Question map
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?
Explanation
The correct answer is Option 4. While all listed options represent negative consequences of black money, the primary concern for the Government of India from a fiscal and governance perspective is the loss of revenue to the State Exchequer due to tax evasion.
- Fiscal Impact: Tax evasion directly reduces the government's tax-to-GDP ratio, limiting its capacity to fund essential social infrastructure, welfare schemes, and developmental projects.
- Macroeconomic Instability: A shrinking revenue base leads to higher fiscal deficits, forcing the government to either increase public debt or impose higher tax burdens on honest taxpayers.
- Why others are secondary: Options 1, 2, and 3 describe the utilization of black money (real estate, luxury goods, or political funding). While these distort resource allocation and affect political integrity, they are symptomatic. The fundamental cause of worry is the leakage of potential public funds that hinders sovereign economic planning and distributive justice.
PROVENANCE & STUDY PATTERN
Full viewThis is a classic 'Most Appropriate Option' question where all choices are correct effects, but only one represents the sovereign's primary injury. The answer lies in fundamental NCERT Macroeconomics logic (Fiscal Health) rather than niche current affairs. Don't get distracted by the symptoms (Real Estate/Gold); focus on the root fiscal damage.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: Has the diversion of resources to the purchase of real estate and investment in luxury housing been the main cause of concern for the Government of India regarding the creation of black money in India?
- Statement 2: Has investment in unproductive activities and the purchase of precious stones, jewellery, and gold been the main cause of concern for the Government of India regarding the creation of black money in India?
- Statement 3: Have large donations to political parties and the growth of regionalism been the main cause of concern for the Government of India regarding the creation of black money in India?
- Statement 4: Has loss of revenue to the State Exchequer due to tax evasion been the main cause of concern for the Government of India regarding the creation of black money in India?
- Explicitly identifies real estate as a potent source of corruption and unaccounted money.
- Links political actors to the use of real estate for storing unaccounted wealth, implying major concern.
- Describes 2016 legal tightening on benami property to curb use of unaccounted/tax‑evaded money in property transactions.
- Reports new enforcement powers and penalties directed at property-related black money, showing government focus on real estate.
- Notes that a major Act did not address the practice of using black money in real estate transactions, highlighting the sector’s centrality to the problem.
- Implicates real estate transactions as a recognized channel for black money that policy needed to confront.
- Explicitly recommends policy measures to discourage investments in gold and jewellery as 'unproductive assets'.
- Links taxation and customs changes on bullion/jewellery to reducing attraction of such investments — showing government concern.
- Describes how purchases of gold and jewellery convert black money into bullion and allow traders to hold unaccounted wealth — identifying the mechanism of concern.
- Treats gold/jewellery transactions as a common channel for generating and storing black money.
- States that a large proportion of black money is generated from certain vulnerable sectors and identifies gold trading as 'one of the best examples'.
- Frames reforms in gold trading as a major strategy for curbing black money generation — indicating government concern about such investments.
This previous-years MCQ explicitly lists 'investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.' as one of the answer choices offered for 'main cause of worry' about black money — showing it is a recognised candidate concern in official exam material.
A student could treat this as evidence that official discourse considers this channel important and then check policy documents or RBI/Finance Ministry sources to see if government statements emphasise it.
Mentions objectives of Sovereign Gold Bond and Gold Monetisation schemes: 'To bring the idle gold lying with Indian households into the economy' — implying government concern about idle/hoarded gold.
One can extend this by noting that policies to mobilise household gold suggest the government views private gold holdings as an economic problem (e.g., potential black wealth) and then check scheme rationales and statements for links to black money.
Repeats the stated aims of gold mobilisation schemes (bring idle gold into the economy, promote FDI in gold sector, reduce import dependence) — reinforcing that government policy targets household gold stocks.
Combine this with knowledge that hoarded gold can be a store for unaccounted wealth to hypothesise a policy motive tied to reducing avenues for black money.
Notes that major items of India's imports include pearls, precious and semi-precious stones, gold and silver — indicating the economic significance of these items.
A student could infer that high importance of these items in trade makes them a plausible channel for unaccounted wealth and then look up customs/AML concerns or government comments on jewellery/gold and informal money flows.
States India imports large quantities of precious stones, gold and silver alongside other items, suggesting gold/precious stones are economically large sectors that could be relevant to discussions on black money.
Use this to argue that because these items form a sizeable import category, the government may worry about their role in capital outflows and informal value storage; then check policy measures addressing these sectors.
This exam question explicitly lists 'Large donations to political parties and growth of regionalism' as one of the possible main worries about creation of black money, showing it is a recognized candidate concern.
A student could check official government reports or case studies of black money episodes to see whether these factors are mentioned among primary causes.
Description of the Electoral Bond Scheme positions cash/opaque donations as a problem and presents a policy aimed at bringing 'clean money' and transparency to political funding.
One could compare pre- and post-electoral-bond donation patterns or government statements to judge whether donations were a key driver of black money concerns.
Data on the very large sums spent by parties and candidates in elections highlights the scale of political funding, which can be a channel for unaccounted money.
Use these magnitudes alongside known limits/regulation gaps to assess plausibility that political donations contributed materially to black money creation.
Notes that regional distortions and social disparities (linked to corruption and scams) continue to affect India, tying regional imbalances to corrupt practices that can generate black money.
Map regions with large disparities and documented corruption cases to test whether regionalism-related factors correlate with black-money generation.
Lists economic disparities and regional imbalances as causes for the rise of regional parties, suggesting a pathway where regionalism and competition could increase money flows into politics.
A student could examine whether the rise of regional parties increased demand for unaccounted funds (e.g., to finance local mobilisation) in specific states.
- Describes demonetisation as a State decision to curb black money by targeting tax evasion.
- Explicitly links efforts against black money to improving tax compliance and imposing penalties for tax evasion.
- States demonetisation brought cash into the formal system, allowing some previously unaccounted money to be tracked.
- Reports the government widened the tax base and achieved an increase in tax revenue as a result.
- States tax evasions lower tax collections and weaken the financial base needed for development.
- Links practices like round-tripping and money-laundering to reduced tax collections, implicating revenue loss as a key harm.
- [THE VERDICT]: Sitter. Directly solvable using NCERT Class XII Macroeconomics (Box 3.2 on Demonetisation) or basic common sense.
- [THE CONCEPTUAL TRIGGER]: Public Finance > Black Money & Parallel Economy > Impact on Fiscal Deficit.
- [THE HORIZONTAL EXPANSION]: 1. Tax Evasion vs. Tax Avoidance vs. Tax Planning (Definitions). 2. PMLA 2002 (ED powers & burden of proof). 3. Benami Transactions (Prohibition) Amendment Act, 2016 (Confiscation provisions). 4. Fugitive Economic Offenders Act, 2018 (Threshold of ₹100 cr). 5. GAAR (General Anti-Avoidance Rule) vs. DTAA (Double Taxation Avoidance Agreement).
- [THE STRATEGIC METACOGNITION]: When UPSC asks for the 'main cause of worry' among multiple valid options, apply the 'Sovereign Filter'. Does it hurt a specific sector (Real Estate) or the State's existence (Revenue)? The State prioritizes its own fiscal survival above sectoral distortions.
Purchase of property and luxury housing functions as a major channel for storing and laundering black money.
High-yield for UPSC because questions often connect corruption, asset accumulation and policy response; mastering this links topics in public finance, governance and electoral politics and enables analysis of policy measures targeting asset-based concealment of income.
- Rajiv Ahir. A Brief History of Modern India (2019 ed.). SPECTRUM. > Chapter 39: After Nehru... > First Steps towards Liberalising the Economy > p. 726
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > Shortcomings/criticism: > p. 435
The 2016 amendments strengthened penalties and confiscation powers to stop use of benami property for hiding unaccounted money.
Important for governance and law topics: explains a specific legal instrument used to curb black money in property, connects to land/real‑estate regulation and enforcement questions, and helps answer policy-evaluation and reform‑impact prompts.
- Rajiv Ahir. A Brief History of Modern India (2019 ed.). SPECTRUM. > Chapter 39: After Nehru... > Disbanding Planning Commission and Setting up NITI Aayog > p. 783
The government used demonetisation and voluntary/penalty disclosure schemes to bring undeclared cash into the formal system and widen the tax base.
Exam-relevant for contemporary governance and economy questions: links monetary policy actions to tax administration and anti-corruption strategy, enabling critique of effectiveness and trade-offs of such measures.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Demonetization > p. 57
- Rajiv Ahir. A Brief History of Modern India (2019 ed.). SPECTRUM. > Chapter 39: After Nehru... > Disbanding Planning Commission and Setting up NITI Aayog > p. 785
- Rajiv Ahir. A Brief History of Modern India (2019 ed.). SPECTRUM. > Chapter 39: After Nehru... > Disbanding Planning Commission and Setting up NITI Aayog > p. 784
Gold functions primarily as a store of value or asset rather than as currency, which makes it a preferred vehicle for hoarding wealth outside the formal monetary system.
High-yield for UPSC because it links monetary concepts (legal tender vs asset) to informal wealth storage and black money dynamics; connects to questions on currency, alternative assets, and informal financial behaviour. Understanding this helps answer questions on why precious metals attract unaccounted wealth and how policy can target asset hoarding.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > What are Crypto currencies? > p. 77
Precious stones, gold and silver are major items in India's import basket, reflecting large domestic demand and significant cross-border flows related to these commodities.
Important for UPSC as it ties trade composition and balance-of-payments issues to domestic demand for luxury/precious goods, which can be channels for unaccounted transactions; useful for answering questions on trade policy, BOP, and how imports interact with informal economies.
- INDIA PEOPLE AND ECONOMY, TEXTBOOK IN GEOGRAPHY FOR CLASS XII (NCERT 2025 ed.) > Chapter 8: International Trade > Changing Patterns of the Composition of India's Import > p. 88
- Geography of India ,Majid Husain, (McGrawHill 9th ed.) > Chapter 12: Transport, Communications and Trade > 1. Unfavourable Balance of Trade > p. 49
The Reserve Bank/Government treat gold as a balance-sheet asset and may transact in gold to manage foreign exchange reserves and liquidity, linking gold stocks to macroeconomic policy tools.
Valuable for UPSC because it connects gold holdings to monetary and forex management, illustrating policy levers available when large private hoarding of gold affects macro variables; aids in framing answers on RBI operations, reserve management, and policy responses to informal gold demand.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.11 Money Circulation > p. 57
Electoral bond scheme and reforms target the flow of money into political parties and aim to reduce cash-based donations.
High-yield: questions often probe political finance, transparency and anti-corruption measures. Mastering this helps answer governance and electoral reform questions and links to public policy, law and accountability debates.
- Indian Polity, M. Laxmikanth(7th ed.) > Chapter 82: Electoral Reforms > 22Ibid. > p. 589
- Democratic Politics-I. Political Science-Class IX . NCERT(Revised ed 2025) > Chapter 3: ELECTORAL POLITICS > Are the elections too expensive for our country? > p. 45
Since the 'effect' was asked, the 'mechanism' is next. Prepare the 'Participatory Notes (P-Notes)' regulations by SEBI (ODIs) and the 'Round Tripping' mechanism. Also, look out for the 'Global Minimum Tax' (Pillar Two of OECD/G20 BEPS) as the global solution to this exact worry.
Use the 'Root vs. Fruit' technique. Options A (Real Estate), B (Gold), and C (Politics) are the 'fruits' or destinations where black money parks itself. Option D (Revenue Loss) is the 'root' reason why the money became 'black' in the first place (it wasn't taxed). The Government fights the root, not just the fruit.
Link Economy to Internal Security (GS3 Mains): Black Money is not just a fiscal issue; it is the fuel for 'Terror Financing' and 'Left Wing Extremism'. The 'Worry' extends from the Exchequer (Ministry of Finance) to National Security (Ministry of Home Affairs).