Such is the size of India's black money that India saved it from 2009 recession.
I will explain how.
Consider these two contrast in property market:
1) In India, generally a buyer does not report full value of the property in order to save lot of taxes and instead show some amount less than the actual price and pay the rest in cash i.e. black money. So the banks are giving loan on prices less than the actual amount of the property.
2) Elsewhere(The US,Europe etc), the price of property is declared as it is or even in some cases inflated amount is declared to get hefty loans.
So when the property market crashed, banks in The US, Europe were sitting on huge amount of bad loans however their counterparts in India were sitting comfortably.
Black Money -
It is not easy to calculate the magnitude of black money in any society. The economists in the United States, the United Kingdom, Norway, Sweden and Italy adopted different measures but could not estimate the amount involved in black money.
Norway and Sweden used questionnaire method for eliciting answers from persons whether they had participated in illegal activities as buyers or sellers. Italy attempted to estimate the underground economy by finding out the difference between the size of the labour-force officially reported and actually employed. This enabled the authorities to determine productivity in the underground sector.
The United Kingdom tried to assess parallel economy by comparing the official estimates of the Gross National Product (GNP) made from the consumption side with those made from the income side. In the United States, Guttman assumed that only cash is used in illegal transactions. He tried to find out the difference between currency required for economic transactions in a fixed period and actual currency held outside banks in the same period.
In spite of the varied methods used, it is not possible to estimate the magnitude of black money in a society, even though it is described as a world-wide phenomenon. It is said to be in operation not only in the developing countries but also in the developed countries like the United States, the United Kingdom, Russia, Japan, Canada, France, Germany, etc.
A study conducted by the IMF about a decade and a half back showed that in regard to the size of the underground money, India holds the first rank followed by the United States and Canada having the second and the third ranks.
In India, black money or unaccounted wealth estimated by Prof. Kaldor in 1953-54 as Rs. 600 crore was estimated by Wanchoo Committee as Rs. 1,000 crore in 1965-66 and Rs. 1,400 crore in 1969-70. Rangnekar placed the figures of black money at Rs. 1,150 crore for 1961-62, Rs. 2,350 crore for 1964-65, Rs. 2,833 crore for 1968-69, and Rs. 3,080 crore for 1969-70.
Chopra’s estimate (Economic and Political Weekly, Vol. XVII, Nos. 17 & 18, April, 24 and May 1, 1982) showed that black money in 1960-61 was Rs. 916 crore which increased to Rs. 8,098 crore in 1976-77. According to Gupta (Economic and Political Weekly, January 16, 1982:73), the amount of black money in our country was Rs. 3,034 crore in 1967-68 and Rs, 40,867 crore in 1978-79.
According to his estimate, black money which constituted 9.5 per cent of the GNP in 1967-68 swelled to nearly 49 per cent in 1978-79. In 1981, black money was estimated by one source at Rs. 7,500 crore (6.8% of the national income at 1981 prices) and by an other source at Rs. 25,000 crore (22.7% of the national income at 1981 prices).
The National Institute of Public Finance and Policy estimated the quantum of black money in economy in 1985 at around Rs. 1, 00,000 crore or about 20 per cent of the national income. The Planning Commission study, however, estimated it to be in the range of Rs. 70,000 crore. Further, it is generated at the rate of Rs. 50,000 crore per year.
The flight of capital has resulted in an overseas stash which government officials conservatively place at $50 million (about Rs. 1, 30,000 crore). In 1996, the estimated black money in our country was believed to be more than Rs, 4, 00,000 crore {The Hindustan Times, January, 20, 1997).
Recently, Prof. Arun Kumar of Centre for Economic Studies, Jawaharlal Nehru University, Delhi has authored a book on black money in India (1999). He holds that black economy is equivalent to 40 per cent of the GDP out of which 32 per cent is in the legal sectors (business and professionals like doctors, film-stars, etc.) and 8 per cent in the illegal sector (narcotics, etc.) (The Hindustan Times, September 12, 1999).
Some scholars have pointed out that of the total black money in our society, about one-fourth (26%) is from the tax-evaded income. In the United States, black money is expected to be about 8 per cent of its Gross National Product (GNP). While in India, black money is more from legal sources (about 80%), in the United States too it is more from legal sources (about 75%).
There is no official estimation of amount of black money that has been sent to foreign countries by India persons as recently said by government.
“Determination of black money sent to foreign countries by Indian persons is subject matter of investigation and other follow-up actions by relevant law enforcement agencies, including Income Tax Department, Enforcement Directorate, CBI etc, which is on-going.
“However, details regarding the amount of money involved in such cases are not maintained centrally,” Minister of State for Finance Jayant Sinha said in a written reply to Rajya Sabha.
Asked whether Indian share in black money stashed in tax havens across the world is at USD 152-181 billion, as per the recent estimate by economists from Bank of Italy, he said there seems to be no empirical evidence to suggest that the figures arrived at on the basis of certain assumptions and presumptions, necessarily represent Indian’s share in black money stashed in tax havens.
These economists have reportedly analysed data from IMF and the Bank of International Settlement (BIS) and applied certain assumptions to arrive at the estimation, he added.
The minister pointed out that by applying another set of assumptions, the same economists have reportedly estimated Indian share in black assets at USD 4-5 billion.
“In the context of these estimation, they have reportedly put the caveat that these estimations have to be considered with great care and in no way can represent firm data,” Sinha said.
Black money is mostly in circulation through stock business and business, legal and illegal and it is also stashed in fixed assets and bullion. It is reported to be of 6% of the total money transactions. We cannot define its percentage in GDP. GDP represents the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time. If a business man who has Rs.one crore of black money (undeclared income) invests it in his legal business, it becomes white. If I buy goods from a businessman who has black money in his business circulation and sell it as a retail businessman and pays tax on the profit earned by me, that part of the black money held by the wholesale businessman becomes white. It is very difficult to quantity the black money in GDP.
Source - Quara
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