UPSC Prelims 2021 Q9: Indian Economy – Banking & Financial Sector
- (a) Diversion of resources to the purchase of real estate and investment in luxury housing
- (b) Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
- (c) Large donations to political parties and growth of regionalism
- (d) Loss of revenue to the State Exchequer due to tax evasion
Answer: (d) Loss of revenue to the State Exchequer due to tax evasion
Explanation
Black Money: The Main Government Concern
| Option | Concern Type | Government's Priority? |
|---|---|---|
| Diversion to real estate/luxury housing | Sectoral distortion | Secondary |
| Investment in unproductive assets (jewellery, gold) | Capital misallocation | Secondary |
| Political funding/regionalism | Political concern | Secondary |
| Loss of revenue via tax evasion | Fiscal loss to State Exchequer | PRIMARY |
Black money's chief government concern is revenue loss - it directly reduces the tax base, forces higher tax rates on honest taxpayers, and undermines the government's ability to fund development. Estimated tax evasion of Rs 4-6 lakh crore annually pre-GST. Post-GST and demonetisation (2016), formalisation has expanded the tax base.
Answer: (d) Loss of revenue to the State Exchequer due to tax evasion.
Why each option is right or wrong
- (a) Incorrect. Real estate diversion is a symptom, not the primary concern. Tax evasion is the root fiscal issue.
- (b) Incorrect. Unproductive investment is a concern but secondary to the direct revenue loss.
- (c) Incorrect. Political funding is a governance concern but the government's fiscal worry is revenue loss.
- (d) CORRECT. The main concern is loss of revenue to the State Exchequer due to tax evasion - it directly cripples government finances and forces higher taxes on honest citizens.
Key point
Main black money concern = tax evasion causing revenue loss to State Exchequer. Reduces tax base, forces higher rates on honest taxpayers, undermines development spending. Root fiscal issue behind demonetisation (2016) and GST (2017).
Remember
The main government concern about black money is the loss of revenue to the State Exchequer due to tax evasion. This reduces the tax base, forces higher rates on compliant taxpayers, and cripples fiscal capacity for development spending. Real estate, jewellery and political funding concerns are secondary symptoms.
Common mistakes
- Confusing symptoms (real estate, jewellery diversion) with the root problem (tax evasion).
- Missing that black money = untaxed income, so the primary loss is fiscal/revenue.
- Not connecting black money to India's low tax-to-GDP ratio (~11-12% vs OECD 34%).
Exam tip
Black money = untaxed money. Formalisation drives (GST, demonetisation, PMLA, Black Money Act 2015) all target the tax base. India's tax-to-GDP ratio is low (~11-12%) partly because of the informal/black economy.
Sources
- Ministry of Finance - White Paper on Black Money (2012)
- Black Money (Undisclosed Foreign Income and Assets) Act, 2015