Page 357 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 28: Parallel Economy

overall consumption leaves less resources for investment in priority areas. These distortions in the Notes
product-mix in favour of non-essential consumption have adverse effects on production and thus
they distort the objectives of planning.
Thirdly, black money encourages investment in precious stones, jewellery, bullion, etc. This has an
adverse effect on growth via its demonstration effect.
Fourthly, black money has encouraged diversion of resources in the purchase of real estate and
investment in luxury housing. There is large scale under-valuation of property and in this way, lot of
black money is made white. This has also pushed up the prices of land to astronomical heights
because of speculative purchases of land by black money operators. As a consequence, the middle
classes are priced out in the purchase of land for houses. Not only that, a lot of nation’s resources are
used in only making inputs available for luxury housing. Since most of these buildings are registered
at under-valued prices, the Government loses by way of tax revenues when these buildings are
transferred as gifts or are bequeathed.
Fifthly, a part of the black incomes is held in cash and as a consequence there is an abundance of
liquidity which becomes available through the accumulation of savings held in the form of cash,
bullion, gold, silver, etc. This is popularly termed as ‘black liquidity’. Thus, whenever the Government
attempts to control excess demand with the help of measures of credit control or rationing, such
attempts are frustrated by the huge liquidity provided by black money. Since this liquidity results in
heavy inventory build-up, it becomes a threat to price stability.
Sixthly, black money results in transfer of funds from India to foreign countries through clandestine
channels. Such transfers are made possible by violations of foreign exchange regulations through the
device of under-invoicing of exports and over-invoicing of imports. The country thus finds itself in a
paradoxical situation, “where capital and more particularly foreign exchange resources are scarce,
(the country) becomes a de facto lender of aid and capital to economically advanced and wealthier
nations, with the concealed outflow of funds.” The situation has worsened further over the years.
28.1.4 Factors Responsible for Generation of Black Money
There are several factors responsible for the generation of black money. It would be relevant to discuss
those factors so that a correct understanding about the genesis, growth and expansion of black money
can be made. The principal factors are :
(i) Divergence between the acceptable net rate of return and legally permissible rate of return :
There is a school of thought which believes that the chief factor responsible for generation of
black incomes is that individuals expect a higher net rate of return than the legally permissible
rate of return. In this connection, the higher marginal rates of taxes assume special importance.
The Chambers of Commerce and Industry hold a unanimous view that very high rates of taxation
on incomes above a certain limit are in fact expropriatory in nature. For instance, at one time,
the marginal rate of income tax was as high as 97.5 per cent and this was tantamount to near
nationalisation of all incomes beyond a certain level. The high marginal rates led many experts
on public finance to describe that we are “the most highly taxed nation.” These high rates were
gradually brought down to 40% by former Finance Minister Dr. Manmohan Singh by 1996.
Mr. P. Chidambram has further reduced them in 1997-98 budget to 30 % for individual and 35%
for corporations.
However, there is another school of thought led by economists of the left who believe that the
argument of high marginal tax rates is over-played. They assert that actually paid rates on
declared incomes are not as high as determined by the officially prescribed marginal rates of
taxation. Consequently, a reduction in rates of taxation, would not result in reduction in tax
evasion but it only grants more relief to the tax evaders.
Dr. K.N. Kabra in his empirical study of high rates of income tax and tax evasion has worked
out the actual income taxes paid at various levels of income during the period 1971-72 and
1978-79. His study reveals the following :
(a) Tax evasion was of the order of ` 1,890 crores in 1971-72 and it jumped to three times this
figure (at nearly ` 5,400 crores) in 1978-79. Evaded tax as a percentage of potential tax

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