India's mushrooming black economy
By Indrajit Basu
KOLKATA - As India's economic ministers patted one another's backs last week,
taking credit for the country's gross domestic product (GDP) recording its
second consecutive year of more than 9% growth, attention turned to the problem
of the parallel "black" economy - the one that remains off the books and beyond
the reach of the taxmen.
The black economy, which "quintessentially was the phenomenon of the 1970s, is
back and booming", said Business World, a
leading business magazine, adding that it is distorting the legal economy,
pushing up stock and property prices, causing inflation and even making the
rupee unusually strong against the US dollar, all of which is taking its toll
on the country's industries and taxpayers.
Indeed, it is an economic problem that India has been fighting for decades. Yet
even as successive governments have claimed that the aggressive liberalization
of the past 18 years has been able to weed out much of the black economy, it is
still thriving and the country can't really function without it.
There are no hard numbers on its size, since black money is generated by both
legal and illegal activities. However, according to Arun Kumar, a professor at
Jawaharlal Nehru University in New Delhi, author of Black Money in India,
the black economy has assumed huge proportions and it keeps growing. His
estimates suggest it is worth a whopping US$500 billion - almost half the size
of the official economy - but some say it is even larger and could be as high
as 70% of the official economy, if parallel activities undertaken outside the
country are considered.
"Don't forget that parallel economic activity pertaining to the Indian economy
does not just happen within the [country's] borders," said Sanjay Kapoor, a tax
consultant based in Delhi. "For instance, a lot of real-estate deals are struck
in Indian rupees in Dubai, and rupee-denominated business deals are not unusual
even in New York."
Kumar said: "An Indian is affected at every step by the black economy. The
education of a child, a visit to a doctor, policemen who extort money ...
electricity or water departments all demand black payments."
But the black economy is a global problem. The Economist magazine, for
instance, estimated that in 1998 the world's black economy accounted for a
missing $9 trillion worth of output - a volume of output almost equivalent to
that of the US.
Later, a study by Friedrich Schneider, an economics professor at Johannes
Kepler University in Linz, Austria, attempted to measure the size of the black
economy in no fewer than 76 developed and emerging economies, revealing that
underground activity is equivalent to 15% of officially reported GDP, on
average, in rich economies, and about one-third of GDP in emerging ones.
But the difference in India is that while most of the underground economy
elsewhere in the world revolves around criminal or illegal activities, the
major contributors to the black economy in India are legal businesses and the
government.
According to the New Delhi-based think-tank Indian Council for Research on
International Economic Relations (ICRIER), legal businesses controlled by the
government, government expenditures and taxes have also been the "major source
of black-money creation".
For instance, say officials from ICRIER, no real-estate deal in the country is
done without the involvement of at least 40% unaccounted-for money, and a large
portion of the billions of dollars in foreign-exchange inflows that India sees
every year is actually the returning black money that went out of the country
in the high-tax regime before liberalization began.
ICRIER adds that the government control and licensing system reached its peak
during the 1970s and resulted in the infamous license permit-quota raj. And
though a gradual process of de-control started in the 1980s, with a major spurt
taking place in the early 1990s, has resulted in the dismantling of that
licensing regime, the process is far from complete.
But is black money really all that evil?
Some feel the black economy may provide benefits. T C A Ramanujam, a former
chief commissioner of the Income Tax Department, for instance, prefers to call
the black economy a "parallel economy", since "the hidden or informal economy
operates alongside or underneath the visible formal economy", and says it is an
integral part of the modern or capitalistic economic model. "Much of the
investments in real estate would not have been possible without the informal
sector participating in a big way," he said.
And Sanjay Kapoor, the tax expert from Delhi, highlights the upside of the
black economy from another angle by arguing that "had it not been for the
shadow economy, India's dream of funding the $150 billion worth of investments
may well have remained a dream".
The black economy is perhaps not India's biggest problem; a bigger problem for
the Indian economy is that "we already see signs of overheating", said Charles
Kramer, division chief of the Asia and Pacific department of the International
Monetary Fund. Indeed, many fear that the economy is so hot that its current
pace of expansion is not sustainable.
According to experts, although consistent double-digit growth in manufacturing
and services saw the country record an 18-year high in GDP, fourth-quarter GDP
growth was slower than what was seen (more than 10%) in the same period a year
ago, chiefly because of slower growth in agriculture, construction, and
financial and social services, all of which indicate deceleration of the growth
momentum.
Despite optimism, added The Economist magazine, the fact is "demand is
outpacing supply and hence the pace of growth is unsustainable". To support its
argument, The Economist said that in spite of the fact that oil prices have
been lower lately, wholesale price inflation has risen to 6%, which is above
the 5.5% upper limit set by the Reserve Bank of India, the country's federal
bank.
"India's capacity for growth has certainly increased over the past decade,
thanks to earlier reforms," said The Economist. "Yet given widespread signs
that India is already exceeding its speed limit, there is a high risk that if
the economy continues to grow at 9% or more, it will get ever hotter."
Moreover, N R Narayananurthy, founder and former head of India's poster-boy
information-technology company Infosys, said, "The dilemma [in the Indian
economy] is that although India is now really taking advantage of globalization
and is highly integrated into the global economy and growing very rapidly, it
has not so far been able to create opportunities for the 650 million people
living in rural India and earning a tiny income every day."
Therefore, experts suggest that instead of making the economy run "beyond its
safe maximum speed", policymakers and the government should concentrate on
clearing the path of hurdles that lie ahead. According to ICRIER, the need of
the day in India is not a scorching economy but "better infrastructure and
education, which are needed to make the rural poor more mobile" as well as
improved public services, which can not only increase growth, but also spread
the rewards.
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