Do you ever wonder why the purchasing power of rupee has come down considerably? If the paper currency is not supported by sufficient gold reserves with the government, then the value or worth of the same may not take much time to touch the rock-bottom. This precisely means inflation. Another contributing factor is the ratio of consumer goods to the paper money in circulation. Yet another aggravating factor is the black money which, by creating parallel economy, directly helps the growth of by-product of three factors: massive personal taxation in terms of income-tax, wealth tax, capital gains tax and gift tax which, tax pundits assure us, is the sophisticated form of fiscal encirclement of the income tax assesses; scarcities of manufactured and consumer goods brought about by under-development of the country, and the regulation and controls which are themselves the secret temptation to the people to circumvent.
Black money has today become a fact of life. It is good thing so long as such money keeps sterilized in clandestine safes and is out of circulation, because this reduces the quantum of currency that does mischief with prices. Non-utilization of black money for trade or for hoarding is monetarily welcome development as it keeps the inflation under check by the mere fact of the corresponding subtraction from money supply. But the man who has the black money knows how to utilize it. He knows that life is short and therefore, must be lived in all its intensity. He therefore, builds an extension to his house, performs a family wedding or goes and buys gold or precious stones that are easy to carry and hoard. The high echelon of black money holder reserves black money for financing parliamentary or local elections and treat the money earmarked to back particular candidates, as an investment in the bank of providence. They are aware these are long gestation outlays of resources and are content to use the candidate as a command performer at the appropriate time.
Conspicuous consumption is not possible with taxed incomes and everybody knows this. But spending black money on illumination, feasts, and imported car purchases, is a way of converting black money into white, some of the activities that hoarders of black money indulge in.
Every time there is a talk of demonetization, more of these clandestine hoards get dissipated and we have a fresh spiral of inflation. Today, perhaps there are more black goods, black gold, unaccounted collections of precious stones, more decorated and elegant homes than black currency. Indeed, prevailing inflation is in some measure, ascribable to currency released under compulsions of fear of impending measure, even as in major part, it is due to the vastly enhanced money supply by the exchequer.
The accumulation of black money will cease in the major part when our direct taxes get reduced; when our production of goods increases through a consequential abolition of all controls and regulations; and when we do away with two tier prices for all our controlled goods. Simply preaching against the unethical character of black money, without corresponding steps to remove the motivations to make it, will be just waste of time. Threats and warning to the holders of black money will only result in further inflation. To check this evil, some kind of Indemnity Loan Issue applicable to holders of black money on the lines of gold bonds, etc., can help bring hidden currency into the banking system for use by the economy instead of acting as ground-swelled of inflation.