Deviations do Exist and so do Anarchicts.
Government should act as a regulator and
interfere as minimum as possible.
Parallel economy as % of GDP
• Developed countries – 8 to 20 %
• Transition countries – 20 to 30 %
• Developing countries – 25 to 50 %
Size of parallel economy
• Rs 3034 crores in 1967-68
– 9.5 % of GDP
• Rs. 46,867 crores in 1978-79
– 49 % of GDP
– a 15-fold increase in 12 years
• During 80s parallel economy grew faster than
– 46.7 % vs 40 % (between 1980 and 1989)
• High taxes result in cash transactions that go
• Under-declaration of deals skews market info
• Affects the process of capital allocation
• Upsets accuracy of economic forecasts
• Erosion of public confidence on the system
that leads to a vicious cycle
Have there been policies?
• Tax amnesties have been provided
• Permanent (Settlement Commission) and
• To promote better tax compliance
• In return for immunity from prosecution
Tax Amnesties in India
Year Authority Income Revenue Total % of total
disclosed Collected Revenue revenue
(INR Crores) (INR Crores) (INR Crores)
1951 N/A 70.20 10.89 N/A N/A
1965 Finance Act 52.18 30.80 N/A N/A
1965 Finance Act (2) 145.00 19.45 N/A N/A
1975 Voluntary 1587.89 249 2204 11.29
1985 Finance Act 10778.34 458.79 11858 3.87
1997 Finance Act 33776.90 9729.02 38895 25.01
The participants believe
• Black money cannot be eradicated altogether
• Although black money goes unrecorded it still
trickles down to improve level of well-being
• Participants feel so because
– It provides G&S that are sometimes unavailable
– It lubricates the working of the formal economy
– Helps realize entrepreneurial endeavours
Would regulations help ?
• Frequent tax audits and high penalties for
• Incentivisation of above-board transactions
• Value Added Tax (VAT) encourages better
• Vigilance helps to a large extent (RTI, CVC)
• Risk of being caught is not worth taking
beyond a point
Are we getting there ?
• High value transactions demand PAN
• Cash transactions should be discouraged
• Tax structures are being rationalized
• Deductions will be phased out
• Tax payment process has been simplified
The way out
• Why should there be a policy?
– Size of the parallel economy is reason enough
– The economic impact of not having one is very
• How should the policy be ?
– A mix of temporary and permanent provisions
– More incentives for above-board transactions
– Coupled with reduced taxes and better vigilance