Flawed tax system Comparison with an ideal regime Details of current tax regime Defects in the present tax system Effets of the tax regime Weak banking system Current economic affairs and trends Globalization and it's impact

Effects of current tax regime

Effects of irrational rates and complex taxation system

Figures In 1998 Black Money 11,00,000 Crores, Increasing at 13 % White Money: 8,50,000 Crores, Increasing at 7.5 % Source: Indian Economy, by Ruddar Datta

Effects of parallel economy Effects of weak banking system

	People are naturally inclined to evade tax
	Business and Industry sector non-enthusiastic about - R & D and also quality standards - as much of the resources engaged in tax management
	Negative impact on creativity and innovativeness of the work force
	Ever-thinning employment creation potential of the Industry, (with frightening increase in unemployment levels)
	Total dependence on imported know-how and technology
	Invasion of the Indian market by foreign industries
	Increasing import-export trade gap
	Continuous threat of devaluation of national currency
	Dominant role of the foreign financial institutions in the national economy
	IMF and WB have imposed conditions harmful to our economy while lending loans
	Inability of the government to respond effectively to natural and man-made calamities like flood, draught, war etc., due to poor financial base
	Indirect promotion of anti-social businesses and industries like liquor, cigarette, tobacco, lottery etc. Very high excise duties levied on these products make them guaranteed revenue sources, hence can not be banned
	Creation of a huge amount of black money (money generated due to tax evasion) resulting in the formation of a parallel economy in the Country

Effects due to creation of parallel economy

Parallel economy is posing many fundamental problems before the nation and is thus having highly destructive effects on the development of nation, as seen below

	Unrestrained generation of black money leading to unlimited scope for corruption
	Political, social, financial, education, health systems have collapsed leading to an increasing feeling of insecurity in the Society
	High banking interest rates and thus inflation
	Retarded cash-flow cycle
	Velocity of circulation of money reduces because, in every one rupee, seventy paise become black money and thus, not available for cash-flow
	Industries and trades facing the N.P.A. (Non Performing Assets) problem
	Industries inability to repay loans
	Slowing down of industrial growth
	Continuous increase in budgetary deficit
	Continuous decrease in government revenues
	Increasing bitterness in the center-state and state-local government relationships (e.g. Eleventh Finance Commission Dispute)
	N.P.A. is a major hurdle in the interest rate rationalization process of banks
	Law and Order system in the country is under tremendous pressure
	Lack of revenue with the government
	Therefore, no money for training & modernization
	Lack of moral support
	Black money has the power to influence law & order

Effects of weak banking system

	Inadequate capital formation: The proportion of banking transactions to cash transactions in India is 30:70 as opposed to a ratio of 85:15 in the developed nations. This naturally leads to inadequate capital formation.
	Minimum use of banking system leads to minimum generation of capital via Credit expansion. This leads to a poor capital supply situation with grave consequences on the Indian economy.
	This inadequate capital formation leads to a resultant fatal paucity of infrastructure
	This then leads to slow or no growth in the agriculture as well industrial sectors of the economy.
	Most of the money in the economy is outside the banking system and this black money then gives birth to/ fuels the parallel economy.
	Uncontrolled and uncontrollable increase in the parallel economy which in turn fuels corruption.
	Increasing NPAs with banks are due to Lack of Credit Registration Therefore no creation of Credit History Even people lacking credit history get loans Slowed or halted Money cycle and failure of industries Non availability of timely capital inflows
	To address the growing menace of NPAs the banks adopt a more cautious approach. They demand more security. Hence the common man cannot get access to loans, which leads to scarcity of capital. This then leads to the reduction in capital formation. These NPAs are thus endangering the whole banking system and the economy, which runs on it.