Parallel economy research paper ppt

1. PARALLEL ECONOMY: ISSUES AND
CHALLENGES
Presented by:
Abhinay Kumar
1

2. ABSTRACT
 PM Modi and Economist show an effective interest
from last two year is to narrow down the gap
between rich and lower section.
 Therefore govt initiative to unearth black money
through demonetized of legal tender would be
strong move to curb the black money and also
avoiding the tax litigation.
 Due to this GDP is undervalued and biased
financial statement of corporates. This deliberately
false representation come to an end along with the
roll over of GST standard rate would be a revenue
enhancing policy to reduce the magnitude of black
money. 2

3. INTRODUCTION
WHAT IS PARALLEL ECONOMY?
 The term parallel economy is coined by “Dan Bawley”.
 According to National Institute of Public Finance and
Policy (NIPFP) defines-”Black Money is the aggregate of
incomes which are taxable but not reported to the tax
authorities.”
 According to Edgar L. Feige defines “The hidden economy as
including those economic activities which go unreported or are
unreported by the society current technique for monitoring
economic activity”.
 Thus it isn’t included in that government’s Gross National
Product (GNP) and Gross National income.
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4. GAP
 GDP and GNI is still undervalued.
 Real Gross National income and Output are biased.
 Estimated black money excludes income from
smuggling, black market transactions, acceptance of
bribes etc.
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5. OBJECTIVES:
 To study the causes and impact of parallel
economy.
 To study whether the India’s GDP is undervalued or
not.
 To Study the main reason behind the generation of
black money.
 Methodologies for estimating parallel economy. 5

6. 6
Size of the Parallel economy

7. INDIA’S POST LIBERALIZATION PARALLEL ECONOMY
7
128,076
124,642
118,018
131,730
147,015
153,710
165,343
167,241
180,185
188,561
198,399
212,204
254,999
316,984
383,854
445,088
580,636
640,668
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Estimated Parallel economy volume(In USD)
Parallel economy volume(In USD)
Estimates of the Unreported Economy in India:
Gupta and Gupta paper

8. FROM WHERE IS IT GENERATED?
 There are two means – Illegal means and Legal means
 Illegal means: Such as drug trafficking, weapons
trading, terrorist funding, counterfeit currency, crime etc.
 Corruption: which includes bribe given to and by public
officers.
 legitimate income that is concealment from tax
authorities for the purpose to evade tax.
 Commercial classes generate black money through
Trade by manipulation of “books of account”.
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9. PROBLEM OF PARALLEL ECONOMY
 The magnitude of ‘black‐money’ is large and difficult to
quantify which is rising at an alarming rate.
 The illicit income out of it is neither taxed nor monitored by
a govt.
 Therefore it’s difficult to estimate unaccounted black money
fairly.
 It leads to inequalities in income and wealth or say income &
wealth disparity.
 Black money stashed into the foreign bank (Tax haven)
which is complex for the tax regime.
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10. CAUSE OF GENERATING BLACK MONEY
 Controls and licensing system: Black money is increasing in
India for the reasons of controls, permits, quotas and licenses.
 Higher Rates of Taxes: It has resulted a growing tendency of tax
evasion among the tax payers.
 Ineffective enforcement of tax laws: In India, the enforcement of
tax laws is quite weak. This has led to enormous unrestrained
evasion of taxes and piling up of black money.
 Funding of political parties: Big trade houses are donating an
enormous amount of black money to the political parties.
 Agriculture income
 Privatization
 Other Factors: Like smuggling, property deals, bribery, kick‐ backs,
commissions, concealment of income by professionals, artists etc.
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11. IMPACT
 Black income has been causing underestimation of real GDP in
India.
 Corruption
 Less Tax for the Government: Loss of revenue from tax due to
higher tax resulting to tax evasion.
 Uncontrollable inflation
 Leads to speculation: Black money has resulted in diversion of
resources into the real estate & luxury housing lead to 95 % of
speculation which lead to hurt the sentiments of real buyer.
 Transfer of Indian Funds Abroad to Safe Heavens: that was
come back as FDI, hawala & through participatory notes which is
mobilize in the Indian stock market as a white money.
 Leads to Mass Poverty: Abundance of black money with the
businessmen is resulted in inequality of income and wealth.
 Inflated Real Estate: Artificially inflating the price. And get
converted to legal money.
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12. CHALLENGES
 Dabba trading creating a tunnel for black money.
 Sec 80 GGA and deduction in respect of charitable trust
is still facilitate in the conversion of black into white
money.
 Lack of financial investigation and knowledge of tax for
identifying loopholes in the tax system.
 Lack in effective tax officer because they promoted from
lower grade till to senior officer without efficacious
upgrading their knowledge of tax.
 Majority of I-T department employee is vulnerable in
black money.
 And also some more effective amendment in existing
law is pre-requisite to curb black money.
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13. METHODOLOGY FOR ESTIMATING PARALLEL ECONOMY:
1. Monetary Approach.
1.1 Denomination of bank notes
1.2 Currency ratio/Demand Method
1.3 Transaction Method
2. Income and Expenditure measure.
2.1 GDP income/expenditure discrepancies
2.2 Household income/expenditure discrepancies.
3. Indirect Non-monetary Measures
3.1 Ranking Method
3.2 Electricity consumption 13

14. GOVERNMENT INITIATIVES:
 Demonetization: It is an effective way to curb the black
money, corruption, terrorist funding, counterfeit currency to
shrink magnitude of parallel economy. And the people with
high accumulation of wealth in cash is more impacted by
the same is the prime objective.
 Voluntary disclosure scheme (VDS)- VDS which was
extensively advertised yielded tax revenue of Rs.10,500 Cr,
Rs 65000 Cr. in 1997 and 2016 respectively.
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15. RECOMMENDATIONS AND SUGGESTIONS
 Agriculture income should be taxed for those who have
both the agricultural as well as non-agricultural income.
 Creating awareness program so as to increase the use
of Plastic Money .
 Govt should reduces the tax levy on card payment so as
to pass on the incentives to end consumer.
 The use of technology be made on like E-Registration
with Revenue Authorities, E-Filing of Returns.
 Lower the effective tax rates and marginal tax rates.
15

16. CONCLUSION
 Parallel economy is a menace for the Indian
economy and the magnitude of this squeeze out
due to an effective move that is demonetization in
NDA regime.
 And further the gap between official and unofficial
economy will narrow down.
 Demonetization and GST come into picture which is
a better revenue enhancing policy made by govt to
curb and probe the case of manipulation in the
books of account that will aid in long term
sustainable growth of India.
 The prime objective of the govt will definitely
benefiting to the lower income group. 16

17. REFERENCES
 https://www.centralbank.gov.cy/media/pdf/PBRPE_ME
ASURINGTHESIZEOFTHEINFORMALECONOMY_05200
7.pdf
 http://www.crisil.com/youngthoughtleader/winners/topi
c4_Jyoti_Agarwal_IIM_CAL.PDF
 http://finmin.nic.in/reports/whitepaper_backmoney2012
.pdf
 Estimates of the Unreported Economy in India: Gupta and
Gupta paper
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