What is black money?

economy : What-is-black-money -2

Answer by Sunny Mewati:

*I have tried to keep Switzerland out of this answer as adding it would require further elaboration beyond the present scope of the question.

Black money is any money on which tax is not paid to the government. This is the universally agreed upon definition and most applicable to India. The process of transferring/moving this money is called laundering as opposed to 'transferring' because the money is essentially illegal and transfer/transaction has a positive connotation to them.

It's initiation is easy. If you earn money and you do not pay tax on it, wallah, you have just created black money. This is fairly common in India.

  1. You* go to a local convenience store ( kirana shop), buy something and do not ask for a receipt. That purchase is not recorded in the accounts of that store, he does not pay sales tax on it and the money you have paid him essentially becomes black money.
  2. You rent yourself an unregistered cab in New Delhi. There is no tax on that rent because the vehicle is not registered as a commercial cab. *swush* Black money.
  3. [Very very common]*** You buy/sell real estate/land. The cost of it is 100,000**. You pay 10,000 officially and pay 12 percent tax on it. You pay the remaining 90,000 'below the table' and do not pay tax on it. That 90,000 is black money.

There are hundreds of such examples. It is possible that you during the course of this day have created thousands of rupees in black money. Indians*** are quite good at it too having developed hawala and hundi over the ages.

Its effect on economic growth? This is easy.  Consider a continuously running water pump. How would the efficiency of this pump be affected if there was a water leak somewhere? Slowly all the water will run out through this leak and the pump would run dry and eventually collapse. An economy works in the same way, you earn money, you pay taxes to the government, government provides basic services, you pay taxes on it and life goes on. Black money disturbs this iterative process by contributing to financial leakage.
Black money is also a threat to national security. Money laundering is a very common way of terrorist financing.

But the most important negative effect of black money on an economy is in its opportunity cost. For a growing economy like India, time is of essence. We cannot afford to be complacent at such a crucial stage of our development. All black money represents the hundreds of beneficial projects we could have executed had we had that money. We could have build infrastructure, provided better health services, developed SME's etc if the money that is rightfully the governments' had not been diverted away.

We cannot quantify as of now if the Indian economy had been different if there was no black money as it is impossible to observe the counterfactual, it is still plausible to guess that we would have been better off.

Further reading: Sunny Mewati's answer to Why is the BJP not revealing the list of Swiss bank account holders to the media?
For the interested reader, read Sandhya Ramesh's answer here for the etymology of the term 'black money'. 

I skipped details for the sake of simplicity. Black money is a very complex phenomenon that involves, international law, international economics, bank secrecy, ethics and morality to begin with. I am happy to answer more specific question on it too.

Endnotes
* By you, I do not mean the OP or any other Indian in particular. The use of 'you' is solely for the convenience of the reader so that he can empathetically think if he/she has created(or helped to create) any black money today
** Undervalued registration is the most common source of black money in India. This article is a good account of how most of the 'fabled' black money is actually right here in India locked in undervalued registrations.
*** Indians along with North Africans have perfected the art of hawala transactions.

Thanks for the A2A Anon.

What is black money?

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