what is the effect of black money on our economy
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Government Spending - More than 50% of the funding that the GOI requires to run our economy comes from the taxes people pay. So when black money eats up a part of this tax, the government deficit increases. The government has to balance this deficit by increasing taxes, decreasing subsidies and borrowing. Borrowing leads to a further increase in the government debt. If the goverment is unable to balance the deficit it decreases spending which affects development.
Money Circulation - In order to multiply the money that circulates within an economy the banks give loans to people in need. Now consider the case of the average person who does not have the funds to directly pay up for the house he wants to buy (person A in Amar Prabhu's answer). By taking a loan from the bank to buy the house, the person is also increasing the money supply in the economy in a regulated way. So when he is unable to complete the transaction, a legitimate opportunity to increase money supply in the economy has been lost.
The infusion of unaccounted black money in the economy leads to higher inflation.
It also increases the disparity between the rich and the poor. Firstly, the black money keeps circulating among the wealthy and creates more opportunities for them. Secondly, the increase in the inflation hits the poor the most.
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Money Circulation - In order to multiply the money that circulates within an economy the banks give loans to people in need. Now consider the case of the average person who does not have the funds to directly pay up for the house he wants to buy (person A in Amar Prabhu's answer). By taking a loan from the bank to buy the house, the person is also increasing the money supply in the economy in a regulated way. So when he is unable to complete the transaction, a legitimate opportunity to increase money supply in the economy has been lost.
The infusion of unaccounted black money in the economy leads to higher inflation.
It also increases the disparity between the rich and the poor. Firstly, the black money keeps circulating among the wealthy and creates more opportunities for them. Secondly, the increase in the inflation hits the poor the most.
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Explanation:Higher amounts of black money in the economy often lead to increased corruption. On the other hand, black money can reduce the negative impact of oppressive laws. Black money can be illegally disguised as legitimate money through money laundering.
The portion of a country's income tied to black money affects the economic growth of the country. Black money causes financial leakage, as unreported income that is not taxed causes the government to lose revenue. In addition, these funds rarely enter the banking system.
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