Lot of Questions to Answer???

• Rs. 40k Crore: Spent by Indian Govt. on NREGA every year.

• Rs. 1.25L Crores: Estimated cost of Implementation of Food Security Bill

Macroeconomics Presentationon

BLACK MONEYNaveen Sounderajan

Pratik DukhandeRajaSekkaranRavi KaushalUday Kumar

Sandeep Jannu

Agenda

Introduction

Causes of Black Money

Macro-Economic Perspective of Black Money (Inflation, Fiscal Deficit)

Methods to Estimate Black Money

Converting Black Money into White Money

Effects of Black Money

Govt. initiative to curb Black Money

Suggestions to Curb Black Money

Money Gone Black…• Black money is earned through illegal activity and, as such, is not taxed.

Recipients of black money must hide it, spend it only in the underground economy, or attempt to give it the appearance of legitimacy through illegal money laundering.

• Possible sources: Drug trafficking, Weapons trading, Terrorism, Prostitution, Selling counterfeit or stolen goods and selling pirated versions of copyrighted items such as software and musical recordings.

Causes of Black Money

Shortage during War

Scarcity of Resources

Unfair Practices

Faulty Taxation and Excise Duty

Temptation of Tax

evasion

Downgrading of product

Price Control Policy of Govt.

Commodities

Artificial scarcity

Corruption

Bribes

Karnataka Coal Scam

Elections, Party Funds

BJP: Rs. 4000cores

Source of funds???

Real Estate Transactions

Devaluation of Property

• Understanding the implications of Black Money on • Inflation• GDP• Fiscal Deficit

Macro-Economic Perspective

Caus

es o

f Infl

ation

Demand Pull

BLACK MONEY

Disposable Income

Dearness Allowance

RBI’s Monitory Policy

Cost Push

Wages

Taxes

Raw Materials

Profit Margin

A Politician

Declare yourself a farmer

IT RaidUses PAN Share Market Deposit in Bank

Black Money

Swiss BankGold, Silver, Diamond

Plays Safe

Election CampaignMoney Lenders

YES YESNo No

Black Money & GDP

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Swiss Bank Liabili-ties

23373 15000 11000 9000 9500 12100

Fiscal Deficit 148600 250000 330100 412000 369000 520000

Estimated Total Black Money

136000 178000 226000 287700 306000 319000

50000150000250000350000450000550000

Black Money and Fiscal Deficit

Axis Title

Methods to estimate black money:Input/output method:

• Uses input/output ratio & input to calculate true output.

• Calculates black money as the difference between declared output & expected output.

• Useful only if applied to individual sectors but being used for the whole economy is useless.

• Ignores structural changes in the economy including technology.

Survey approach

Fiscal approach

Methods to estimate black money:Velocity of money method:

• Based on assumption that currency is used by both shadow & regular economy

• Money is used to circulate incomes in both regular & shadow economies

• Compare the velocity of money (average number of times currency changes hand in a year) to the income captured in the NAS (National Accounting System)

• Difference gives the black component.

• Assumption that NAS provides accounted incomes accurately cannot be true.

• Large proportions of incomes from unorganized sectors are not captured correctly.

Methods to estimate black money:Kaldor’s approach:

• Estimated non-salary income by breaking national income into:

1. Wages & salaries

2. Income of self-employed

3. Profit, interest, rent etc.

• NDP – Wages & salaries = total non-salary income

• Estimated actual non-salary income assessed to tax in each sector to find the total.

• Estimated non-salary income above exemption limit – actual non-salary income assessed to tax = black money

Variations in Economists’ estimates:

Limitations:• Excludes income generated through illegal activities

• Not standardized, no absolute figures/ small ranges, varies widely among economists.

• Taxes other than income tax are evaded (sales tax, excise duty, stamp duty etc)

Money Laundering and Converting Black money into White Money

Money Laundering

• The process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.

The Money Laundering Process

Placement Layering Integration

DISGUISED OWNERSHIP

CRIMINAL A

HAWALACompany’s account, promoted by A in foreign Countries

Company in India promoted by A

Hands over

DepositedInvests

As Shares

Dividends & Income

As white money

MIXED SALES

Increase Expenses with fake bills

WHITE MONEY

Both Mixed

Pay less tax

Converted

Long term bonds

Special Economic Zones

Section 10AA of Income Tax exemption:

• 100% Income Tax exemption on export income for 5 years.

• 50% for next 5 years thereafter.

• 50% of the ploughed back export profit for next 5 years.

Showing the amount as exports from SEZ’s.

Ill Effects of Black Money on Indian Economy

1• Mass Poverty: Inequitable distribution of income and hence

purchasing power

2• Low collection of taxes such as Income Tax, GST

3• Low GDP and widening fiscal deficit

4• Effective spikes of inflation in the economy

5• Crippled growth of the infrastructure within the economy

Steps taken to curb Black Money… Till Now

1• Successive waves of economic liberalization in India since the 1990s

2• Voluntary disclosure scheme in 1975

3• Demonetization of the notes of higher denomination

4• Foreign Exchange and Prevention of Smuggling Activities Act to curb smuggling

5• Withdraw from circulation all currency notes prior to 2005

6• CBDT has begun its operation of trailing stashed bank accounts of the Indians in

the tax havens (Tax Information Exchange Agreements)

Steps that can be taken to curb Black money

Simplification of tax laws

Implement GST and Direct taxes code

Sign Bilateral International Agreements to ensure sharing of information on tax evaders

Reforms in Sectors Vulnerable to Generation of Black Money: Bullion and Jewelry Sector, Real Estate, Cash Economy

Strengthening of the Prosecution Mechanism and FIU , CEIB & other institutions

Enhancing the Accountability of Auditors

Incoming and outgoing funds to NGOs and religious trusts must be regulated and transparent.

Thank You!!!