Black Economy in India

Posted in Finance Articles, Total Reads: 2655 , Published on November 20, 2012

The word black associated with economy is cajoling me to define what does black signifies and its relevance to economy. Speaking scientifically, black is an absence of colour. It absorbs and conceals all aspect of life. During bad times it contains forewarning of impending unknown. Hence it has come to mean deadly, sinful, ugly, hidden, unknown, unseen, and mysterious at all.

So, when black gets associated with economy. It begin to signifies huge impending danger to nation’s economy and well being by concealing the actual figure of GDP, GNP, per capita income etc. thus resulting in gross miscalculation of various numbers resulting into misallocation of funds.

The epoch of graft in India can be traced back to east India company rule when Warren Hastings, The first governor-general of India was impeached on accounts of corruption in 1787. Though he was acquitted in 1795, his lengthy trial brought various aspects of illegitimate company activity to light.  Thus the founding stone of black economy was laid down by the east India Company through corrupt bureaucracy and a parallel economy. During World War II Indian saw a huge surge in the black economy as Indian wealth was plundered to make up the shortage in war ammunition, daily necessity. Though at that time black economy was only of minuscule amount compared to present level, the framework was developed then.

The most perceivable development in the black economy occurred after Gandhian and Nehruvian era. It was during this time that politician who lacked idealism entered the pious building of the parliament and engulfed themselves in corruption leading to surge in black economy. In the coeval world corruption has pervaded all the sections of the society. It has been estimated that today black economy id 40% of the Indian GDP i.e. around $500 billion.

India is a land of paradox. The sum total of wealth of top ten richest people in India is 6% of our GDP, while in USA its just 2% of their GDP; now the question where does this huge/colossal money goes. The answer lies in discussion below.

What is the cost of running a political party? What is the cost of fighting an election? Form where does this money come? If we talk about richest political party in India, it is congress party, followed by Bahujan Samaj Party (BSP), and then comes the BJP. The audited balance sheet of congress shows it has a fortune of 525.97crore (and political party are tax exempt). The congress party is a big party with presence in all state and UT (direct or indirect).

It has been  Election Commission’s unofficial estimates  that on an average the party spend  between Rs 2.5 crore and Rs 5 crore for an assembly constituency (official EC cap: Rs 25 lakh) and between Rs 5 and Rs 20 crore for a Lok Sabha constituency (official EC cap: Rs 40 lakh). So expenditure in holistic fashion including viz. election campaign expenses, organizational and logistical expenses etc. the cost of running party will dross 5000crore. So, who pays the difference? The parallel black economy. The richest Indian and corrupt Indian come to rescue of political party, helping them and taking return in kind.  This endless cycle had lead to pervasive corruption.

Let’s discuss about the tax heaven. There are in total 77 tax heaven. Major once are LGT, Singapore, Switzerland, Mauritius etc. these tax heavens sometimes levy small tax or many a time not at all thus resulting into tax evasion. Moreover, because of extremely feeble rules and regulation tax can be avoided. For Indians the biggest tax heaven is Mauritius. Initially double taxation avoidance treaty (DTAT) was signed in 1983 to help Mauritian firm to invest in India and vice-versa. But DTAT has been widely misused leading to large revenue loss to India.

In the coeval world black economy has become ubiquitous. It is present in almost all things in one form or other (either in cash or in kind). Teacher will not teach in the class so that students join his coaching classes. Doctors will not see his patents in government hospital so that patient visit his private clinic and he can mint money. Pervasive  duplicitous and deceptive products, graft, smuggling, control and licensing system, donation to political party, ineffective enforcement of tax law, generation of black money in public sector and a host of other squalid  business negotiation  that are usually untraceable and hence unaccountable has become a norm. 

Besides, administrative and bureaucratic work get slowed down, all this is done to mint money and more money. This percolating black economy led to parallel economy, which led to policy breakdown and social unrest resulting into anti corruption movement. It is widely reported that Indian black economy is around 40% of its GDP. Prof Arun Kumar in his book- ‘Black Economy in India’ has estimated that black economy has resulted into loss of 5% of GDP every year since 1970. India’s GDP as per Purchasing power parity (PPP) in 2011 was $4.469 trillion. That means that the current size of the economy could have been around $9 trillion making us the second largest economy in the world. Also, Prof R. Vaidyanathan of Indian Institute of Management (Bangalore) has estimated that the black money in India is worth around Rs. 724,000 crore ($1.4 trillion). Even if the professor's figures are exaggerated, the amount of money in India is huge, very huge. That is why there are so many clamors about checking black money

At the socio-economic front black economy has led to high cost and low quality product in international arena leading to brand India dilution. At the social level as people are extremely unhappy with the government, the society as whole has lost its faith leading to rise of movements like Anna Movements. All these direct and indirect cost that black economy imposes leads to distorted target, misdirection of precious natural resources, worsened income distribution, big size unreported segment of the economy, transfer of fund from India to foreign countries,  ineffective investment, higher inequality and lower rate of growth, corruption in society and political system.

This article has been authored by Nilaya Mitash Shanker and Saurabh Paul from DoMS, IIT Roorkee.

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