B.Com Ist Year Parallel Economy Long Short Question Answer Notes

B.Com Ist Year Parallel Economy Long Short Question Answer Notes :- Study Material Long Short Question Answers Unit-wise chapter wise syllabus of the content Notes Sample papers examinations papers .

Parallel Economy

18. What is meant by Parallel Economy (Black Money) ?Write causes and demerits of Parallel Economy. What steps have been taken by the government to check it? .(Meerut, 2013)

Ans.                             MEANING OF BLACK MONEY NOTES

Black money refers to that income which is not disclosed to government authorities. Neither any account is maintained on such income nor any tax is paid on it. It is earned either through illegal activities or through evading tax on income. People in India disclose their income too less so that taxes could be evaded and they remain outside the bracket of income tax. These activities help in the generation of black money, Black money is also known by unaccounted money, illegal money, unofficial money etc.


The unaccounted transactions of production, consumption and investment which take place parallel to the transactions duly accounted for, constitute the Parallel Economy. Thus, the parallel economy refers to functioning of an illegal or unsanctioned sector in the economy alongwith the legal sector. The Indian economy exhibits dualistic structure involving the co-existence of legitimate and illegitimate transactions pertaining to production, consumption and investment.

The nagnitude of the parallel economy has grown and proliferated with the expansion of economic activities under both public and private sectors. It is also referred to as ‘black economy because black income is the basis of its establishment. It run through the black money which has made government plans and programmes ineffective, create inequalities in income and wealth a breeding a new class of black rich in the society.


The emergence of the black economy in India can be summed up as follows:

High Rates of Taxation: High rates of taxation is a major esponsible for tax evasion. Due to high rates of taxation, the won of tax-evaders and the amount of tax evasion have been ng in India. People do not produce the account of their actual income becouse if they disclose their actual income then they are charged with higher rates of taxes. Thus, high rate of taxes help in generation of black money. –

(2) Rapid Increase in Prices: Black income is both the cause and consequence of inflation. During inflation money wages and profits both rise, but profits rise at a higher rate than money wages. But businessmen show less profits to reduce the burden of tax and thereby generate black income. Rapid increase in prices also motivates hoarding of goods, black marketing and speculative practices in the country which is the main source of black money.

(3) Inefficient Enforcement of Tax Laws: Enforcement of tax laws and tax administration in our country is very weak. An inefficient administration of tax laws is responsible not only for tax evasion but also tax outstanding by way of arrears. The inefficiency in the administration of tax law is due to loopholes in tax laws and the prevailing corrupt practices.

(4) Smuggling Actiities : The smuggling also plays a vital role in generation of black money. All the transactions related to smuggling are illegal and unaccounted, thereby generate black money in the market.

(5) The Regime of Quantitative Restrictions: The regime of controls, permits, quotas and licenses has been responsible for the generation of black money. In our economy, price control has also responsible for the generation of black income as the traders have been selling the scarce commodities at prices higher than the controlled prices determined by the government.

(6 Donations to Political Parties : In India, business system and political system are mutually supporting each other to degenerate the legitimate economy into a parallel economy. The big business houses give donations to political parties to meet their election expenses. In return of donations, the businessmen secure concessions by getting policies relaxed to their favour to generate black income. This vicious circle of unaccounted income and political power goes on operating.

(7) Defective Election System : The political parties spend huge amount in the elections. This expenditure is financed through unaccounted money. Thus, the election system of our country helped in the generation of black money.

(8) Transactions in Real Estate Property : The black income is generated by getting the sale of the property registered at understated value. This absorbs the black income of the purchaser and creates black income for the seller. Thus, there is a vicious circle of black income generation in real estate transactions.

(9) Corrupt Bureaucracy: In India, large sized and corrupt bureaucracy is also responsible for the generation of black money. The bribes and the receipts of commission have become normal phenomena in public life. The chartered accountants, income tax consultants and liason officers solicit favours for their principals from civil servants and politicians through bribes. It help in increasing black money in the economy.


The generation of black income has evil effects on the functioning as well as the growth of Indian economy. Some of the serious consequences of black money are as follows:

(1) Increase in Social Inequity : The operation of black economy transfer the burden of tax liability to the shoulders of good citizens. Thus existence of parallel economy cause social injustice. and increase the inequalities of income.

(2) Loss of Revenue : Government has to bear huge loss of revenue every year due to evasion of taxes. It affects the pace of economic development of the country adversely.

(3) Distortions in Investment Pattern: The black money is responsible for distortions in resource allocation. It encourages investment in precious stones, jewellery, luxury items etc. This has an adverse impact on the growth of the economy.

(4) Increase in the Prices: Black income is one of the sources of indlation in India. It is due to the fact that a major portion of black money is used for the purchase of real estate and luxury good. thereby pushing up their prices.

(5) Problems in the Formulations and Implementations of Economic Policies : Due to existence of black money, true statistical data related to production, consumption, saving and investment are never available. As a result of this, the nolining an. programmes do not yield the targeted results. The monetary and fiscal policy also fails to achieve their objectives.

(6) Increase in Demonstration Effect: The black money give rise to demonstration effect in the country as major part of black money is used in non-essential articles of conspicuous consumption. As a result, the consumption pattern is titled in favour of the rich and elite classes at the cost of encouraging the production of mass consumption goods.

(7) Increase in Immoral Deeds : Due to generation of blank money, serveral immoral practices take place in the society. Blan income is spent on wrong and immoral deeds like alcoholic drinks and affluent life style etc. It also encourages corruption in the society.

(8) Adverse Effect on the Economic Development: Black money creates obstacles in the pace of rapid economic development of the country. Due to black money, the whole development process becomes void and useless. True measurement of the national income, saving and consumption can not be done as it is very difficult to make a right analysis of black money. This affects the progress of the country adversely.


Government of India has been persuing various policy measures to check the generation of black income. The main efforts done by the government are as under:

(1) Demonetization: It is the oldest method of unearthing the black income. It refers to the withdrawal of currency notes in circulation. Generally, black income are held in the form of cash balances comprising currency notes of high denominations. In 1978, government demonetized the notes of high denomination of Rs. 1,000, Rs. 5,000 and Rs. 10,000 to check the parallel economy.

(2) Voluntary Disclosure Schemes : The government of India from time to time, launched various tax amnesty schemes. These are voluntary disclosure schemes which grants complete immunity from inquiry and investigation regarding the source of incomes disclosed. The holders of black incomes are permitted to convert their income into white money by paying taxes.

(3) Reforms in Tax Structure: To check the black money, reforms in tax structure is also necessary. For this government has made several structural changes in tax administration. 1 government have removed most of the controls during last decade.

(4) Special Bearer Bond Scheme of 1981 : Black money, the order of Rs. 1,052 crores could be mopped up through the Spec Bearer Bond Scheme of 1981. The holders of these bonds enjoy complete immunity from investigation about the source of mone, deployed in their acquisition.

(5) Raids : On the basis of certain clues or information, raids are conducted on the business premises and residential house to seize incriminating documents suggesting concealment of incomes and also to seize unaccounted cash. The raids also help to unearth the immovable assets which go unreported in wealth tax returns.

(6) Measures to Check Evasion of Taxes : On the recommendations of various committees and commission, large number of legal and administrative measures were undertaken for checking evasion of taxes.

Short Answer Questions

Q.1. What is meant by black money and parallel economy?

Ans. See Page 77.

Q.2. Discuss the main causes of generation of black money.

Ans. See Page 77 and 78.

Q.3. Discuss the effects of black money on the economy of a country.

Ans. See Page 79 and 80.

Q.4. What efforts have been made by the government of India to check black money?

Ans. See Page 80 and 81.

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