Impacts of Black Economy on India's Economy

Table of Contents
1)Introduction
2) Sources of
Generation
3)Industries
which generate
black economy
4)Impact of Black
Economy
5)Impact of Black
Economy on
SDG-9
6) Model of Black
income generation
in legal activities
7) Legal Aspects
8)Steps to reduce
Black Economy
9)Conclusion

Introduction
 A black economy is that portion of a country's economy that is undocumented.
Individuals prefer to operate within the black economy so that they can avoid making
tax payments to the government, or to avoid price controls or rationing. The black
economy operates by using cash payments or barter to settle transactions. The
transactions occurring within the black economy are not included in a country's gross
domestic product (GDP) calculation, since there is no way to measure it.
 The black economy constitutes a large part of the total economy of a country in the
developing world, because these nations have a large proportion of low-income citizens
who cannot afford to pay taxes. Consequently, the GDP figures for many developing
nations are probably severely under-reported.

 There also tends to be a thriving black economy when a government
imposes excessively high taxes, or when the government restricts certain
types of activities, such as the sale of drugs or weapons. A black economy
is also present when the government imposes an excessive amount of
regulation. Examples of black economy transactions are:
 The sale of illegal drugs
 The provision of unauthorized transportation services
 Smuggling heavily-taxed goods over the border for sale within the country
 Paying cash to a housekeeper
 Unauthorized currency conversions

What is Black Economy?
• In India, black money is funds earned on the black market, on which income and
other taxes have not been paid. Also, the unaccounted money that is concealed
from the tax administrator is called black money.
• The black money is accumulated by the criminals, smugglers, hoarders, tax-
evaders and other anti-social elements of society.
• People generally tend to keep black money in the form of gold, immovable
property and other secret manners. Such money does not become part of the main
economy and, therefore, remains generally out of circulation. The black money
keeps circulating among the wealthy and creates more opportunities for them.
• Around 22,000 crores of rupees are supposed to have been accumulated by the
criminals for vested interests, though writ petitions in the supreme court estimate
this to be even larger, at ₹300 lakh crores.
• The infusion of unaccounted black money in the economy leads to higher
inflation, which obviously hits the poor the most. It also increases the disparity
between the rich and the poor.

What is the difference?
Black Economy
 Black economy can be defined as the
part of a country's economic activity
which is unrecorded and untaxed by its
government. The black economy is
made up of the collection of various
black markets in an economy.
 The black economy is all economic
activity in a given economy that occurs
outside or in violation of the prevailing
laws and regulations of society.
 Activity in the black economy is often
illegal, usually untaxed, and rarely
recorded by official economic statistics.
In fact, the activity may not consist of
formal market transactions at all,
making it very difficult to estimate.
Black Market
 A black market is an economic activity
that takes place outside government-
sanctioned channels.
 Black markets trade in illegal goods and
services, legal goods and services to
avoid taxes, or both.
 Black markets do provide some
benefits, such as creating jobs for those
who may not be able to find
employment in traditional markets and
allowing access to medicine and
healthcare to those individuals that
might not have had access otherwise.

Continuing…
Black Economy
 Black economies typically arise when a
government restricts economic activity for
particular goods and services, either by making
the transaction illegal or by taxing the item so
much that it becomes cost-prohibitive.
 A black market may arise to make illegal goods
and services available or to make expensive
items available for less money (such as pirated
music or software). The black economy also
consists of fake goods industry where replicas of
the goods belonging to another well-established
brand are sold under the same name. The fake
goods industry is outside the formal economy,
causing piracy and loss of revenue to both the
brand and the government. This is part of
unreported or the unrecorded economy.
 For example, there is a restriction on production,
cultivation, trading, and distribution of any
narcotic drug or psychotropic substance under
the Narcotic Drugs and Psychotropic Substances
Act, 1985. This would be part of the illegal
economy.
Black Market
 Black markets can have a negative impact
on the economy because the activity is not
reported and taxes are not collected on the
transactions.
 With the rise of the Internet, many black-
market transactions are now done online,
such as on the dark web, and often
conducted with digital currencies.
 Example of this can be black marketing of
oxygen concentrators by Navneet Kalra,
this the most recent example we can see.

Major sources of Black economy
1)Real Estate
2)Bullion & Jewellery
Market
3)Public Procurement
4)Financial Market
Transactions
5)Informal Sector & Cash
Economy
6) Tax Havens

7)Profits earned
through unorganized
markets
8)Donation to
political parties
9)Smuggling
10)Control and
licensing system

Size of black economy in India created
by different industries
 It is estimated that India has a black economy of 62 percent of GDP - earning
roughly Rs 93 lakh in income (or USD 14 trillion). This is greater than the
combined revenue from agriculture and industry, which is around 39% of
GDP. It is more than the government (centre plus states) expenditure, which
is around 27% of GDP. The country's economy lost an average of 5% growth
from the mid-1970s, when the Black economy was important in terms of its
presence (in comparison to official numbers).
 In the last four decades or so, if we add 5% of growth rate, our economy
would be Rs 1,050 lakh (or around US Dollars 15 trillion at current exchange
rates) rather than Rs 150 lakh (or 2.2 trillion US Dollars) as is now the case.
Behind the US and the middle-income countries, we would have become the
second largest in the world. The country's revenue per capita was Rs 7.4 lakh
(or $ 11,000) rather than about Rs 1 lakh (or $ 1,500). That is to say, each of us
would have been on average seven times richer.

Impacts of black economy
 Loss of revenue to the government and running of parallel economy in the
country- The black money is in such amount that it is said that a separate economy
including only black money is running parallel to the current Indian economy.
 Vicious circle as a result of black money and corruption- The bribes are given by
the people to the bureaucrats, government officials, etc. for getting their work done
go to the unaccounted books and is never shown as income which adds more black
money to the society.
 Effects on national income and real capita income- Black money is a result of
revealing low income to the government while paying tax by the people which also
results in low national income of the country.
 Decrease in the quality of public goods & services- The people who give bribe to
the producers and marketing staff or the services provider will naturally get good
quality products and services in comparison to the general public who will not be
provided with the same products and quality of services has to suffer.

 Higher taxation and inflation- The Reserve Bank of India itself has admitted that the
amount of money in circulation in the Indian economy is quite more than the money inflow
on papers.
 Difficulty in the formation of monetary and fiscal policy- This is an obvious impact as the
government while making these policies is not able to count the exact national income
because of the hidden black money which makes such policies unrealistic.
 Increased criminal activities in the society- Various terrorist activities have backup power
of hoarders of black money which is even harmful to the whole country. The illegal
weapons with various groups of unsocial elements are usually bought up by the use of black
money. Drugs are the biggest enemy for the youth of the country.
• It is estimated that India has a black economy of 62 percent of GDP - earning roughly
Rs 93 lakh in income (or USD 14 trillion). This is greater than the combined revenue from
agriculture and industry, which is around 39% of GDP. It is more than the government
(centre plus states) expenditure, which is around 27% of GDP. The country's economy lost
an average of 5% growth from the mid-1970s, when the Black economy was important in
terms of its presence (in comparison to official numbers).

IMPACTS
of
BLACK ECONOMY
on macro level

India's black economy is estimated to be 62% of GDP- generating about Rs. 93
lakh crore of revenue Because of its existence, the country's economy has been
losing on an average 5% growth since the mid-1970s when the black economy
became significant. If we add 5% to the rate of growth over the past four decades
or so, the size of our economy would be Rs 1,050 lakh crore instead of Rs 150 lakh
crore as it is now. We would have become the world's second largest income nation
and every one of us would have been seven times richer on average.
These figures are enough to show the degree and nature of the impacts of Black
economy on any nation.

PROS of Black Economy
Despite the natural negative effect of Black economy, there are few pros of
Black economy too:
1) The shadow economy provides jobs and income to people who might not
have good options in the legitimate economy. For example, a street market
allows dozens of entrepreneurs selling similar products to compete.
2) It allows people to afford medicine, health services, and other essential
products they could never obtain otherwise. For example, a doctor in a
country illegally can provide low-cost health care on a cash basis because he
doesn't pay taxes.
3) It also helps countries survive economic downturns.
When people lose jobs, they turn to the shadow economy to survive
until the recession is over.

CONS of Black Economy
1) It uses money laundering to convert payments to a legitimate form: The goal of
money laundering is to move the money from the illicit business through many
transactions to obscure the money trail. It prevents bank compliance officers and
federal officials from recognizing the signs of an underground business.
2) It may provide goods or services that are prohibited by law. Also, it could provide
legal goods or services that avoid taxes.

3) Bank capital itself tends to respond to changes in bank lending and the
macroeconomic environment: A large part of the variation in bank capital is likely
to result from variations in macroeconomic variables (such as changes in economic
activity and interest rate spreads), as well as from changes in economic policy per
se. For example, changes in macroeconomic variables affect capital through
operating income and asset valuation.
4) Black economy equals less revenue to government: Though huge amount of money
is involved in black market transactions throughout the world, the very aim of these
off-the-record transactions is to avoid the various taxes, which otherwise need to be
paid to the governments. Owing to this, every year, the various governments tend to
lose revenue amounting to millions of dollars, which otherwise would have been
used for the benefit of countries and their citizens.
5) It causes underestimation of National Income:
The black market is illegal in nature, and all the transactions
that happen therein, are off the record. In the absence of
any authentic record, it is very difficult for the government
to correctly estimate the actual economic status of the country.
Consequently, it becomes immensely difficult for the
government to plan and implement policies for
the country’s economic development.

Sustainable Development Goal 9
The aim of SDG-9 is to build resilient infrastructure, promote inclusive and
sustainable industrialization and foster innovation .
This is because economic growth, social development and climate
action are heavily dependent on investments in infrastructure, sustainable
industrial development and technological global manufacturing – considered
an engine of overall economic growth – has been steadily declining due to
tariffs and trade tensions.

How Black economy acts as a hindrance in
achieving SDG 9...
 In order to achieve SDG 9, countries have determined that investing in more
resilient infrastructure, cooperating across borders, and encouraging small
enterprises will all be critical to ensuring sustainable industrial development.
 They will also have to improve our existing industrial infrastructure, and here,
technological innovation will be key. Governments and businesses will have to
contribute to creating a hospitable policy environment for innovation, encourage
scientific research, and improve access to information technology universally.
 For implementing these ideas, any nation will be required to fulfil
three basic prerequisites:
a huge budget for investment as advancing infrastructure requires a
huge capital investment;
an effective government occupied with an incorrupt bureaucracy as
mere allocation of funds is not enough but the execution
matters more;
will of the public and businesses to contribute towards
sustainable development.

Now as we are well aware of the impacts of Black economy, we know that:
 Black economy reduces a government's revenue significantly. As it facilitates
tax evasion, a large amount of money which was supposed to be in
government's treasury gets eat up in black market. Also most of the good sold
in black market are those which are either banned or are highly taxed. So that
extra tax, or the penalties on illegal sales of such goods, never come to
government. Thus, it hampers the government's capacity to invest on better
infrastructure.
 Black economy and corruption go hand in hand as one induces the other. The
strong presence of black economy disrupts the smooth functioning of the
government schemes as a majority part of the bureaucrat is corrupt. So even if
a government somehow manages to put in a huge investment, the end product
will be of much inferior quality as a huge portion of that investment got stuck
away in the Black economy. For low-income countries,
where the governance is weaker than in high-income countries,
corruption and shadow economy may help firms to
avoid government regulations, to solve many
economic problems and thus, the negative effect of
corruption and shadow economy is reduced for low-income
countries as compared to high income countries

 When companies can earn a much larger profit in black economy, they
would never want to cut off their profits and work in a sustainable
way. We have already been witnessing various incidents since a long
time where capital giants skip the measures required for a sustainable
growth and often big capitalists get their names involved in money
laundering, black marketing and other financial scams. As long as
black economy prevails in the current world, these things are not
going to change at all.
Additionally, the public already have less trust on the state forces
owing to the prevalent corruption. As the figures of the national
economy also get affected negatively from the black economy, public
start to look down upon the government's economy policies.
And as we saw that there are few advantages of the black economy
too especially on a micro level, people tend to indulge in it
due to these benefits and the lack of trust on state.
So the contribution from businesses, especially
small entrepreneurs and the people is likely to
remain negligible towards achieving SDG-9.

Generation of Black Economy
through Legal Activities
An important example of the black economy is legal goods and services that are shielded from
taxes. It includes any work done "under the table." It includes any income that isn't reported to tax
authorities. For example, a construction worker engages in the black market economy if he takes a
cash payment and doesn't report it on his taxes. The work is legal, but his tax avoidance isn't.
Another source of black income generation is the variety of permits that are required from
government agencies for construction or transfer of urban properties. Any new building requires
sanction of a building plan, water connections, electricity connections, a completion certificate and
so forth. For expeditious clearance each of these typically requires payment of bribes. Even the
simple registration of
sale deeds has often to be consummated through bribes.
In the case of Delhi a large portion of urban land is controlled
by the Delhi Development Authority (DDA) and the
Land and Development Office (L&DO) of the Union Ministry of
Works and Housing. Transfer of such lands or the
associated construction requires prior sanction by the concerned authority.
Further, 50 per cent of capital gains (the "unearned increment") is required
to be shared with these governmental agencies. All this affords substantial
opportunities for unscrupulous elements in the staff of these
agencies to extort bribes from the concerned parties.

Typically, both buyer and seller of real estate have incentives to declare a lower
price on the sale deed than the one at which the transaction actually occurs.
For the seller, these inducements include:
a. the evasion of capital gains taxation;
b. the continued evasion of wealth tax in so far as the black portion of the sale
proceeds can be held in undeclared forms of wealth;
c. ready access to black funds for use in activities-including fresh purchases of
real estate-where such resources are necessary.
For the buyer, the incentives encompass:
a. the evasion of wealth tax;
b. the evasion of stamp duties and registration charges. on the transaction;
c. the evasion of income tax (corresponding to income from house property);
d. the evasion of house property tax;
e. investment of black resources in a form in which its detection is far more
problematic and in which it earns a higher return than is the case with some
alter natives such as undisclosed cash or 'benami' financial assets.

Steps To Reduce Black Economy
 Reform in Labor Laws-
One institution that unambiguously increases the shadow economy is the strictness of
employment protection legislation. Pro-worker laws were also associated with an
increase in urban poverty. So in order to reduce black economy, one of the things that
the government could do is reform the labor laws that currently make hiring labor
through formal channels costly. In addition, we need a social safety net in place to
support such reforms.
 Right to information-
The black economy functions in secrecy. It is crucial to bring under RTI all political
parties, the judiciary, the prime minister and the chief ministers’ offices. If it is
extended to them, it would make the politician and the executive accountable and
their functioning transparent so that, unlike at present, they cannot subvert the law
deliberately.

 Business Transactions
India has consistently fared worse on the ‘ease of doing business‘ index. One of
the main reasons for this is the lack of transparency in rules and regulations
governing business transactions. Reforms in these laws would certainly reduce
the growth of the informal or black economy.
 Changes in structure of taxes
The tax structure needs simplification and modification.
 Corporation tax should be on gross profit and not net so that the costs
incurred cannot be manipulated to show lower incomes.
 Property taxation, which is currently manipulated by fudging the value
declared, should be based on site and services valuation.
 Indirect taxes too need to be simplified by levying them only on final and
luxury goods.
 In the case of taxation of services, incomes are manipulated since norms are
difficult to establish. Such manipulation of income by those in the services
sector needs to be checked via what is called a presumptive tax.
 Other regulations that introduce opaqueness in implementation and
compliance can also increase the size of black economy or the ability .of the
informal economy to pay taxes. The policy of a goods and services tax is a right step in this regard.

 Infrastructure Related Policies and Regulations-
One of the peculiarities of the Indian informal manufacturing sector growth after 1989
is that it is significantly present in urban India and is constituted mostly by one-person
establishments focused on tradable sectors. There is some evidence of subcontracting
from larger enterprises suggesting benefits in staying close to the outsourcing firm.
These could come from infrastructure being more dependable in urban areas than in
rural ones suggesting some role for infrastructure related policies and regulations.
Also, subcontracting to the informal sector could be thought of as a way of avoiding
hiring labor formally.
 Political change needed
 A major reform required is that political parties function democratically.
There is need for internal democracy. Many of today’s leaders come up
without serving the people and take over parties. Parties and
constituencies are often passed on by political leaders to relatives like
property. Such leaders are often contemptuous of the people and
represent mostly the interest of society’s upper crust.
 Citizens’ groups which can present an independent record of the
performance of the candidates before elections will help make voters
better informed. A politically alert public – which votes consciously in
the national interest and not along caste and communal lines – is needed.

 Women Participation
The growth of the informal sector suggests increasing economic participation of women
and could be thought of as a healthy trend. To promote such participation in the interest of
reducing gender disparities in economic outcomes would mean finding other ways of
tracking such economic activity and bringing it under taxation without distorting the
incentives.
 Fundamental changes in the structure and organization of economy and politics.
 We need to replace the extractive institutions with ones that broaden access to resources
and opportunities, and help build the capabilities of the masses. This is easier said than
done and may entail significant political costs in the short term, reducing its
attractiveness as a political platform.
 The urban elites, where most of the votes, taxes and policy influences come from, have
reaped the benefits of globalization. In order to make these benefits accessible to the
masses would require significant shift in resource allocation and government spending
towards better schools, electricity, roads and law and order.
 The set of policies that could influence the size and growth of black economy as well
as corruption have to do with transparency of policies governing different economic
transactions in the economy and their sensitivity to socio-economic problems in India.

Some steps taken by Government
but did not work
Voluntary Disclosure Schemes
 The idea behind the government announcing the Voluntary Disclosure Schemes,
which were introduced six times until 1997 was that if the black savings
accumulated over time could be channeled into the white economy then at least it
could contribute to the development of the economy.
 The government also came out with Bearer Bond scheme in 1979-80.
 In 2016, it floated an Income Declaration Scheme to raise resources for
development.
All of these schemes proved to be counter-productive as it had made people habitual
tax offenders. The ineffectiveness of these kinds of schemes shows a lack of
imagination on the part of the government as well as an inability to come to grips
with the problem for a variety of reasons.

Demonetization
• It wanted to eliminate counterfeit currency used by terrorists and smugglers and it
wanted to destroy the black economy by forcing the ‘de-hoarding’ of cash held by
those generating black income. But,
• since demonetization was announced, unemployment has risen, investment has
fallen, banks are facing difficulties and the crisis in agriculture has been
aggravated in spite of a good monsoon. All this leads to the emergence of
recessionary conditions in the economy.

CHITRANSH SRIVASTAVA 20BAL169
HARSHIT SINGH 20BAL176
KHUSHI GUPTA 20BAL189
LAVANYA THAKUR 20BAL191
RITAMBARA SHARMA 20BAL205
TANISHKA GUPTA 20BAL220
PRESENTED BY

Impacts of Black Economy on India's Economy

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