The 50 Shades of Money

BY ARADHIA BHAGAT

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Don’t think you’ve ever seen black money? Think again. Black money in a nutshell, includes all funds earned through illegal activity and otherwise legal income that is not recorded for tax purposes. The most common source of black money is the black market or underground economy. Activities in the black market may include selling prohibited drugs, gunrunning, terrorism, and human trafficking. Black market activities also involve less severe offences, such as the sale of counterfeit goods, stolen credit cards, or pirated versions of copyrighted material.

The portion of a country's income tied to black money affects the economic growth of the country. Black money causes financial leakage, as unreported income that is not taxed causes the government to lose revenue. In addition, these funds rarely enter the banking system. As a result, it can be more difficult for legitimate small businesses and entrepreneurs to obtain loans.

Furthermore, black money causes the financial health of a nation to be underestimated. Unsurprisingly, it is extremely difficult to calculate the amount of black money in any economy given that participants in the underground economy have strong incentives to conceal their activities. These unreported earnings cannot be included in a country’s gross national product (GNP) or gross domestic product (GDP). Thus, a nation's estimates of savings, consumption, and other macroeconomic variables would be misleading. These inaccuracies adversely affect planning and policymaking.

Believe it or not… There are 2 sides to black money being prevalent in an economy. Black money produces the most benefits in societies with the most oppressive laws. For example, many ordinary market economic transactions were illegal in the Soviet Union. People turned to the underground economy to alleviate shortages and obtain banned goods. In many other cases, regimes imposed price controls that made goods unobtainable or sales taxes that made them unaffordable. Black money provided a way to decrease the damage.

Black money can also help to reduce the impact of systematic racism. Historically, governments banned certain races from holding land, trading securities, or otherwise exercising their natural rights to engage in commerce. These bans pushed some victims of discrimination into less regulated areas where they were free to earn black money. Whilst these concepts do not justify the harm black money causes to the economy, it is important to consider the duality of the situation.

Black Money Overshadowing the Indian Economy:

India is infamous for residing around 22000 crores INR worth of black money and trying to continuously fix it. Knowingly or unknowingly, living in India, you probably have encountered black money circulated in some part of the economy.

Whilst black money is an umbrella term used to describe revenue generated from illegal activities, it majorly accounts for money generated from criminal enterprises such as drug dealing. Here we introduced grey money (this is the last colour we promise), which is much more common and abundant in the economy as it is a result of tax evasion. For example, grey money includes illicit deductions or funds hidden in an offshore bank. In fact according to a study conducted by the Financial Express in September 2020, only 1% of India fully pays their income tax indicating how tax evasion and grey money is a major roadblock for the wellbeing of India’s economy.

The total amount of black and grey money deposited in foreign banks by Indians is unknown. Some reports claim a total of US $1.06 – $1.4 trillions is held illegally in Switzerland. Other reports, including those reported by the Swiss Bankers Association and the Government of Switzerland, claim these reports are false and fabricated, and the total amount held in all Swiss bank accounts by citizens of India is about US$2 billion. In February 2012, the director of India's Central Bureau of Investigation said that Indians have US$500 billion of illegal funds in foreign tax havens, more than any other country. In March 2012, the government of India clarified in its parliament that the CBI director's statement on $500 billion of illegal money was an estimate based on a statement made to India's Supreme Court in July 2011. In March 2018, it was revealed that the amount of Indian black money currently present in Swiss and other offshore banks is estimated to be ₹300 lakh crores or US$1.5 trillion.

These numbers did not only startle us, but also Prime Minister Narendra Modi when he assumed office in 2014. 2 years later, he decided to do something about the problem of black money overcasting India’s economy and introduced Demonetization. On 8 November 2016, the Government of India announced the demonetization of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new ₹500 and ₹2,000 banknotes in exchange for the demonetised banknotes. Prime Minister Narendra Modi claimed that the action would curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism. The announcement of demonetisation was followed by prolonged cash shortages in the weeks that followed, which created significant disruption throughout the economy.People seeking to exchange their banknotes had to stand in lengthy queues, and several deaths were linked to the rush to exchange cash.

Conforming to the prediction of numerous economists and scholars from organizations such as the Harvard Business Review and the UN itself, the Indian economy was doomed after demonitization. According to a 2018 report from the Reserve Bank of India, approximately 99.3% of the demonetised banknotes were deposited with the banking system, leading analysts to state that the effort had miserably failed to remove black money from the economy. RBI predicted that only 70% would return to the bank to get demonetized, indicating that the rest 30% would be black money which would have to exit the economy, however, Indians ended up converting a majority of money to white money which in turn got monetized leading to only 0.7% of black money could be forced out of the economy. Not only did India's demonetization harm the economy, but it also produced numerous negative externalities. The BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on the day after the announcement. The move reduced the country's industrial production and its GDP growth rate. It is estimated that 1.5 million jobs were lost.

Unfortunately, despite drastic measures such as demonitization the government was unsuccessful in permanently removing black money from the flow of the Indian economy. This simply proves how systemic and deep-rooted the issue of black money in India is as people continue to find ways to colour their money white either by finding loopholes such as investing money in Swiss Banks, faking loans and altering tax receipts.