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Day 12 – Q 1.The existence of black or parallel economy has serious implications for government finances. Do you agree? Substantiate.

1. The existence of black or parallel economy has serious implications for government finances. Do you agree? Substantiate.  

काली या समानांतर अर्थव्यवस्था के अस्तित्व का सरकारी वित्त के लिए गंभीर प्रभाव है। क्या आप सहमत हैं? पुष्टी करें।


Parallel economy, is based on the unaccounted money of the people and is also know as the ‘Black Money’. An alternative term for it is ‘Black economy’. It is a great menace to the Indian economy. Black money is nothing but money generated in transactions which are hidden from Government in order to avoid tax. This is usually done in cash because cash transactions do not reveal the identity of the person carrying out the transaction. It’s elimination will help the society in more than one way.


The following are some of the implications parallel economy on government 

  • A large underground economy and growth of black income lead to under-estimation of the true size and incorrect picture of the economy by the officially complied national income data.
  • Black money is largely attributed to tax evasion. Its direct impact is the loss of the Government revenue. Since the Government fails to get sufficient tax revenue due to large-scale tax evasion, it is forced to resort to high taxation and deficit financing which again carry their ill-economic effects.
  • When the Government resorts to progressive direct taxation to maintain equity in the distribution of the tax burden, the tax evasion and growth of black money affect the very concept of social justice by not allowing the desirable reduction in inequalities of incomes. Again, when underground activities like smuggling etc. could not be taxed, the Government will impose higher taxes on officially sanctioned activities.
  • Growth of the black economy causes regressive distribution of income in the society. When the black money grows faster, rich becomes richer and the poor become poorer. By way of concentration of income and wealth in few hands, the black money widens the gap between the rich and the poor.
  • Black money is disposed off by lavish spending on travels and tours, entertainment, ostentatious articles, financing of extravagant elections etc. This has also lead to many social evils and deteriorated the values of life of the common people.
  • The black money has altered the choice coefficients in the market in favour of luxuries, which lead to the diversification of productive resources from essential goods to the non-essential goods.
  • Black money holders are always in a position to put their prior claim over the scarce goods in the market due to their readiness and ability to pay more, thereby depriving the honest and poor people from their legitimate share. This obviously reduces the net economic welfare of the Indian society at large.
  • Black money is largely responsible for the deterioration of general moral standards of the society. Black income generation implies a deviation from the accepted norms in society and from the point of view of the society is unethical.
  • As a consequence, the consumption pattern is titled in favor of the rich and elite, at the cost of encouraging production of articles of mass consumption. A rise in overall consumption leaves fewer resources for investment in priority areas, having an adverse effect on production.


The exact effect of black money on any economy shall be summarized as, Growth of economic dualism. Under-estimation of the true size of the economy, Tax evasion, thereby loss of revenue to Government, Undermining equity, Widening Gap between the Rich and Poor, Lavish Consumption Spending, Distortion of Production Pattern, Distribution of Scarce Resources, Deterioration of General Moral Standards of the Society, Effects on Production.

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