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Black money: A major threat to Indian economy
Jun 24, 2014


With a size that could exceed the accounted money in the economy, it would not be an exaggeration to say that black money has been a black hole that has hugely affected the growth prospects for India. The issue of black money has haunted the Indian economy for a long time now. The UPA Government had faced a lot of flak for not being able to bring this money back. Retrieving it was on the top of the agenda for NDA Government and one of the major highlights of its election campaign. Now that Mr. Modi's Government has come to power, it is apparently doing its best to crack whip on the offenders. In fact, it constituted a Special Investigation team (SIT) to track black money abroad on the first day in office.

As per different estimates, the illegal assets of Indians abroad could be double India's GDP. As we all know, a bulk of it is stashed in Switzerland. The latter has been one of the tax havens where the untaxed money is held.

Data Source: Swiss National Bank, Indianexpress.com

As per recent news, finance minister Arun Jaitley has asked for the details of Indians that have stashed unaccounted money in Swiss banks. In contrast to its earlier stand of keeping such details secret, Switzerland has softened under sustained pressure from all quarters. It seems it is ready to unveil the tax related details.

While this is a positive development, it can hardly be the remedy for the deep rooted rot of black money. As an article in Business Standard suggests, what Government needs to target is the policies and incentives that generate black economy in the first place. First of all, tax treaties that have so far allowed such free laundering of black money should be modified. Further, better disclosure norms; such as for Participatory notes (P- notes) should be ensured to make it tough for offenders to bring back this black money, thus killing the incentive to launder money in the first place. It is important to note here that P- note is an instrument issued by registered FIIs to overseas investors. The latter in turn invest in the Indian stock markets without registering themselves with the Securities and Exchange Board of India (Sebi).

However, doing this would be a real test for the Government. Such a move could impact flow of black money into the Indian stock markets that have been surging to new highs on huge FII money inflow. This would likely impact the market sentiments in the short term and burst the stock market bubble, something that has spooked the Governments of the past. Still, we believe it's a bitter pill that the new Government should pop to ensure growth and stability in the economy and Indian stock markets over the long term. Meanwhile, investors would do well to not to get carried away by bullish sentiments in the stock markets but focus on bottom up stock picking approach.

This Chart Of The Day was published in The 5 Minute WrapUp - Will anti black money move impact stock markets?

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