We all talk about “black money”. Those huge stashes of undisclosed money, mostly cash, tucked away secretly by certain individuals in safe havens.
We drool over it. We say it’s bad. We say it’s illegal, it’s unjust, it’s unfair, it damages the economy, and so on. We talk about everything but the point. But wait, hold on a second.
There’s the reason why it’s a menace! The last point, up there. Yeah, it damages the economy, or, to put it a bit more quaintly, it affects the health of the economy. Few manage to get beyond accusing those with stashes of black money. As for the few who are able to surmount this first barrier, many get stuck at the second.
How does black money affect the economy? To get that, we first need to go through some basic economics.
What exactly is “Black Money”?
The first part is more of lexicography than economics. Yes, I’m referring to the metaphorical use of the word “black”.
Loosely speaking, when we refer to black money, we are referring to any form of money that the government can’t keep track of.
So, how does the government keep track of money? Through taxes. Rates of specific taxes are fixed. Suppose, you are paying 14.5% VAT on a restaurant bill. When this VAT gets deposited with the government, a simple back-calculation reveals the total bill amount.
For example, if VAT is the only tax charged on a bill, and the government receives 145 INR as VAT, rate of VAT being 14.5%, it knows that the bill amount must have been 1000 INR.
Same goes for other taxes: customs, central excise, service tax, and so on. So for income tax: merely by knowing the amount of tax you pay, the government knows how much you earn every month.
There are other methods too, such as, bank transaction records, credit card bills, and so on.
In fact, there is a separate branch of intelligence known as revenue intelligence, or financial intelligence, that keeps track of this paper trail you leave behind. And thus, it knowns how much money is circulating, in addition to where, when and how.
This is a complex system. Financial Intelligence is no cup of tea. And like every system, it has its own set of loopholes. When you manage to successfully exploit these loopholes and siphon off money with the financial apparatus of the State unable to keep track of it, such money becomes “black”.
In today’s world of computerized banking, it is increasingly difficult to go “off-grid”. Most of our transactions no longer involve paper money or coins, it involves sending computer commands to update that imaginary value known as your “bank account balance”. And all of it is logged. It’s a gold mine for financial intelligence, it’s easy to keep track of.
What isn’t easy to keep track of is paper money, and coins. You’re using it everyday. You’re paying the bus conductor, the taxi driver, the hawkers, and so many hundreds of other people. Most of these transactions are not taxed.
So, it’s difficult to keep track of. Although there are ways, if you don’t declare to the government how much money you’ve transacted, and if you manage to do it properly, it often goes unnoticed.
That’s why, most of the black money is cash. It’s why criminals don’t take payment with credit cards (the sanity of one who does is to be doubted). It’s why bribes are given in cash. Paper money doesn’t have a GPS tag or an RFID chip attached to it to keep track of.
Every country has what is known as a Central Bank, which is empowered by national legislation to use various measures to control the state of the economy. As for India, our Central Bank happens to be the Reserve Bank of India, its governing legislation being the Reserve Bank of India Act, 1934.
The Central Bank is the chief economic policymaker of the country. Through various indicators, it monitors the health of the economy, and is empowered by legislation to accordingly take various measures (such as, modifying interest and exchange rates) as it sees fit to keep the national economy in proper shape.
Intricacies of this delicate game aside, knowledge is power. The key for the Central Bank to make appropriate decisions about maintaining the economy is being aware of what the hell is going on. And the fundamental element in that process involves keeping track of money (which is pretty much all economics revolves around): how fast it’s changing hands, how much leaves the country, how much enters the country, and so on.
Only when does it have a full picture is it able to make an effective evaluation of the economy and do what it has to accordingly.
The Art of Governance
The another, perhaps more important reason why governments cry hoarse over untaxed money is loss of revenue.
The art of governance involves keeping money in circulation.
Your job as the government is to take money from the people, and then use that very same money to give services from the people. The people avail such services by giving you more money, and the cycle goes on and on.
Similarly, when people work for you, you’re paying them money. Some of it comes back to you as taxes, which you’re again using to deliver services and pay salaries, and……..
That’s all governance is about. Keep the money circulating. Because it’s job is to look after us. And this is how it’s all done.
So, when you exploit loopholes in the system and go “off-grid”, the Central Bank effectively loses track of your money. And when it loses track of your money, it is unable to factor in the effect of such money when evaluating the health of the economy. What happens as a result is an erroneous analysis of the economy, which in turn leads to (slightly) miscalculated corrections that do not have the entire required effect on the economy.
Secondly, when you don’t pay your taxes, you are disturbing the money circle that is like a match made in heaven for allowing the government to do its job: deliver services.
No wonder governments go crazy about black money!