“Black money is so much a part of our white economy, a tumour in the centre of the brain - try to remove it and you kill the patient.”- Rohinton Mistry
The economy of any country comprises of an economic system of thatterritory, itsmen, money, land resources, and other economic instruments that activelyengage in the production, exchange, distribution, and consumption of goods and services of that place. All of these activitiescontribute in making of an economy. In contrast to this, an informal economy includes those economic activities that arebeyond the supervision of the government and therefore, not taxed. The income gained from this parallel economy is not counted while estimatingthe government’s Gross National Product (GNP).
Parallel economy means functioning of an unaccounted sector in the economy whose basic idea and principlesrefute the legal objectives set bythe sanctioned or authorized sector of the same economy. In other words, A parallel market, underground economy or shadow economy inculcates all the forms of activities that have some aspect of illegality and with the operation of which illicit income is generated, which isgenerally not accounted for and has a very negative impact on a country’s economy.
History and Size of the Shadow Economy in India
Looking back in history, the emergence of the black sector in India dates back to the time of World War II, when there existed acute shortage daily necessities and the then government adopted rationing as a welfare policy, therebyinitiating a system of controls. With prices no longer regulated by the inherent system of market demand and supply, people were forced to make money out of the shortages and thus black marketingemerged. The illegitimate parallel economy thenstarted expanding, and once the control mechanisms were established, it achieved diverse dimensions. India's parallel economy has so profoundly ingrained in the possession of black money that even businessmen and politicians seem to have joined the race to accumulate such illicit wealth.
According to the estimate of Central Statistical Organisation (CSO), the size of the Indian economy is around Rs 61,64,000 crore. The Black Economy forms 40% of India's gross domestic product (GDP) i.e. around Rs 25, 00,000 crore. If all the estimated black money is declared and accounted for, it could generate a tax revenue of Rs 7,50,000 crore for the government and hence beneficial for the growth and development of the country.
Components of parallel market economy
Goods and services acquired illegally or transacted for in an illegal manner may exchange above or below the price of legal market transactionsSome examples of underground economic activities include:
Income from bribery and corruption
purchases of drugs alcohol & tobacco
illegal arms and ammunition
offshore bank accounts
Role played by Shadow Banking System
Shadow banks, like standard commercial banks offer loans and increase liquidity of the monetary system. However, they are not eligible to avails the schemes of central bank or government. According to IMF, shadow banking system serves two purposes as securitizationi.e. production of protected assets and collateral intermediation as well as alleviating counterparty risks and encourage secured transactions.
NBFCs (Non-Banking-Financial Companies) play a vital role in implementing sustainable growth in the country by addressingvarious financial needs of customers. These are investment banks whichwork hand in hand with the banking sector to meet the increasing financial needs of the business industry, providing credit facility to the unorganized sector and to small scalebusinesses. However, they do not include aspects relating to agriculture, industrial activity, sale, purchase, or construction of immovable property. The shadow banking system thus play an important role in the credit intermediation process, when the traditional banking system is confined by non-performing loans orcomplex legal arrangement.
Grounds for the growth of Parallel Market Economy in India
Licensing system- The growth of black money in India is owed to the existence of controls, permits, quotas and licenses.The licensing system was articulated before the independence of India.The planning commission of free India emphasized the importance of licensing system as the British East India Company had exhausted all the resources of India. To regenerate the already consumed resources, the government placed high tariffs on the import and exports, promoted the production and use domestic products and imposition of custom duties, excise duties on various commodities.
Higher Rates of taxes- Taxes were increased to promote import substitution.The higher rates of taxes resulted in evasion practices among tax payers. Tax evasion is common in sales tax, corporate tax, income tax, etc.
Ineffective enforcement of tax laws- In India, there is a lackstrict enforcement of tax laws in respect of income tax, sales tax, excise duty etc which results in evasion of taxes and accumulation of black money.
Inflation-The rise inprices of goods and services like petrol, etc. in international market, shoots prices of these essential commodities due to increase in the taxes levied by the government.The utilization created by people with excess money, diverting resources from producer to speculation leads to creation of black money.
Privatization- Privatization has taught people to conceal their overt acts, helping political leaders, bureaucrats and big businessmen to make black money. Even thetransactions in urban real estates are a great source of generation of black money.
Other factors-The main factors that give way to parallel universes and lead to generation of black incomeare bribing, smuggling, concealment of incomes and commissions, etc.
Impact of Parallel Economy on India’s financial security
The parallel economy is a threat to a country’s economic as well as internal security system. It can cause serious social and economic problems in India.
Illegitimate proceeds of income lead to underestimation of GDP in India as a huge volume of income is redirected to the unaccounted sector resulting in elevating parallel economy of the country.
Black money results in the loss of revenue to the state owing to tax evasion.
The availability of illicit gains with businessmen and capitalists causes inequalities of income with a large amount of fund at their disposal.
A part of the black money is held in the form cash, bullion, gold, silver as a result there is an abundance of liquidity which becomes available through theseadditional savings.
Money evaded by illegal meansis spent in an undesirable and inappropriate manner which undermines the virtues like honesty and hard work. Apart from the economic problems, the money generated from the shadow market is often routed towards money laundering which starts the investment chain in illegal activities such as terrorism, illegal drug trafficking, human trafficking, smuggling of contraband products,real estate properties, etc. This not only encourages terror financing but also arms smuggling, drug financing, and corruption& bribery thus posing a serious threat towards the financial security of our country.
Government’s initiatives against parallel economy
The Indian government, through decades has taken many initiatives to curb the illegal economic activities going on in our country. In addition to the Searches, seizures, surveys, and scrutiny of income tax returns are being done by the Income Tax Department, the government also brought changes in the provisions of the Finance Act, 2004 to make it more effective.For the smooth functioning of the economy, the following measures are taken up to fight the menace of the parallel economy:
Demonetization- Demonetization was announced for the first time in 1946 but was not successful, because only a very small proportion of currency notes in circulation were demonetized. In 1978 demonetization was restored again for high demonisation currency notes. On 8th November 2016, the BJP government again introduced demonetization banned rs.500 and rs.2000currency notes in circulation to curb the accumulation of black money.
Voluntary Disclosure of Income Schemes-The voluntary disclosure of income scheme was launched by the former finance minister Mr. P Chidambaram which was straight and simple way out for defaulters. The people were given an opportunity to come out clean and disclose their wealth to the government and no penalty would be imposed on them. The operation was successful and about 3.5 lakh people disclosed their income leading to generation of huge revenue by the Indian Finance Ministry in 1997.
Economic Liberalization-The economic liberalization has simplified the policy of controls and regulations and thereby the extent of black-market economy shall be reduced eventually.
Measures to Check Tax Evasion- Dealing with tax evasion has been one of the most challenging tasks for the government. many people try to conceal their actual income by providing false income details to the tax officials to reduce the amount of their liability.The income tax evasion punishments can help the government recover increased revenue in the form of tax and use the money for public welfare. Many committees like Taxation Enquiry Commission (1953), Administrative Reforms Commission (1969), Direct Tax Enquiry Committee (1971) have been set up throughout years to take notice of illegal financial activities.
Other Measures-Various steps have been taken bythe Government to contain the growth of black income in the country which includesraids, searches, deposit in the National Housing Banking scheme, NRI foreign exchange remittance, issuing National Development Bonds, controlling the election expenses, introducing the Prevention of Money Laundering Act, 2002, Income Tax Act,1961 etc.
The parallel economy has always projected a threat to our economy and our country and is expanding at rapid speed.The illegal methods of financing have not only undermined the GDPof India but have also increasedwhite collar crimes andwidenedthe income gap between the poor and the rich.Over the past 73 years of independence, the government has introduced several schemes offering opportunities to bring black money overboard but the result is not so effective. We can only hope that the such instruments will reduce the volume of the black economy and protect our country’s financial security in the coming years.