Shortages during War:
During the Second World War period, many in the Indian industry found the situation ripe for black marketing. Supplies of industrial goods from the traditional suppliers of the West were cut off. Huge profits were made in respect of goods that were in short supply. These circumstances and the psychology formed the backdrop of what followed subsequently.
The control regulation of the economy was of course desirable for planned use of scarce resources. But the controls were excessive and inadequately implemented. ‘The result was twofold. In the first place, there was corruption.
In the second place, these controls created shortages, which were often artificially created. The prices paid received on these controlled goods were much above the official prices. These excess prices, called ‘premia’ have swelled the black money.
Defects in the tax structure have also been responsible for the existence of black money to a large extent. Till recently the lax on income and on wealth was very high to invite evasion. The corporate tax rate too, was very high.
In these circumstances, the temptation gain from tax evasion was substantial. Even in the case of indirect taxes, the situation is no better. The excise evasion is rampant in such sectors as copper, cotton fabrics and plastics.
Large Public Expenditure:
A factor of considerable importance has been the large increase in public expenditure, as pointed out in the Black Money Committee Report of the National Institute of Public Finance and Policy. This factor started fuelling the phenomenon of black money after the cautious budgetary position, prevalent during the early sixties, was given a go by.
Ostensibly, this was done to promote such good causes as removal of poverty, subsidisation of the supplies for the needy, larger plans, etc. But the huge spending which these entailed have neither been efficiently administered nor properly targeted. The result has been large leakages into the stream of unaccounted income.