In recent years, the purchasing power of rupee came down considerably. In other words, there was all-round price rise. Many factors are responsible for this rise. Presence of black money is one of them.
It creates a parallel economy, which directly helps the growth of massive personal taxation, in terms of income tax, wealth tax, capital gains tax and gift tax.
Black money today has become a fact of life. Simply defined, it is the unaccounted money for which taxes has not been paid by an individual or a company. It is good thing, so long as such money is being kept in clandestine safes, out of circulation, because this reduces the quantum of currency that does mischief with prices.
Non-utilization of black money for trade or for hoarding is a monetarily welcome development, as it keeps the inflation under check by the mere fact of the corresponding subtraction from money supply. But the man, who has the black money, knows how to utilize it. He knows that life is short and, therefore, must be lived in all its intensity. He therefore, builds an extension to his house, performs a family wedding, or goes and buys gold or precious stones that are easy to carry and hoard.
The high echelon of black-money-holder reserves black money for financing parliamentary or local elections and treat the money earmarked to back particular candidates, as an investment in the ‘bank of providence’. They are aware that these are long gestation outlays of resources and are content using the candidate as a command performer at the appropriate time.
Conspicuous consumption is possible with taxable income. Spending black money on illumination, feasts and the purchase of imported cars is a way of converting that into white; some of such activities hoarders of black money quite often cashes in on.
Today, perhaps there are more black goods, black gold, unaccounted collections of precious stones, more decorated and elegant homes than black currency. Indeed, prevailing inflation would be in some measure, ascribable to the currency released under compulsions of fear of impending measure, even as in major part, it is due to the vastly enhanced money supply by the exchequer.
The accumulation of black money will cease to be so, in the major part when, our direct taxes get reduced; when our production of goods increases through a consequential abolition of all controls and regulations; and when we do away with two-tier prices for all our controlled goods.
Simply preaching against the unethical character of black money, without corresponding steps to remove the motivations to make it, will be just waste of time threats and warnings to the holders of black money will only result in further inflation. To check this evil, some kind of Indemnity Loan Issue applicable to holders of black money on the lines of gold bonds, etc. could help bring hidden currency into the banking system for use by the economy instead of acting as a breeding ground of inflation.