Arvind Subramanian on how to tackle the menace of black money

Says one of the problems in addressing the issue of black money is that India's tax system is perceived as being arbitrary

Suggesting systemic changes to check generation of black money, Chief Economic Adviser Arvind Subramanian has said the current system of chasing illicit funds is actually compounding the problem because the taxation rules are being seen as arbitrary.

"The much more important thing about black money is to understand why do we create black money in the first place and how to address those things," he said.

"For me black money is much more important in terms of what it signals...arbitrariness, tax rules, discretion and corruption, all these things. We need to be very serious about addressing them. What we are doing (currently) that gives rise to black money," Subramanian said.

The former International Monetary Fund economist said that one of the problems in addressing the issue of black money was that India's tax system was perceived as being arbitrary.

"The danger is that in trying to address that, you could actually compound some of the perceptions about India," Subramanian said.

"For example, our tax system is seen as somewhat arbitrary. The whole (system of) going after black money could play into that and I think we need to be very careful about that," he said here during an interaction organised by Bangalore International Centre and Indian Institute of Human Settlements here last night.

Subramanian said it is important to understand the reason behind why people create black money.

In a lighter vein, he said, "I don't understand black money. Politicians spend a lot of time and money on it. What I would say is that the way to think about black money is as a stock problem and a flow problem."

Speaking about inflation, Subramanian said one solution to curb price rise could be to encourage people to keep their money in banks and not spend too much.

Replying to a question by Nandan Nilekani, co-founder of Infosys and the former head of UIDAI (Unique Identification Authority of India), Subramanian said India's inflation has been very high and it was still higher than most emerging markets.

"When you want to fight inflation...One way you do that is by saying that you are going to offer savers enough money to make it attractive to them to put money in banks and not to spend and that's how you kind of curb inflation," he said.