(PARALLEL ECONOMY)
Black money or unaccounted money circulating in the parallel economy is a big menace to the
economy. It is also a cause of big loss in the tax-revenues for the government. As such it needs to be
curbed. Its elimination will benefit the economy in more than one way. It will also generate more
revenues for the government.
Black money may be defined as the money that is generated by activities that are kept secret in the
sense that these are not reported to the authorities. As such this money is also not accounted to the
fiscal authorities i.e., taxes are not paid on this money. Contrasted to this is the white money that is
shown in relevant accounts and tax paid, if due.
Parallel economy connotes the functioning of an unsanctioned sector in the economy whose
objectives run parallel, rather in contradiction with the aroused social objectives. This is variously
termed as ‘black economy’, ‘unaccounted economy’, ‘illegal economy’, ‘subterranean economy’, or
‘unsanctioned economy’.
The money involved in black/secret transactions or used in parallel economy (i.e., parallel to the
legitimate economy) is very large indeed. Very recently the National Institute of Public Finance Policy
has estimated that the sum involved is as much as about Rs4O, OOO crores. This constitutes around
20 per cent of the gross domestic product of the economy. This size of the black money has grown
fast over the past many years. A recent estimate puts the size of black money at over 50 per cent of
GDP (at factor cost) . It is also stated that the annual rate of growth of black money is higher than the
annual growth-rate of GDP. The present size of black money is thus very large indeed.
Impact of Black Money
The circulation of black money has adversely affected the Indian economy in several ways. It would
be of interest to study the impact of black money on the Indian economic and social system.
i) It leads to the misdirection of precious national resources.
A part of black money is kept in a form that contributes nil/Little to productive activities.
(ii) It has enormously worsened the income-distribution, and has thereby undermined the fabric of
the fixed income salary class finds itself ever be the lower rung of the income-ladder. They pay taxes.
Quite a number among them, though not l the corrupt activities of getting bribes / commissions, etc.
But in general they are not able to catch up with the people in business, or in professions, or many of
those employed. Many in these categories make black activities. Many high placed official and honest
employees earn much less than an average small shopkeeper in big cities like Bombay and Delhi.
(iii) The existence of a big-sized unreported segment of the economy is a- big handicap in
making a correct analysis and formulation of right policies for it. For example it is not possible to
calculate accurately the vital indicators of progress like saving-income ratio, sectorial composition of
national income, etc. Nor is it possible to monitor the developments in the economy with precision.
Much of these estimates / monitoring of the economy are bound to be guesswork. No wonder the
government’s policies cannot be firm in their perception and deal weak data base.
(iv) Black money results in transfer of funds from India to foreign countries through
clandestine channels. Such transfers are made possible by violations exchange regulations
through the device of under – invoicing of exports and over-invoicing of imports thus finds itself in a
paradoxical situation,’ where capital and more particularly foreign exchange resources are scarce,
(the country) becomes a de facto lender of aid and capital to economically advanced and wealthier
nations, with the concealed outflow of funds.” The situation has worsened further over the years.
(v) Black money requires for its protection, proliferation and expansion of a service organisation
composed of musclemen, touts and brokers to combat the forces of law and order on the one hand
and on the other hand, there are income t ax advisers, or chartered accountants in the pay of black
money operators. Then there are contact men, better known as liaison officers who negotiate favors
from top bureaucracy and political bosses through bribes of black money. This has developed a new
black money culture in the business world.
(vi) Last but not the least; black money has corrupted our political system in a most vicious
manner. At various levels, MLAs, MPs, Ministers, party functionaries openly and shamelessly go on
collecting funds.The politics of black money thus has corroded the moral fibre of Indian polity.
Ministers dole out favours of crores by accepting black money donations of a few lakhs from
businessmen. Musclemen and criminals are fed by political parties to capture booths and thus
elections are becoming more and more of a farce. National policies are, therefore, being bent in
favour of the big business under the pressure of black money. Thus, it is the parallel economy which
does the backseat driving, while the political leadership only acts as the mouth-piece of big business
to justify the abolition of controls or introduction of a dual system of prices in the name of productivity
or national interests. It was due to the pernicious impact of black money on the Indian economy and
polity that the Wanchoo Committee concluded: “It is, therefore, no exaggeration to say that black
money is like a cancerous growth in the country’s economy which, if not checked in time, is sure to
lead to its ruination”.
Causes for Generation of Black Money
There are several factors responsible for the emergence – of black money. It would be relevant to
discuss those factors so that a correct understanding about the genesis, growth and expansion of
black money can be made. The principal factors are:
(i) Beginning of the evil: The beginning of this evil can be traced to the Second World War. During
this period supplies of industrial goods from the traditional suppliers of the West were cut off. This
resulted in severe shortages in many vital lines. The British Government indulged in large inflationary
finance for war efforts. This led to price escalation. Taxes too were raised sharply on higher incomes
and excess profits. In these circumstances many indulged in black marketing. And at the same time,
they evaded taxes. Huge profits were made in respect of goods that were in short supply. This
created a psychology of making money out of shortages and not out of production / expansion of
sales. These circumstances and the psychology formed the backdrop of what followed subsequently.
(ii) Controls and licensing system: The system of controls, permits, quotas and licenses which are
associated with misdistributions of the commodities in short supply results in the generation of black
money. The Wanchoo Committee explaining this factor as a source of black money observed, “In
spite of the vigilance exercised by the Government, controls and regulations came to be used by the
unscrupulous for amassing money for themselves. Since considerable discretionary powers lay in the
hands of those who administered controls~ this provided them with a scope for corruption – ‘speed
money’ for turning a blind eye to the violation of controls. All this gave rise to trading in permits,
quotas and licenses, malpractices in distribution and in the process; it generated sizeable sums of
black money.”
Price and distribution controls have in the past led to the generation of black money on a significant
scale. Any price control without any adequate machinery of distribution and speedy arrangement for
increasing supplies is potentially a source of black money generation.
Rent control leads to “pugree system” and is, therefore, another source of black money. Similarly,
the system of licenses requires large number of inspectors for completing various formalities and thus
good amount of hush money has to be paid. Where controls are not implementable, they have led to
harassment and black money generation.
(iii) Tax structure: High tax rates and defective tax structure have also been responsible for the
existence of black money to a large extent. Take for instance direct taxation. Till recently the tax on
income and on wealth was very high to invite evasion. The marginal rate of income tax was as high as
75 per cent. And when it was combined with the tax on wealth, it was still higher. For example, for a
person with net wealth ofRs.12 lakh, the combined tax rate came to 95 per cent. And for a person with
a net wealth exceeding Rs.18 lakhs, the marginal tax rate exceeded cent percent. This was the
situation in respect of personal taxation until a decade ago. The corporate tax rate too was very high.
In these circumstances the temptation / gain from tax evasion was substantial.
Even in the case of indirect taxes the situation is no better. In fact worse, as the revenue from these
taxes constitutes a big proportion of all the tax revenues. For example, in the case of government,
revenue from customs and central excise duties has been as much as 80 per cent of the total
revenue. Hence even a small fraction of the evaded tax runs into crores of black money. According to
the National Institute of Public Finance Policy the excise evasion is rampant in such sectors as
copper, cotton fabrics and plastics. It is also suggested by the Institute that the tax-evasion through
the underestimation of production and sales is most pronounced in manufacturing, trade, hotels and
restaurants.
(iv) Donation to political parties: Ever since the Government decided to ban donations to political
parties in 1968, it prompted businessmen to fund political parties, especially the ruling party, with the
help of black money. Ostensibly, this decision was taken to reduce the influence of big business on
the electoral process, but in practice what happened was precisely the opposite. Businessmen
everywhere have by now learnt that they should pay a certain charge out of the black money to the
coffers of political parties and then be sure that the political leaders will only bark but not bite. Big
business, in the process, has been able to tame the political leadership. This is evidenced by the
relaxation of various controls, permitting business houses to enter areas reserved for the public
sector, putting a large number of banned items on the Open General License list etc.
The political instability witnessed in the country in -various states has resulted in widespread horse-
trading of the MLAs at the state levels and MPs at the Central level. In this process of buying political
support, black money plays a crucial role. Consequently the determination of the ruling political party
to curb black money has become very weak. As a consequence, businessmen feel they have an
unfettered license to spin black money, pay a small part to the political parties as donations and then
enjoy the rest the way they like.Unless the link between black money and political power is broken,
there is no hope of controlling the generation of black money or its link with crime.
(v) Ineffective enforcement of tax laws : Whereas the Government has an armoury of tax laws
pertaining to income tax, sales tax, stamp duties, excise duty etc., their enforcement is very weak due
to widespread corruption in these departments. . The high rates of these taxes induce businessmen to
avoid recording of these transactions. This evasion largely goes unchecked and thus sets in a chain
reaction for the generation of black money at the wholesale, retail as well as production levels.
(vi) Generation of black money in the public sector: Every successive five-year plan is planned for
a larger size of investment in the public sector. The projects undertaken by the public sector have to
be monitored by the bureaucrats in Government departments and public sector undertakings. Tenders
are invited for the various works and these tenders are awarded by the bureaucracy in consultation
with the political bosses.
Thus, a symbiotic relationship develops between the contractors, bureaucracy and the politicians and
by a large number of devices costs ‘are artificially escalated and black money is generated by
underhand deals. Instability of the political system has given a further momentum to this process.
Since the ministers are not sure of their tenure and in a majority of cases, the tenure is very short, the
principle ‘Make hey while the sun shines’ is adopted by most of them. The larger number of scandals
that are unearthed by the Opposition only support the contention that huge investment in the public
sector is a big potential source for black money generation. In this process, bureaucrats act as
brokers for political leaders and thus the nexus between business, bureaucracy and politicians
promotes the generation of black money.
(Vii) Ceiling on depreciation and other business expenses: Government has imposed restriction It
has also circumscribed expenses on advertisement, entertainment, guest houses, payment of
perquisites to directors. The purpose of these restrictions is to protect the shareholders and
consumers from the unscrupulous action of businessmen. But businessmen feel that these
restrictions are unjustified. They take the maximum advantage of these provisions but do not like to
part with the remaining part of by various clandestine devices; they convert it into black money and
use it either for conspicuous production to satisfy the wants of the rich and elite sections of society.
