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How black money inflates asset prices...
Tue, 7 Jan Pre-Open

In simple words, black money means unaccounted money with no trail of origination. Hence, it does not find the eyes of the taxmen. Evasion of tax is the primary reason for the origin of a black money transaction. Also, if the source in acquiring money itself is illegal the motive is to not disclose the income origination avenue. Such transactions increase the amount of black money that floats in the system. This distorts the entire economy as it inflates asset prices particularly real estate. Since one cannot invest with black money in legitimate investment avenues the obvious asset class that attracts such money is real estate. Little transparency and cash transactions make real estate a preferred asset class for parking black money.

This is the primary reason why property prices are refusing to correct despite the demand supply dynamics not being in favor. Apart from real estate, various other asset classes like gold have also fallen prey to artificial pricing because of abundant liquidity that black money creates.

Black money finds its way into other asset classes like equities as well where disclosure standards for investment are stringent. For example, most of the black money that is stashed abroad comes as an FII inflow into India through round tripping. This not only inflates equity prices but also converts that black money into white.

In all, it is the common man that pays the price for living in a cash economy. He has to deal with property price inflation. Even gold goes out of his reach due to ever increasing prices. However, with demand for gold remaining intact, current account deficit widens as India imports majority of its gold requirement. This pressurizes rupee. Depreciating currency further imports inflation into the country.

However, the biggest disadvantage of black economy is the loss of government revenue in the form of taxes. As spending increases and revenue falls short of target due to tax evasion, the government runs a deficit. And in order to fund the deficit government borrows. This increases borrowing cost and crowds out private investment. Further, loss of revenue in the form of taxes means government is unable to spend on nation building. As a result, infrastructure growth suffers.

In short, the black money menace distorts the economics of asset pricing. It also results in loss of revenue to the government. Coming out with a stringent law to punish the offenders and tracing income source right at the origination is the need of the hour.

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1 Responses to "How black money inflates asset prices..."

Kirandeep Atwal

Jan 7, 2014

Read, “Picture of Dorian Gray” by Oscar Wilde. In west, if you own expensive car and have big house then, you will be respected everywhere. People will think that you are very ethical person and you can be trusted. In west, it does not matter how you accumulated your fortune.

As Indians keep on copying western culture, the problem of black money will increase dramatically. Previously, even big businesspersons keep low profile and drive ordinary car and lives in decent size houses. Now, upper middle class people are buying expensive cars and big houses on credit.

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