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Key Takeaways
Core essence: The cost of India's black economy is 5% GDP growth sacrifice every
year since mid-70s. But for this, India's size of the economy would have been ~USD9
trillion.
Black economy: the conceptual issues
Black economy v/s black money: Black economy is much wider than black income
and black money and corruption. Black money is only a tiny part of the black income
that is saved in cash. Black savings can also take the form of non-cash assets,
inventories, flight of capital, investments in legal and illegal activities, etc.
Corruption and black economy: Black economy is much larger than corruption
(which is mainly bribes), and includes illegal activities like hawala (money laundering),
drug trafficking, smuggling, etc.
Two to tango: The black economy involves both public and private sector.
Size does matter: If the black economy is say 50% of the economy, can we just
add 50% to the white economy to get the size of the potential economy? The answer
is 'NO'. In many ways, the black economy has disproportionate impact on various
aspects of the economy.
The impact is severe
Loss in growth and potential: The rates of growth are less than the potential
rate by 5% since mid-seventies. But for the black economy, Indian economy could
have been nine times its present size i.e. ~USD9 trillion. In other words, India could
have migrated from the poorest 30 countries of the world to middle income country
by now.
Policy failures: Black economy leads to policy failures and reduces its effectiveness
leading to a sense of a failing state amongst citizens.
Macroeconomic implications: Black economy raises black savings, but at the
same time it lowers investment rates, increases input output ratio and ICOR. It
lowers the employment potential, raises inflation, adversely affects the fiscal situation,
leads to flight of capital and balance of payments difficulties - thus, economic
development gets adversely affected.
Monetary sector: Informal money market remains strong, thus a whole lot of
black liquidity remains outside the central banks calculus. This leads to volatility in
money multiplier and velocity of circulation defeating RBI's attempt to fight inflation
by raising rates.
Broader implications: Black economy leads to governance deficit, criminalization
of society, wastage (activity without production), deterioration of norms (the usual
becomes unusual and unusual becomes usual), criminalization and weakening rule
of law.
Inequality: Black income is concentrated in 3% of households, but 97% of the people
are affected. The segment gaining from the black economy (i.e., the upper 3%) also
loses due to lost growth opportunities, uncivilized conditions, pollution, etc. However,
this 3% of the population is larger than many large size European countries, and their
spending of their black income feeds into the notion of India shining in terms of consumer
boom, etc.
Size is 50% of economy now
According to Prof Kumar's estimates, the size of the black money has grown from 5% in
1955 to 50% now.
The black economy encompasses all sectors of the economy but is concentrated most in
the tertiary sector. Therefore, the structure of the economy is different from what is
revealed by the white economy.
Number of scams and their size has increased exponentially since the 1950s, with nearly
one scam breaking out every week now.
The reason for black money - The Triad
Three pillars of the triad - Black economy is both systematic and systemic. The black
economy triad consists of the business, politician and the executive.
Ineffectiveness of redressal mechanism - Now the public delivery mechanism is largely
ineffective. In 1984 all commissioners of income tax said 95% of their department is
corrupt. Similarly in 2002, Municipal Commission of Delhi (MCD) said in Delhi High Court
that no honest engineer in Public Works Department (PWD).
Spirit unwilling - The triad leads to weakening of law, loopholes and resultant complexity.
As the spirit was unwilling, this has led to corruption cases knowingly being scuttled
(Hasan Ali, Liechtenstein disc, 2G, etc.). A large amount of cases are waiting to come
out of closet based on the private information with the Government but used selectively
for political end.
The solution
Committees and suggestions: There have been many committees since independence
to look into the aspects of the black economy and made thousands of suggestions. But
the implementation has not been successful.
Narrow technical solutions don't work: Also technical solutions like reducing tax
rates, reduced control, voluntary disclosure scheme, property acquisition, etc, have not
worked. This is because the nature of the problem is actually political and cannot be
tackled without strong will.
Strong RTI and accountability: A strong RTI and accountability at all levels is a
minimum imperative.
Competition: New parties and politics need to come up. Lack of democracy within
party also does not augur well.
An ideal Lokpal structure: An ideal Lokpal structure would perhaps be to include the
top echelons of the executive and the judiciary. If accountability is ensured at the top,
then they would in turn demand accountability down-the-line. However, a very elaborate
Lokpal with large bureaucracy would be bound by the same weakness of corruption and
inefficiencies that the current system is susceptible to.
Public pressure critical: The movement by Anna Hazare has rekindled hope that the
turning point may be coming. However, sustenance of the movement depends upon the
continuance of public pressure.
Professor Arun Kumar is the
Chairperson of the Center for
Economic Studies and Planning,
Jawaharlal Nehru University (JNU).
He has been teaching Economics at
the Center since 1984.
He went to Princeton University in
the US for a PhD in Physics but in
1977 switched to a PhD in Economics
at the Jawaharlal Nehru University.
He completed BSc (Physics) from St
Stephens College, India in 1970. He
is a gold medalist of the Delhi Higher
Secondary Board and Delhi
University. He has had visiting
assignments in Pavia University, Italy
and Humboldt and Leipzig
Universities, Germany.
His PhD thesis was on Inflation and
Terms of Trade, which gave a new
understanding of the role of trade
and government in inflation in India.
He specialized in Development
Economics, Public Finance and Public
Policy and Macroeconomics, and
published articles in these areas. His
book, The Black Economy in India,
published by Penguin, broke new
ground in thinking about the Indian
economy and its development. He
published a book, Challenges Facing
Indian Universities, and wrote
extensively on issues pertaining to
higher education in India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key Takeaways
Core essence: The cost of India's black economy is 5% GDP growth sacrifice every
year since mid-70s. But for this, India's size of the economy would have been ~USD9
trillion.
Black economy: the conceptual issues
Black economy v/s black money: Black economy is much wider than black income
and black money and corruption. Black money is only a tiny part of the black income
that is saved in cash. Black savings can also take the form of non-cash assets,
inventories, flight of capital, investments in legal and illegal activities, etc.
Corruption and black economy: Black economy is much larger than corruption
(which is mainly bribes), and includes illegal activities like hawala (money laundering),
drug trafficking, smuggling, etc.
Two to tango: The black economy involves both public and private sector.
Size does matter: If the black economy is say 50% of the economy, can we just
add 50% to the white economy to get the size of the potential economy? The answer
is 'NO'. In many ways, the black economy has disproportionate impact on various
aspects of the economy.
The impact is severe
Loss in growth and potential: The rates of growth are less than the potential
rate by 5% since mid-seventies. But for the black economy, Indian economy could
have been nine times its present size i.e. ~USD9 trillion. In other words, India could
have migrated from the poorest 30 countries of the world to middle income country
by now.
Policy failures: Black economy leads to policy failures and reduces its effectiveness
leading to a sense of a failing state amongst citizens.
Macroeconomic implications: Black economy raises black savings, but at the
same time it lowers investment rates, increases input output ratio and ICOR. It
lowers the employment potential, raises inflation, adversely affects the fiscal situation,
leads to flight of capital and balance of payments difficulties - thus, economic
development gets adversely affected.
Monetary sector: Informal money market remains strong, thus a whole lot of
black liquidity remains outside the central banks calculus. This leads to volatility in
money multiplier and velocity of circulation defeating RBI's attempt to fight inflation
by raising rates.
Broader implications: Black economy leads to governance deficit, criminalization
of society, wastage (activity without production), deterioration of norms (the usual
becomes unusual and unusual becomes usual), criminalization and weakening rule
of law.
Inequality: Black income is concentrated in 3% of households, but 97% of the people
are affected. The segment gaining from the black economy (i.e., the upper 3%) also
loses due to lost growth opportunities, uncivilized conditions, pollution, etc. However,
this 3% of the population is larger than many large size European countries, and their
spending of their black income feeds into the notion of India shining in terms of consumer
boom, etc.
Size is 50% of economy now
According to Prof Kumar's estimates, the size of the black money has grown from 5% in
1955 to 50% now.
The black economy encompasses all sectors of the economy but is concentrated most in
the tertiary sector. Therefore, the structure of the economy is different from what is
revealed by the white economy.
Number of scams and their size has increased exponentially since the 1950s, with nearly
one scam breaking out every week now.
The reason for black money - The Triad
Three pillars of the triad - Black economy is both systematic and systemic. The black
economy triad consists of the business, politician and the executive.
Ineffectiveness of redressal mechanism - Now the public delivery mechanism is largely
ineffective. In 1984 all commissioners of income tax said 95% of their department is
corrupt. Similarly in 2002, Municipal Commission of Delhi (MCD) said in Delhi High Court
that no honest engineer in Public Works Department (PWD).
Spirit unwilling - The triad leads to weakening of law, loopholes and resultant complexity.
As the spirit was unwilling, this has led to corruption cases knowingly being scuttled
(Hasan Ali, Liechtenstein disc, 2G, etc.). A large amount of cases are waiting to come
out of closet based on the private information with the Government but used selectively
for political end.
The solution
Committees and suggestions: There have been many committees since independence
to look into the aspects of the black economy and made thousands of suggestions. But
the implementation has not been successful.
Narrow technical solutions don't work: Also technical solutions like reducing tax
rates, reduced control, voluntary disclosure scheme, property acquisition, etc, have not
worked. This is because the nature of the problem is actually political and cannot be
tackled without strong will.
Strong RTI and accountability: A strong RTI and accountability at all levels is a
minimum imperative.
Competition: New parties and politics need to come up. Lack of democracy within
party also does not augur well.
An ideal Lokpal structure: An ideal Lokpal structure would perhaps be to include the
top echelons of the executive and the judiciary. If accountability is ensured at the top,
then they would in turn demand accountability down-the-line. However, a very elaborate
Lokpal with large bureaucracy would be bound by the same weakness of corruption and
inefficiencies that the current system is susceptible to.
Public pressure critical: The movement by Anna Hazare has rekindled hope that the
turning point may be coming. However, sustenance of the movement depends upon the
continuance of public pressure.
Professor Arun Kumar is the
Chairperson of the Center for
Economic Studies and Planning,
Jawaharlal Nehru University (JNU).
He has been teaching Economics at
the Center since 1984.
He went to Princeton University in
the US for a PhD in Physics but in
1977 switched to a PhD in Economics
at the Jawaharlal Nehru University.
He completed BSc (Physics) from St
Stephens College, India in 1970. He
is a gold medalist of the Delhi Higher
Secondary Board and Delhi
University. He has had visiting
assignments in Pavia University, Italy
and Humboldt and Leipzig
Universities, Germany.
His PhD thesis was on Inflation and
Terms of Trade, which gave a new
understanding of the role of trade
and government in inflation in India.
He specialized in Development
Economics, Public Finance and Public
Policy and Macroeconomics, and
published articles in these areas. His
book, The Black Economy in India,
published by Penguin, broke new
ground in thinking about the Indian
economy and its development. He
published a book, Challenges Facing
Indian Universities, and wrote
extensively on issues pertaining to
higher education in India.
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