Relationship between “Black Money” and “Parallel Economy”

“Parallel Economy” means an illegal economic domain. It represents a segment which is not legitimate; it practices those activities which are contrary to the principles of economic policy pursued in an economy.

The black economy emerged in India from Second World War. While there was shortage in supply owing to war situation there was artificial scarcity which compelled the government to introduce control and rationing. After independence economic activities became many fold. The black economy in the process began to increase much more.

There has been various studies to measure the quantum of black economy in India. Eminent economist Nicholas Kaldor (Report on India’s Tax Reforms), Wanchoo Committee (Direct Taxes enquiry Committee), D.K. Rangnekar’s studies are some of the remarkable steps in this direction. But the most acceptable and comprehensive study was undertaken by National Institute of public Finance and policy under Dr. Raja Chelliah’s supervision.

Dr. Sankar Acharya directed the course of study. Black income according to this study—those which are taxable but not reported to tax authorities. It is also the unaccounted income. This study mentions that black income is generated from false reporting of incomes, output and transactions for reasons of tax evasion, flouting of other economic controls and related motives.”

In calculating black income the study adopts “the minimum estimate approach.” But is does not take into account black income through smuggling, acceptance of bribes, kick back (Dependable data on these issues are rare). The study mentions the issues of black income generation in six areas, such as: (i) factor payment received during production process under statement of rates, improper classification of personal expenses by various enterprise.

(ii) Uncounted money generated during sale of real estates. Here assumed black money-white money ratio is 40: 60%.

(iii) Fixed Capital formation in PSUs during construction of PSU, erection of buildings, plants and machinery at least 10 percent funds are siphoned off.

(iv) Black money is also generated by private sector when the officials receive kickbacks from contrac­tors/suppliers.

(v) Under-invoicing of traditional items during export.

(vi) Black Income generated by over invoicing of import by private sector.

NIPFP study mentions that in 1975-76, total black income was Rs. 9958 to Rs. 11,870 corers (15 to 18% of GNP), in 1980-81 the amount estimated was Rs. 20362 to Rs. 23678 crores (18 to 21 of GNP), in 1983-84 the estimated amount was Rs. 31584 to 36784 crores.

NIPF study though neglects many aspects of black money generation but it is totally a different and an improved approach in estimation of generation of black money.

Parliament Standing Committee on Finance and Black Money estimated black money circulation in 1994-95 was Rs. 1100000 crores while GNP was Rs. 843295 crores. The black money was 130 percent of Total Country’s GNP.