The parallel economy in India

Discussion in 'Current Affairs, News and Analysis' started by Yusuf, May 11, 2012.

Welcome to the Army Rumour Service, ARRSE

The UK's largest and busiest UNofficial military website.

The heart of the site is the forum area, including:

  1. In the other thread that went OT, i talked about the Indian economy and also the how there is a large parallel economy. Old but relevant article on it.


    India's parallel economy is so deeply entrenched that possession of black money is not even considered worthy of reproach in social reckoning. In fact, custodians of the administrative machinery themselves seem to have joined the race to accumulate such wealth.Perhaps such attitudes were understandable to an extent during the high noon of repressive taxation and socialist subjugation in the 1960s and 1970s, when anything other than a frugal lifestyle was all but impossible for an honest taxpayer to maintain. Those were days of misery. But tax rates in India today are moderate by any yardstick in the world, and the persistence of the impunity with which black money is held suggests a much older provenance. Looking further back in history, the black sector emerged in India during World War II, when daily necessities were in acute scarcity and the government of the day adopted rationing as a welfare policy, thus introducing a system of controls. With prices no longer set by the natural interaction of market demand and supply, black marketeering—the surreptitious sale of diverted goods at higher prices—emerged. The continuance of controls, post-1947, that defied economic sense was justified in the context of the prevailing deprivation then. The parallel economy began to expand, and once the control mechanisms were instiutionalised, it attained multifarious dimensions.
    Estimates of black money, unrecorded and untaxed, circulating in the economy have varied widely from time to time. In 1967-68, it was placed at Rs 3,034 crore. But by 1978-79, it had soared to Rs 46,867 crores— more than 15 times in just 12 years. Black money was estimated to be 9.5% of GDP in 1967-68, rising to 49% of GDP in 1978-79 and 50.7% in 1987-88. This is an alarming rise, and had better information been publicly available on the trend, the pressure for market reforms may have come much sooner—saving India the delay that gave China its headstart.
    By the early 1980s, the problem was virtually blaring bright red danger signals. By one count, the rate of growth in the parallel economy was higher than that of GDP in the period from 1980-81 to 1987-89; the former rose by 46.7% and the latter by 40%.
    Sadly, however, the control raj legacy has not proven easy to shake off. As estimated by the Parliament Standing Committee on Finance, black money in circulation continued to exceed the accounted-for kind in the 1990s. Swiss bank deposits by Indians over the past decade are estimated to have swelled. Thankfully, India’s economic performance and opportunity for high returns have prevented ‘capital flight’ as classically understood. But in the export sector, under and over-invoicing of dollar deals carry on.
    [TABLE="width: 250, align: right"]
    [TR="bgcolor: #006699"]
    [TD="bgcolor: #006699"][/TD]
    [FONT=Arial, Helvetica, sans-serif]Black transactions skew market information and hurt the process of capital allocation. Clearly, ECBs disguised as equity investments are not the only reform required here[/FONT]​
    [TR="bgcolor: #006699"]
    Transparency International, which publishes a Corruption Perception Index, covering 146 countries, places India at rank 91. Some Rs 21,000 crore annually is estimated to exchange hands in the form of bribery in the country, which indicates the extent of the problem.Take the real estate sector. High taxes result in widespread cash transactions and under-declaration of deals, which skews market information and hurts the process of capital allocation. Clearly, ECBs disguised as equity investments are not the only reform required here.
    The existence of black money is injurious not just for tax revenues. It distorts the systematic resource allocation process and upsets the accuracy of economic forecasts. Good economic management requires precise and reliable data.
    Industry, meanwhile, needs a business environment that is free of arbitrary controls that may squeeze out bribes. The PHD Chamber of Commerce and Industry reckons that Indian industry loses at least Rs 63,000 crore of investment because of the corrupt business environment. With just a 15% check on corruption, India’s economic growth could get a 1.3% boost, and faster growth means more money to go round. It is good for all. Similarly, mobilising hoarded stashes of money for productive purposes could push up growth.
    What are the solutions? While policing has its uses, what would work better is a clear incentivisation of above-board transactions. Value added tax (Vat) has already had an impact. To claim Vat credits, large numbers of small shopkeepers are ‘opting in’—signing on to the formal system of business, keeping their books clean and paying taxes. This kind of movement depends on other business associates doing likewise, and it is good that the word of benefits is going around.
    Lower taxes, by and large, beget better compliance. Also, systems of controls that still exist need to be removed. For most rational operators, the risk of being caught on the wrong side of the law is not worth taking beyond a certain point. The job of governance is to make realistic estimates of what precisely these limits are, and then ensure that people are induced to work within the proper framework of law.
    This works by taking an empathetic view of business. Under what circumstances does a small trader, for example, feel constrained enough to jump the law? A system of rules and regulations that is seen as just and conducive to meeting the goals of individuals would encourage people to abandon parallel activities and participate in the official economy. In other words, high levels of black money should be seen as evidence that reforms in India remain a story of underachievement.

    The parallel economy in India
  2. NEW DELHI: The black money issue has angered the masses as various groups have put out staggering numbers to highlight the extent of the problem. Despite several studies since the early Fifties, the exact estimate of the black economy and black money has remained elusive.
    Against this backdrop, the government has been forced to commission a study by three top economic thinks tanks to get an estimate on the size of the black economy. The study is expected to be over by September 2012 and provide fresh insights.

    In 1955, a study conducted by noted economist Nicholas Kaldor showed that the black economy accounted for 4-5 % of the country's gross domestic product (GDP) amounting to roughly Rs 600 crore. In 1969, a panel headed by Justice Wanchoo recommended several measures to streamline the taxation system and estimated the size of the black economy at Rs 7,000 crore. Since then, several experts have undertaken various projects and given their assessments of the problem. A study conducted by the National Institute of Public Finance and Policy under the chairmanship of Raja Chelliah in 1980-81 showed that the black economy accounted for 20% of GDP which would now translate to about Rs 15 lakh crore. A study by S B Gupta in 1992 put the figure at 42% of GDP for 1980-81 and 51% for 1987-88.
    Experts say it is difficult to put an exact number to the problem. "It is very important to distinguish between black economy and black money. Nobody has an accurate estimate of how large the black economy is," Arun Kumar, professor of economics at Jawaharlal Nehru University says. Kumar who has authored the book " Black economy in India" estimates its size to be 50% of GDP which would translate to roughly Rs 39 lakh crore. Kumar made his estimate in 2005 2006. He says about 10% of this has gone out of the country through different channels such as hawala and trade under and over invoicing.
    Kumar says the size and scope of scams have also grown significantly since he undertook his study which would have generated additional black in come. According to him during 1996-1997 there were about 26 scams and in the period 2005 to 2008 there were 150 major scams which would have generated significant amounts of black income. He says all sectors of the economy, whether it is real estate, construction agriculture or services, con tribute to generation of black money. The services sector, Ku mar says, is the biggest generator of black income. Global Financial Integrity Group in its report – The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008 — says India lost $213billion in illicit flows and the present value of those flows would be at least $462 billion. The value is based on the short-term US Treasury bill rate as a benchmark for rate of return on those illicit assets.
    But the report says the estimate is under stated because of difficulties of capturing the extent of problem. "In all likelihood, this estimate is understated because economic models can neither capture all channels through which illicit capital can be generated nor the myriad ways in which the capital can be transferred."

    Parallel economy booms, but hard to tell how big it is - Times Of India
  3. There are various reports of black money in swiss banks held by various individuals amounting to over a trillion dollars.
  4. In 1998, the government of the time undertook an unusual step of coming up with a voluntary disclosure of black money.

    Voluntary Disclosure of Income Scheme (VDIS) was a very unconventional but successful step among the Indian economic policies. It would give an opportunity to the income tax/ wealth tax defaulters to disclose their undisclosed income at the prevailing tax rates. This scheme would also ensure that the laws relating to economic offences will not be applicable for those defaulters. Over 3,50,000 people had disclosed their income and assets under this scheme, which bought revenue of INR 7800 crore ($20 billion as per 1998 dollar price) to Indian finance ministry. The scheme were closed on 31 December, 1998.

    VDIS - Wikipedia, the free encyclopedia
  5. Black money? Don't think that you're actually allowed to say that...are you?
    • Like Like x 1
  6. There is a reason why India has only 18 million credit card users. The total usage on credit card is only $15 billion a year. In all likely hood a similar amount of hard cash exchanges hand every day. The reason to avoid banking channels is obvious. Black money cannot be routed through banking channels. Most people buy goods using cash. Some people even buy their cars by paying cash so that they can use their black money.

    In the last 10 years the number of people spending on luxury has been tremendous.

    When people talk about poverty and its figures in India, its entirely possible that it may not be accurate.

    I will give you guys an example of the "coolie" or porters if you will around my business area. Yes we dont use machines in India to transport goods. We do it the old fashioned way and for a vast majority of illiterate people, it gives them an easy source of earnings. These coolie or porters earn at least Rs 500 ($10) a day or 15,000 ($300) a month. The poverty figure as per WHO is $2 a day which in PPP terms is about Rs 30 a day. But these people live in a manner that qualifies them as being poor. 15,000 a month makes them liable to pay income tax but they pay none.

    That is but a small example. There are many such unorganized sectors in India which generates huge business and none of it reaches govt coffers.

    The point in all this is to show that there is a lot of underlying undisclosed wealth in India which no one knows. The amounts are huge. While there is no denying that millions are out there living in desperate poverty, but they are also coming out of it because of both government schemes and also the opportunities that exists in India to prosper.
  7. I dont know what is correct or not as per British terms, but in India, "Black money" means unaccounted money that evades tax and "white money" is legal money on which tax is paid. There is no racist connotation to it if that is what you are hinting at.
  8. It sounds racist to me. Not really something for a British military web-site to have on it. I think that the thread should be locked. And quickly.
  9. Every country has its terms. Calling someone a monkey may be perfectly all right in one country but racist in another.

    To be be more "politically correct" please guide me to appropriate words to replace as the words I have used are perfectly all right in India and used for ages.

    About this topic not fit for a military forum,

    1) There are many more irrelevant topics on display on the forum.
    2) Economics and military go hand in hand. Powerful economy affords you powerful military.
    3) Economy dictates military policy for example trying to secure energy needs and maintaining sea lanes of communication which in turn requires a lot of money to maintain.

    I'd leave it to the mods to decide.
  10. I note that under item 1. you agree that this is an irrelevant topic.

    Your last sentence is a gracious thought.

    P.S. All right is two words.
  11. Is it ARRSE India week or what?

    Can we do somewhere that's got a dog named after it on Monday, say Newfoundland for example.
  12. No not the week.. Just the weekend :)
    • Like Like x 1
  13. Two points:

    1) Are you on crack/methadone or similar.
    2) What relevance has this to anything? Why should I personally give two shits whether people living on the sub-continent use cash or credit cards.
    3) I refer you to point 1.

    I had Lasagne & Garlic bread for dinner, it was ****ing lush.
  14. Two points:

    1) Are you on crack/methadone or similar Yeah the best variety.. Straight from Afghanistan.
    2) What relevance has this to anything? Why should I personally give two shits whether people living on the sub-continent use cash or credit cards.Who gives two shits to what you think about the sub continent
    3) I refer you to point 1. Answered in point one

    I had Lasagne & Garlic bread for dinner, it was ****ing lush Why should I personally give two shits to that
  15. Negligent-Discharge

    Negligent-Discharge LE Book Reviewer

    How about on Niger (I can say that!)... isn't Niger where the Nigers live?