BJP leader LK Advani may believe Indians have $462 billion stashed away in Swiss banks and yoga guru Baba Ramdev may think the figure is as high as $8.8 trillion. Global Financial Integrity, the organisation Advani swears by, thinks 42.4% of India?s GDP is in the unofficial/black sector ? up from 27.4% in the pre-reforms period. But a new estimate by the National Institute of Financial Management (NIFM) puts the number much lower, at 17% of GDP, and falling.
According to NIFM, the black economy was 30% of GDP in the early 1970s but this fell to around 15% of GDP in 2010-11. In 1985, NIPFP had estimated that around 21% of the economy was black.
NIFM was one of three institutions ? National Institute of Public Finance and Policy (NIPFP) and National Council of Applied Economic Research (NCAER) were the other two ? tasked with estimating the size of the black economy.
While the finance ministry has yet to accept NIFM?s estimates, the numbers are broadly in keeping with the changes in the economy ? with the government lowering tax rates, compliance levels have gone up, reducing overall levels of evasion.
From an average statutory tax rate of 54.9% between 1961-62 and 1975-76, corporation tax rates have been brought down to 32.45%; the effective top marginal rates of personal income tax was as high as 97.2% in 1971-72 and this fell to 30.9% in 2011-12; excise duties have fallen from 30-40% in the pre-1991-92 period to 10% in 2011-12 and 12% currently; custom duties are down from a peak rate of 300% in 1990-91 to an average of 12.5% at present.
As a result, India?s tax-to-GDP level has risen from 11% in FY91 to about 15% in FY12. Given that large segments of the economy are outside the tax net ? agriculture is 17% of GDP ? the effective tax-to-GDP ratio is actually much higher, suggesting that the informal/black component of the economy is falling.
NIFM has estimated the size of the black money using various models. A currency model, for instance, looks at the amount of currency in circulation and correlates this to economic activity. Given the rising proportion of transactions taking place without currency changing hands ? cheques, electronic transfers ? a higher amount of cash signifies a larger shadow economy. Based on the currency model, NIFM comes up with with an estimated shadow economy that, barring a few years, varies between 30% and 40% of India?s GDP. At current prices, the size of the unaccounted economy was estimated at around R30 lakh crore in 2010.
NIFM, however, rejects the currency model after elaborating on some of its flaws. A MIMIC (Multiple Indicator Multiple Causes) model is seen as a better one, and puts the black economy at 33% of GDP in 1971-72, declining to 17% in 1990-91 and to 7% in 2010-11.
NIFM then refines this further to what is called a dynamic MIMIC model ? which also has its shortcomings but is seen as the best model. Variables that are included in MIMIC include taxation, size of government, economic crime, economic reforms, money supply and consumption of electricity.
