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Black Money circulation in India [Insights]

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For the past few years we all have heard one topic being raised by social activists all over the country “Black Money stashed in Swiss banks runs into 50 lakh crores”. With some claiming the amount to be around 100 lakh crore and others claim an even higher amount.

Leading economists of our country like Mr.Swaminathan S Anklesaria Aiyar, who is currently consulting editor for the economic times and is known for his weekly column in Times Of India Swaminomics claimed something completely different. One article by him was about how we are being naive and believing that there is so much black money currently stashed in Swiss accounts. I believe that we believed it because in our so called fact based movies, always the villain / corrupt person has an account in Swiss bank to transfer his illicit money to.

In his column Mr. Swami had clearly explained that there are far too many lucrative ways and means to store and use black money than keeping it in Swiss bank where the interest on deposit is maximum 2% per annum while any regular bank currently offers you an interest of 8-10% per annum. Any financial planner with a fine knowledge of international treaties can easily explain to them about how to make 10% per annum off the black money.

clip_image004Having said that, the document that was leaked to the public when inspected revealed the following facts, of the 26 Indian-owned accounts disclosed in it some were owned by NRIs and only 18 could be taxed (that too if formally given over by the LGT bank, Liechtenstein).

They had received only Rs 39 crores over the past two years and some of it may have a legitimate source of income. So basically even the Swiss break their vows and disclose the amount formally, and then the amount that may finally reach in the treasury will not be worth the paperwork and the work that may have been put into pressuring the Swiss. The Swiss don’t disclose, as a part of an agreement, that is what makes those banks safe. Most of them were initially family owned and since then the custom has been upheld even though now most are board managed.

So according to Mr. Swami, the money if parked in Swiss accounts will only be there temporarily till the financial planner comes out with a foolproof plan to invest the black money. And this actually makes sense, wouldn’t you like to make Rs 100 than Rs 20. That you can do by floating shell corporations in tax havens like Mauritius and when government signs any treaty regarding taxation move it to some other tax haven like Cayman Islands

The real black money is circulated inside the country, how else do you think the intra and inter day changes in the Sensex be so fluctuating and the only reason for it being the money pumped in case of a jump or money pulled out in case of a fall. Where is the money pumped in from? Who pulls it out? Why are there so many NGOs, charity trusts and other such organizations out there? If you carefully see the other markets you will see a gradual increase or decrease, any fluctuation is caused only by some very shocking news like announcement of recession leads to a steep fall. Even if you are in recession unless announced you haven’t seen the actual plunge appear in the form of statistics, till then it is all calm or gradual and minimal decrease. The organizations like NGOs and which support charity help converting white money – black money – white money.

How is common man affected by this?

1) Taxes

The taxation in India is very high compared to any of the developed states, so to evade it people don’t show all the income sources. If tax collection is low then the government starts to raise tax to increase the collection which in turn burdens the common man more and sort of compels him to hide his income, hence more black money.

2) Inflation

you often hear your parents comparing rates from their time to the rates now that is inflation. Inflation is said to be good for the economy up to 3% as it shows growth. But anything over 5% is alarming and we at times have faced double digit inflation. This is how inflation flares up due to black money circulation.

I report an income of Rs 100 and have unreported income of Rs 100, suppose I have to invest in real estate project. I have Rs 200 but legally I can invest maximum Rs 100 but since I want to pump in Rs. 200 the rest Rs 100 is pumped in via some shell corporation. And since you want to make a profit on it you obviously sell the investment higher than Rs. 200 so the value of something that could have been around Rs. 100 is now more than Rs 200 and is out of reach for most. This is how real estate prices have flared all over without any actual development.

3) The black market economy

The black market economy in our country is so huge that is runs parallel to the white market economy in the form of bribes, hawala money, or money acquired by illegal trade. In case of profit more often than not actual gain is reflected on the black money economy and the white economy receives little or no benefit thus honest man fails to get any profit and on a larger perspective even country’s financial health on paper doesn’t improve by the standards it should.

4) Social & Economic Issues

If black money that exists in any form is actually put into our treasury nearly all of our social as well as our economic issues can be solved from the grass-root rather than superficially doing patch work.

Would love to hear readers thoughts on this…

[About the Author – Sudarshan R recently completed his Computer Engineering from University of Mumbai. He loves to read and has opinions on anything and everything. His passions include music, automobiles and gadgets. You can follow him on his Blog here]

  1. Tejas Pawar says

    nice 1 bro :)

    1. Sudarshan Rangarajan says

      thanks :)

  2. Fenil Dedhia says

    brilliantly put! keep it up!

  3. Deepak Behera says

    Finally! somebody making some sense…

    1. Sudarshan Rangarajan says

      thank you :)

  4. Sudarshan Rangarajan says

    Inflation example in simple terms.
    If you have Rs100 to make chocolates to sell at Re1.
    you will make some profit on that Re1.
    If you put Rs100 white money and Rs100 Black money you will expect to make a profit on that chocolate more than what you made with Rs100 intially.
    so you will automatically increase the chocolate to Rs2.
    hence the consumer pays more for the same chocolate.

    1. balaji yadhav says

      Dude … By your logic If you can sell chocolates at Rs 1 with 100 Rs and make a profit wats the point of investing another 100Rs (black or white) to sell the same chocolate at Rs 2. Im a finance professional, I would suggest you to invest the extra 100Rs in black money (to a shell corp) in the business to show as cost of sales and sell the same chocolate at Rs 1 – fake business loss and avoid taxes and Bingo you have converted your black money into white. Only a fool would increase his selling price to accommodate his black money cause not every single chocolate seller in the country is going to sell at Rs 2 with the exact amount of black money. It is called free market economics – prices are determined by the market and not by individual sellers.

      1. Amit Shah says

        who told you India is free market economy?
        check out the real estate market and the price rise.

  5. Shantanu M Bhate says

    sahiye boss :)

  6. Akriti Mittal says

    great work sudarshan!

  7. Vaibhav Deshpande says

    ;)) good one sud!

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