FORMATION OF BLACK MONEY AND FACTOR RESPONSIBLE FOR BLACK MONEY

FORMATION OF BLACK MONEY AND FACTOR RESPONSIBLE FOR BLACK MONEY

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, an excess demand is usually generated for acquiring foreign currency. The government has the choice of either devaluating the currency, or maintaining strict controls over 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.

There are several factors responsible for the emergence - 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)        Beginning of the evil:

The beginning of this evil can be traced to the Second World War. During this period supplies of industrial goods from the traditional suppliers of the West were cut off. This resulted in severe shortages in many vital lines. The British Government indulged in large inflationary finance for war efforts. This led to price escalation. Taxes too were raised sharply on higher incomes and excess profits. In these circumstances many indulged in black marketing. And at the same time, they evaded taxes. Huge profits were made in respect of goods that were in short supply. This created a psychology of making money out of shortages and not out of production / expansion of sales. These circumstances and the psychology formed the backdrop of what followed subsequently. 

(ii)      Controls and licensing system:

The system of controls, permits, quotas and licenses which are associated with misdistributions of the commodities in short supply results in the generation of black money. The Wanchoo Committee explaining this factor as a source of black money observed, In spite of the vigilance exercised by the Government, controls and regulations came to be used by the unscrupulous for amassing money for themselves. Since considerable discretionary powers lay in the hands of those who administered controls this provided them with a scope for corruption - speed money for turning a blind eye to the violation of controls. All this gave rise to trading in permits, quotas and licenses, malpractices in distribution and in the process; it generated sizeable sums of black money. 

Price and distribution controls have in the past led to the generation of black money on a significant scale. Any price control without any adequate machinery of distribution and speedy arrangement for increasing supplies is potentially a source of black money generation. 

Rent control leads to pugree system and is, therefore, another source of black money. Similarly, the system of licenses requires large number of inspectors for completing various formalities and thus good amount of hush money has to be paid. Where controls are not implementable, they have led to harassment and black money generation. 

(iii)            Tax structure:

High tax rates and defective tax structure have also been responsible for the existence of black money to a large extent. Take for instance direct taxation. Till recently the tax on income and on wealth was very high to invite evasion. The marginal rate of income tax was as high as 75 per cent. And when it was combined with the tax on wealth, it was still higher. For example, for a person with net wealth ofRs.12 lakh, the combined tax rate came to 95 per cent. And for a person with a net wealth exceeding Rs.18 lakh, the marginal tax rate exceeded cent percent. This was the situation in respect of personal taxation until a decade ago. The corporate tax rate too was very high. In these circumstances the temptation / gain from tax evasion was substantial. 

Even in the case of indirect taxes the situation is no better. In fact worse, as the revenue from these taxes constitute a big proportion of all the tax revenues. For example, in the case of government, revenue from customs and central excise duties has been as much as 80 per cent of the total revenue. Hence even a small fraction of the evaded tax runs into crores of black money. According to the National Institute of Public Finance Policy the excise evasion is rampant in such sectors as copper, cotton fabrics and plastics. It is also suggested by the Institute that the tax-evasion through the underestimation of production and sales is most pronounced in manufacturing, trade, hotels and restaurants. 

(iv) Donation to political parties:

Ever since the Government decided to ban donations to political parties in 1968, it prompted businessmen to fund political parties, especially the ruling party, with the help of black money. Ostensibly, this decision was taken to reduce the influence of big business on the electoral process, but in practice what happened was precisely the opposite. Businessmen everywhere have by now learnt that they should pay a certain charge out of the black money to the coffers of political parties and then be sure that the political leaders will only bark but not bite. Big business, in the process, has been able to tame the political leadership. This is evidenced by the relaxation of various controls, permitting business houses to enter areas reserved for the public sector, putting a large number of banned items on the Open General License list etc. 

The political instability witnessed in the country in -various states has resulted in widespread horse-trading of the MLAs at the state levels and MPs at the Central level. In this process of buying political support, black money plays a crucial role. Consequently the determination of the ruling political party to curb black money has become very weak. As a consequence, businessmen feel they have an unfettered license to spin black money, pay a small part to the political parties as donations and then enjoy the rest the way they like. Unless the link between black money and political power is broken, there is no hope of controlling the generation of black money or its link with crime. 

(v Ineffective enforcement of tax laws :

Whereas the Government has an armoury of tax laws pertaining to income tax, sales tax, stamp duties, excise duty etc., their enforcement is very weak due to widespread corruption in these departments. . The high rates of these taxes induce businessmen to avoid recording of these transactions. This evasion largely goes unchecked and thus sets in a chain reaction for the generation of black money at the wholesale, retail as well as production levels. 

(vi)            Generation of black money in the public sector:

Every successive five-year plan is planned for a larger size of investment in the public sector. The projects undertaken by the public sector have to be monitored by the bureaucrats in Government departments and public sector undertakings. Tenders are invited for the various works and these tenders are awarded by the bureaucracy in consultation with the political bosses.

Thus, a symbiotic relationship develops between the contractors, bureaucracy and the politicians and by a large number of devices costs are artificially escalated and black money is generated by underhand deals. Instability of the political system has given a further momentum to this process. Since the ministers are not sure of their tenure and in a majority of cases, the tenure is very short, the principle Make hay while the sun shines is adopted by most of them. The larger number of scandals that are unearthed by the Opposition only support the contention that huge investment in the public sector is a big potential source for black money generation. In this process, bureaucrats act as brokers for political leaders and thus the nexus between business, bureaucracy and politicians promotes the generation of black money.  

(Vii) Ceiling on depreciation and other business expenses:

Government has imposed restriction It has also circumscribed expenses on advertisement, entertainment, guest houses, payment of perquisites to directors. The purpose of these restrictions is to protect the shareholders and consumers from the unscrupulous action of businessmen. But businessmen feel that these restrictions are unjustified. They take the maximum advantage of these provisions but do not like to part with the remaining part of by various clandestine devices; they convert it into black money and use it either for conspicuous production to satisfy the wants of the rich and elite sections of society.