Different persons have understood this expression differently and the term has not yet acquired a precise connotation. However, black is a colour which is generally associated with evil.

While it symbolises something which violates moral, social or legal norms, it also suggests a veil of secrecy shrouding it.

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The term black money consequently has both these implications. It not only stands for money earned by violating legal provisions—even social conscience—but also suggests that such money is kept often secret and not accounted for.


Black money is generated in many ways, such as tax- evasion, under-invoicing and over-invoicing, in all cases by violation of laws, rules, licensing procedures, excise, income tax and foreign exchange regulations, capital gains and wealth tax.

But the most important and socially dangerous form of black money generation is related to the production, distribution and hoarding of commodities.

It was during the Second World War that the terms Black Money and Black Market came into vogue.

Owing to imposition of various controls on distribution and prices, a clandestine market had sprung up in which goods were available but at prices higher than the controlled ones. The term ‘black money’ became current to describe the money received or paid in such black market deals.

Since disclosure of these deals, which were entered into in violation of rules and regulations, would have invited severe penalties, these were naturally not entered in the regular books of account and consequently remained concealed from the gaze of the tax authorities as well.

Afterwards, though black market in the commonly understood sense of the term became rare with the lifting of several controls, transactions still continued to be carried on by unscrupulous elements in trade and industry outside their books of account, as this practice helped the parties concerned to evade the payment of taxes thereon.

With the passage of time, black money acquired a wider connotation—wider than its association with black transactions alone.

Today, the term ‘black money’ is generally used to denote unaccounted money or concealed income and/or undisclosed wealth, as well as money involved in transactions wholly or partly suppressed. Some consider only that as black money which had its origin in clandestine transactions and is currently in circulation. There are others who assert that this is taking too narrow a view of black money.

According to them, black money denotes not only unaccounted currency which is either hoarded or is in circulation outside the disclosed trading channels but also its investment in gold, jewellery and precious stones made secretly and even investments in lands and buildings and business assets over and above the amounts shown in the books of account.

Tax evasion and black money go together like love and marriage. While tax evasion leads to the creation of black money, the black money utilised secretively in business for earning more income inevitably leads to tax evasion.

While all tax evaded income represents black money in a broad sense, all black money does not necessarily originate in tax evasion.

Black money is also made through surreptitious use of white money. In this sense, the proliferation of black money derives an additional impetus from the intermixing of black income and white income. This phenomenon arises essentially from the dual nature of the national economy.

Thus there is the “official economy” functioning on the basis of the official monetary system involving open transactions financed through identifiable sources of funds and operating in conformity with government rules and regulations. But there is another economy—a parallel economy based on unaccounted funds—operating simultaneously and competing with the official economy.

Over the years the parallel economy has grown in size and dimensions. Almost every sign of distress and human misery has been manipulated by anti-social elements to boost the parallel economy.

Black money operations and tax-evasion multiplied several fold in the wake of India’s partition which resulted in an influx of refugees, untold sufferings and scarcity conditions. Strange as it may seem, planning was also taken advantage of by tax-evaders and black money makers.

Unauthorised suppliers and agents and a host of racketeers have multiplied and their sole occupation is to discover ever- increasing vistas of secret operations and obtaining commissions and pushing through black money operations.

With the surge of planned expenditures came large government orders, massive industrial outlays, defence programmes and other investment, all creating a boom psychology—one which gave a further thrust to illegal cuts, commissions and transactions and the generation of more black money.

In the worst days of inflation, the artificial element of shortages has always been large; but as black money multiplied, the area of artificial shortages seems to have grown. The distortions in the industrial economy, the periodic foreign exchange crisis and the rigorous import curbs have all provided a fertile field to anti-social elements to ensure that their parallel economy is kept flourishing.

In this environment, the smuggling of foreign consumer goods, gold and gems, speculation in commodities and land and surreptitious money lending have by now become the main props of the black money economy.

Tax evasion and black money have now reached a stage which can only be described as a very big menace to the economy and a challenge to the fulfillment of the avowed objectives of distributive justice and setting up of an egalitarian society.


A recent study by the National Institute of Public Finance indicates that the amount of black money would be Rs. 60,000 crores—it is more than what the Union and State Governments collect by way of direct taxes.

According to one estimate presented by the Finance Minister in Parliament, in 1971-72, black money was 16 per cent of the GNP; in 1980-81 it increased to 52 per cent of the GNP.

The latest study of the black money problem, made by the National Institute of Public Finance and Policy, was sponsored by the Union Finance Ministry. It was concluded that black income generated in 1983-84 might have been Rs. 37,000 crores or roughly 21 per cent of GDP. According to Dr. Kaldor, the income tax loss through tax evasion was of the order of Rs. 200 to 300 crores in 1953-54.

It is interesting to refer here to an IMF study on inflation and black money published in 1980. The study revealed a wide-prevalence of black money both in developed and less developed countries. According to this study, black money constitutes 7.5 per cent of the GNP in the case of the UK, but in the USA it is as high as 33.5 per cent of the GNP.


The effects of black money on the economy are disastrous. As black money is largely generated by unaccounted deals, its first casualty is the revenue because it loses the tax which would have come to the exchequer if such transactions had been done in the open and duly accounted for. Black money and tax evasion have also the effects of seriously undermining the equity concept of taxation and warping its progressiveness.

Together they throw a greater burden on the honest taxpayers and lead to economic inequality and concentration of wealth in the hands of unscrupulous few in the country.

In addition, since black money is, in way cheap money too, because it has not suffered reduction by way of taxation, there is a natural tendency among those who possess it to use it for lavish expenditure and conspicuous consumption.

The existence of black money has, to a large extent, been responsible for the inflationary pressures and unhealthy speculation in commodities.

Part of the black money has, to a large extent, been responsible for the inflationary pressures and unhealthy speculation in commodities.

Part of the black money which is not utilised in lavish consumption, goes to the purchase of bullion, precious stones and other valuables. This in turn encourages large-scale smuggling of gold into the country, causing considerable strain on its balance of payments position.

Further, there are those who by keeping their ill-gotten gains outside the country as deposits in foreign banks deprive the country of a part of its wealth which could have been put to productive use here.

There is also the oddity that a country where capital and foreign exchange resources are usually scarce and trade balance adverse, becomes a de facto lender of aid and capital to economically advanced nations with concealed outflow of funds.

Not infrequently, part of the black money is also hoarded within the country so that it may escape detection.

This results in immobilisation of investible funds, which could have helped in the economic growth of the country and in fostering the welfare of the common man in turn. Moreover, as black money cannot be utilised openly, many are tempted to put it into production of certain non­essential goods in the hope that the risk of detection would be less there.

Black money and tax evasion defeat government’s economic policies. Monetary policy involving severe restrictions on disbursement of credit comes straight in the face of a parallel (black) economy functioning outside the purview of the authorities.

When a dear money policy is pursued, the black money economy can frustrate this by opening up alternative sources of credit at free market rates.

One reason why the Government’s management of credit and money in recent years has been ineffective is the proliferation of black money and rampant tax evasion which provides a free access to surreptitious funds to those who desire them.

Black money encourages over-financing of business which is as dangerous as under-financing. These trends add further to the inflationary pressures in the country.

One of the worst consequences of black money and tax evasion is their pernicious effect on the general moral fibre of society.

They put integrity at a discount and place a premium on vulgar display of wealth. This shatters the faith of the common man in the dignity of honest labour and virtuous living.

For the first time in January 1981 the Central Government officially recognised the existence of black money in our economy and announced a scheme for allowing people with black money to invest it in Special Bearer Bonds without fear of being questioned about the source of their income.

The 10 year special bonds were offered at a face value of Rs. 10,000 per bond. Investors are entitled to receive Rs. 12,000 on each bond after the expiry of the 10-year period. These bonds confer tax-free benefits to the owners, sellers and buyers of the bonds.

The decision to float the Special Bearer Bonds was primarily based on the need to raise additional resources for development purposes without resorting to a heavy dose of deficit financing and excessive taxation.

The issue of Special Bearer Bonds, released twice, could tap only about Rs. 1,600 cores of black money which constitutes only a fraction of the existing black money.

One method which has been tried a number of times in India to unearth black money is Voluntary Disclosure of Income (VDI). The first VDI Scheme was experimented between May and October, 1951. This yielded additional revenue of about Rs. 11 crores.

There were further VDI Schemes in 1965-66 but total tax yield from these two schemes was only Rs. 16.2 crores. Another Voluntary Disclosure scheme was experimented in October, 1975, which covered both income and wealth.

This brought in total revenue of Rs. 250 crores by way of taxes on income and wealth which were voluntarily disclosed. In 1977-78 when the Rs. 1,000 notes were demonetised, as much as Rs. 800 crores went out of circulation.