BLACK MONEY AND ITS IMPACT ON ECONOMIC AND SOCIAL SYSTEM

NAME- YASHVARDHAN SINGH RATHORE ENROLLMENT NUMBER- A3208309205

WHAT IS BLACK MONEY

Black money is an income, as from illegal activities, such as money laundering or unregulated economy, ie economic activities outside regulations smuggling that is not reported to the government for tax purposes or any money that a person or organization acquires illegally, as by a means that involves tax evasion.

ACCORDING TO ECONOMICS- That part of a nation's income that relates to its

black economy.
PARALLEL ECONOMY- Parallel economy connotes the functioning of an unsanctioned

sector in the economy whose objectives run parallel, rather in contradiction with the aroused social objectives. This is variously termed as black economy, unaccounted economy, illegal economy, subterranean economy, unsanctioned economy or 'hidden economy'.

HOW IS BALCK MARKET OR PARALLEL ECONOMY 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.

IMPACT OF BLACK MONEY ON THE ECONOMY

1. It leads to the misdirection of precious national resources. 2. It has enormously worsened the income-distribution. The fixed income salary class finds itself ever be the lower rung of the income-ladder as they pay taxes. They are not able to catch up with the people in business, or in professions, or many of those employed who make money by black activities. Many high placed official and honest employees earn much less than an average small shopkeeper in big cities. 3. The existence of a big-sized unreported segment of the econom is a- big handicap in making a correct analysis and formulation of right policies for it. 4. Black money results in transfer of funds from domestic to foreign countries through clandestine channels. Such transfers are made possible by violations exchange regulations through the device of under invoicing of exports and over-invoicing of imports etc. 5. Black money requires for its protection, proliferation and expansion of a service organisation composed of musclemen, touts and brokers to combat the forces of law and order on the one hand and on the other hand, there are income tax advisers, or chartered accountants in the pay of black money operators. There are contact men, liaison officers, dalals who negotiate favors from top bureaucracy and political bosses through bribes of black money. 6. Black money has corrupted our political system in a most vicious manner. At various levels, MLAs, MPs, Ministers, party functionaries openly go on collecting funds for party or elections. Ministers dole out favours of crores by accepting black money donations of a few lakhs from businessmen National policies are, therefore, being bent in favour of the big business under the pressure of black money. 7. Causes inflations 8. Affects public revenues by degenerating the investable surplus. 9. Delimits the national productivity by draining the balance of payments. 10. Distorts equity and equality concepts of economic distribution.

ADVANTAGES OF BLACK MONEY IN THE ECONOMY

The black economy has many important functions: 1.The black economy is a cash economy. 2.It is liquid and Fast 3. It increases the velocity of money. 4. It injects the much needed foreign exchange into the economy and inadvertently increases the effective money supply and the resulting money aggregates. In this sense, it defies the dictates of "we know better" institutions such as the IMF. 5. It fosters economic activity and employs people 6. It encourages labour mobility and international trade. 7. Black economy, in short, is very positive. With the exception of illegal activities, it does everything that the official economy does and, usually, more efficiently.

The Black economy is important in times of economic hardships. Countries in transition are a private case of emerging economies, which are a private case of developing countries that are called (in less politically correct times) "Third World Countries". They suffer from all manner of acute economic illnesses. They lose their export markets, they are technologically backward, their unemployment skyrockets, their plant and machinery are dilapidated, their infrastructure decrepit and dysfunctional, they are lethally ill-liquid, they become immoral societies (obligations not honoured, crime flourishes), their trade deficits and budget deficits balloon and they are conditioned to be dependent on handouts and dictates from various international financial institutions and donor countries.

It enhances exports(and competitiveness through imports), it encourages technology transfers, it employs people, it invests in legitimate businesses (or is practiced by them), it adds to the wealth of the nation (black marketers are big spenders, good consumers and build real estate), it injects liquidity to an otherwise dehydrated market.

DISADVANTAGES
1. It is exploitative. Other parts of the economy, which are not hidden (though would have liked to be), are penalized for their visibility. They pay taxes. Workers in a factory owned by the state or in the government service cannot avoid paying taxes. 2. The money that the state collects from them is invested, for instance, in infrastructure (roads, phones, electricity) or used to pay for public services (education, defense, policing). The operators of the black economy enjoy these services without paying for them, without bearing the costs and worse: while others bear the costs. This encourages them, in theory to use these resources less efficiently.

IMPACT OF BLACK MONEY ON THE SOCIAL SYSTEM OR THE SOCIETY

Inflation and black money is in the form of parallel economy. The eradication of black money for a viable economy of the Country is required for a healthy structure on all its front. The factors responsible for the generation of black money are required to be spotted just to provide a curve over the nefarious activities of the politicians and other bureaucrats in the society. The judicial institutions has partly realised the ideals of the constitution to develop through judicial activism in the form of a revolution for providing a check over the reprehensible conduct of the people to accumulating enormous well through any means. "Fair or Foul" at the cost of Nation. Price rise to the fantastic levels and velocity or liquidity of money circulation became enormous. One of the main feature of inflation is that money looses its value. This is virtually in confrontation with the aimed social objectives of legitimate expectations of the citizens. Black money is very important route cause of urban value which deprives the Government its legitimate dues by way of taxes to the exchequer and induces dishonesty in the individuals trying to get more & more accommodation beyond his means. Transactions involved and element of black money. No individual posses adequate white account of money to buy a flat, thus this has ultimately resultant to the creation of black money as the parallel economy in the nation. The idea of inflation accounting mooted during the 2nd world war which became the topic of active discussion and ultimately attained momentum and due to the rapid universal inflation is persisting upon as a major problem in the country which has the effect of the almost crippling the entire economic structure of society in all sphere. Inflation and black money has become menace to Society and its economic structure in all its spheres. It has become necessary to have a rethinking in all the monetary polities of the Government and their administration in all sectors as to how incorporate the effect of inflation accounting to eradicate black money from the society. This requires a strong Government and a high morality in living pattern of society. It needs fighting with all statutory powers wasted in Government. Inflationary tendencies have to be contained within a tolerable limits Government expert economics and planners with eminent public men requires the determination of inflationary trends which is galloping in nature and very difficult being tricky and onerous, to tackle by ordinary process.