Prelims 2021

Q. Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?

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.

Correct Answer: d) Loss of revenue to the State Exchequer due to tax evasion.

Question from UPSC Prelims 2021 GS Paper

Explanation : 

Black Money

The creation of black money, which refers to income illegally obtained or not declared for tax purposes, is a significant concern for any government due to its numerous negative impacts on the economy and society. Among the various effects of black money, the main cause of worry to the Government of India has been the loss of revenue to the State Exchequer due to tax evasion.

Reduced Fiscal Space

When individuals or entities do not pay taxes on their income, the government loses out on a significant amount of revenue that could have been used to fund public services and infrastructure. This reduction in available funds limits the government’s ability to invest in key areas such as healthcare, education, and social welfare programs, which are essential for the overall development of the country.

Budget Deficits

The shortfall in revenue due to tax evasion can lead to higher budget deficits. To make up for the lost revenue, the government may have to borrow more, which can increase the national debt and potentially lead to higher interest rates and inflation.


Black money exacerbates income inequality because it is typically the wealthier individuals and large corporations that are able to evade taxes. This means that the tax burden falls disproportionately on the middle and lower-income groups, who are less able to avoid taxation, leading to a more unequal society.

Distorted Economic Decisions

Tax evasion can lead to misallocation of resources, as individuals and businesses make economic decisions based on tax avoidance opportunities rather than the true economic potential of investments. This can lead to inefficiencies and a less productive economy.

While the other effects listed, such as the diversion of resources to real estate and luxury housing, investment in unproductive activities, and large donations to political parties, are also concerning, the direct impact on the government’s ability to function and provide services due to loss of revenue is the most immediate and measurable concern. It undermines the government’s fiscal policy and can have far-reaching consequences for economic stability and growth. Therefore, combating black money and tax evasion is often a top priority for governments seeking to ensure a fair and efficient tax system and to maintain the integrity of public finances.

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