The parallel economy in India

May 02 2007, 00:00 IST
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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

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