June 24 – Essay: 2026 | UPSC Daily Answer Writing Practice PDF Download

The Functioning of an Unsanctioned Sector (Black Money) in Indian Economy

(1) Opening: Meaning of black money (Estimates of black money)

(2) Body: 

Causes of its existence:

• Legacy of World War II
• Post-war reconstruction
• High tax rates and their defective structures
• Bureaucratic controls
• The steady increase in public expenditure
• Transactions in real estate
• Inflations in real estate
• Moral standards
• Weak deterrence

ill effects

• Possible remedies.
• Government Measures.
• Drawbacks.

(3) Closing: Suggestions to curb black money

Sample Essay

"Corruption is paid by the poor." – Pope Francis

Black money, or the parallel economy, refers to an unsanctioned sector in the economy whose objectives run parallel and in contradiction with those of the legitimate sector. This illicit economy accentuates income inequalities and frustrates the State’s attempts to establish a socialist pattern of society. Black money is generated by activities kept secret, unreported to authorities, and thus untaxed. It is defined as the aggregate of taxable income not reported to tax authorities. This shadow economy has gained social acceptability and serves as a key source of party funds, accumulating not only among businessmen but also among dishonest bureaucrats and unscrupulous politicians. There is no firm estimate of black money’s size in India, but tentative guesses suggest it rivals the white economy, earning the term "Parallel Economy." Criminals, smugglers, hoarders, tax-evaders, and other anti-social elements amass this wealth, undeterred by legal punishments. The Supreme Court estimates black money in India at ₹25,000 crores to ₹95 lakh crores. The total amount deposited in foreign banks, particularly in Switzerland, is uncertain, with claims ranging from US $1.5 billion (per Swiss authorities) to an improbable US $95 trillion. A 2024 Finance Ministry report noted 92% of black money remains within India, while recent data from 2025 shows ₹3,128 crore collected in taxes and penalties, with ₹22,450 crore in undisclosed credits linked to 1,050 entities in the Panama and Paradise Papers leaks.

The genesis of black money traces back to World War II, a period of economic crisis marked by hyperinflation, price escalation, and high taxation to raise government revenue. This fostered tax evasion and black marketing, driven by a psychology of profiting from shortages rather than productive sales expansion. Post-war, excessive and poorly implemented controls and regulations failed to deliver scarce goods, breeding corruption. Bribes, or "speed money," were used to secure permits, quotas, and licenses, creating artificial shortages across imported and domestic goods, manufactures, and raw materials. Prices paid or received on these controlled goods far exceeded official rates, swelling black money. The tendency for tax evasion stems from high marginal tax rates—30.9% for individuals in 2013 and corporate rates of 33.66%–34.61% from 2006–2015, per World Bank data. In 2025, India’s individual tax rate remains at 30% for high earners, with corporate rates reduced to 22% for new companies under reforms. Indirect taxes, like customs and excise duties, constitute up to 80% of tax revenue, ​but evasion is rampant in sectors like cotton fabrics and plastics, as per the National Institute of Public Finance Policy. The progressive decline in direct-to-indirect tax revenue ratios highlights severe direct tax evasion.

The steady increase in public expenditure results in large leakages into unaccounted income streams. Non-poor beneficiaries perpetuate these schemes, attracted by easy funds, while political funding further fuels black income growth. Real estate transactions significantly swell black money through practices like "pugree"—a scarcity premium in rent-controlled properties—and under-declaring property values to evade capital gains tax, wealth tax, stamp duty, and house property tax. Both sellers and buyers benefit, entrenching the parallel economy. The general deterioration in moral standards and weakening inhibitions against tax evasion exacerbate the issue. Despite adequate legal provisions, deterrence is weak. The system of permanent account numbers is incompletely adopted, and coordination of external information is lacking. Systematic surveys for detecting evasion are underutilized. Black money, often held in unproductive assets like real estate, land, buildings, gold, or diamonds, or squandered on ostentatious consumption, contributes little to productive activities.

The consequences of a substantial black economy are profound. It misinforms about the economy’s true state, leading to faulty diagnoses and inappropriate policy actions. Tax evasion reduces the tax system’s elasticity, undermines equity, and affects resource allocation. It destabilizes monetary policy, worsens income distribution, and widens the gap between the haves and have-nots, undermining societal fabrics. Dishonesty becomes normalized, and trickery is seen as better than hard work, delivering a hard knock to the moral fabric of society.

Possible remedies include substantial reductions in taxes on company profits, personal income, wealth, stamp duties, and estate duty, with periodical upward revisions of tax exemptions, allowances, and brackets to neutralize inflation’s impact. Reducing stamp duty on real estate transactions to 5% ad valorem and simplifying tax structures with moderate rates and fewer deductions could discourage evasion. To curb smuggling of high-demand items like electronics, artificial fibers, and watch components, excise and customs duties should be reduced. Shifting from quantitative import controls and import licenses to tariff regulation, simplifying capital goods clearance, and easing exchange controls are recommended. Removing price controls where possible, introducing dual pricing, and relaxing rent control laws without undermining tenant security are also suggested. A floor-level state funding for election expenses for Lok Sabha and state assembly candidates, alongside a reward-and-punishment system and higher remuneration for senior government officials, could reduce corruption. The government should establish a national fund for slum clearance or similar social objectives with ₹120 crores seed capital, floating debentures with a 7–10-year maturity and 7.5% interest rate, exempt from gift tax but liable to wealth and income tax, without questioning fund sources. Ways to discourage asset undervaluation to avoid gift or wealth tax, reducing these tax rates, and abolishing estate duty are essential. Expanding the tax net, rationalizing indirect taxes through the Goods and Services Tax (GST, implemented 2017), increasing penalties for unreported transactions, and overhauling the control/licensing/permit system are critical. GST has enhanced supply chain transparency, reducing evasion. Better pay for tax administrators and a societal shift in attitudes toward tax compliance are vital.

Government measures include Voluntary Disclosure Schemes (1951, 1968, 1975), yielding ₹1,200 crores in disclosed income with amnesty. The 1997 Voluntary Disclosure of Income Scheme (VDIS) was successful, disclosing ₹12,000 crores at concessional rates (30% for individuals, 35% for corporates) with immunity from further inquiries, open from July 1 to December 31, 1997. Demonetization of ₹1,000 notes in 1978 saw ₹160 crores reconverted, while the 2016 demonetization of ₹500 and ₹1,000 notes had limited impact on non-cash assets like gold and real estate. Special Bearer Bonds and the Non-Resident Investment Scheme attracted some black money held abroad. Recent measures include tax deduction at source (TDS), promoting a cashless economy, and mandatory PAN for real estate and bullion purchases. India’s 2005 accession to the Financial Action Task Force (FATF) and laws like the Prevention of Corruption Act and the Benami Transactions (Prohibition) Amendment Act, 2016, reflect progress. 

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, targets foreign assets, recovering ₹5,200 crores by 2025. Renegotiated Double Taxation Avoidance Agreements (DTAAs) with countries like Mauritius and Singapore, and India’s 2016 signing of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, enhance global cooperation. The FATF’s 2025 Mutual Evaluation Report praised India’s "high level of technical compliance" in combating illicit finance, placing it in the "regular follow-up" category, a rare achievement for a major economy. However, challenges remain, including pending money laundering trials and gaps in sectors like gems and jewellery, where only 10,000 of 1,80,000 dealers are registered, per 2025 reports.

These schemes, except VDIS, primarily target cash-based black money, leaving assets like gold, jewellery, and real estate largely untouched. They also discriminate in favor of tax evaders over honest taxpayers. The need of the hour is greater political will, global coordination, and public commitment to tax compliance. People must honestly fulfill their duty to pay taxes, enabling the government to provide equitable services and dismantle the parallel economy.