Parallel economy - Problems of growth, Business Environment | Business Environment - B Com PDF Download

Context:

The Indian economy has continuously recorded high growth rates and has become an attractive destination for investments; but the recent unearthing of corruption cases has thrown light on the dark side of the growth that is rise of the black money circulation in the economy.

What is parallel economy?

When economic activities goes unreported or not measured by societies current techniques to monitor economic activity it falls under parallel economy. Money that have neither been reported to the public authorities at the time of their generation or at any time of possession; no taxes have been paid on it. Also known as Phantom trades or Shadow economy.

A hidden economy in its broadest sense may consist of - a) illegal economy, such as money laundering, smuggling, etc; b) unreported economy including tax evasion; c) unregulated economy, that is economic activities outside  law and regulations. 

History of the parallel economy in India:

The British East India Company in late 18th century laid the foundations of both a corrupt bureaucracy and a parallel economy during World War II. The Indian black economy is immense, lucrative, widespread, and has grown significantly since independence. The black economy has grown from about 3% in the mid-50s to 20% by 1980, to 35% by 1990, and 40% by 1995. 

Supreme Court asked the central government to appraise it of steps taken to implement the recommendations of the Special Investigation Team (SIT) on retrieving black money and to curb the menace of unaccounted wealth.

What are the reasons behind the growth of the black money in the country?

Income generated from illegitimate activities like smuggling, arms trafficking, corruption; even those generating income legitimate activities avoid paying taxes because of excessive taxation, greed and perception that government is corrupt and won't use it for public good. 

As a percentage of GDP and at almost $1 trillion in absolute terms, the black economy is larger than both the industrial and agricultural sectors. Corruption is pervasive from the lowest to the highest levels of public administration, public enterprise, bureaucracy, judiciary, law enforcement, and elected officials. 

After the ‘Gandhian and Nehruvian era’, officials who lacked their idealism, and were more likely to engage in corruption and rent- seeking practices entered into the government. Speed money for turning the blind eye to the violation of controls.

Control and licensing system, tax structure, donation to political parties, and generation of black money in the public sector, deterioration in the moral and civic standards are the influential factors in parallel economy.

Impact of the black money:

In India, the black economy has resulted in an immense loss of tax revenue. If it accounted for 40% of GDP in 1998-99, the loss of direct tax revenue at the prevailing rate would amount to at least Rs. 200,000 crore. Only 2 million of India's billion people pay taxes, just 2% of the population. The government therefore suffers a perennial shortage of funds and public services languish. 

Policies fail both at the macro-level and the micro-level. Targets for education, health, drinking water and so on are not achieved because “expenditures do not mean outcomes.” Much investment goes into wasteful and unproductive channels, like holding gold or real estate abroad.

A country is considered as capital-short has been exporting capital. A nation that gives concessions to multinational corporations to bring in capital loses more capital than it gets, and that too at a high cost, from foreign institutional investments or foreign direct investment.

Strategy for recovering black money

• So far the Government has adopted a five-pronged strategy to tackle the sensitive issue of Black Money –
• Joining the Global Crusade Against Black Money
• Creating an Appropriate Legislative Framework using DTAA and Tax Information Exchange Agreement (TIEA) 
• Setting up Institutions to Deal with Illicit Funds such as Income Tax Overseas Units.
• Manpower of FT&TR Division in CBDT has been doubled.
• Imparting Skills to the Manpower for Effective Action

Recommendations for Black Money Recovery

• Reducing disincentives by Rationalization of tax rates, reduce tax terrorism (retrospective amendments), pass GST and Reducing transaction costs by providing internet-based services to pay tax; 
• Creation of effective credible deterrence by Setting up an investigation unit with Enforcement Directorate as the nodal coordinating agency to remove problem of lack of coordination; CAG should audit on suspicious exports vulnerable sectors like Real estate, jewelry, financial markets, have Time frame for Income Tax and CBEC for completing cases.
• Amend PMLA, FEMA and Make Tax evasion a serious "criminal offence. Reform political funding in India. 
• Establishment of a central KYC (Know Your Customer) registry to deal with the problem of multiple identities of an individual in financial transactions.
• To ensure that banks, on a real time basis, report all suspicious transactions, SIT must seek a report from the Financial Intelligence Unit (FIU) of the Indian government on what it has done about suspicious transactions reported by banks.
• To pressurize Swiss authorities to give name of US citizens who have opened numbered bank account in Swiss Banks, US arrested senior bank officers of Union Bank of Switzerland on charges of espionage. India also has Swiss bank branch offices in Mumbai.

Conclusion

There had been umpteen talks and voluntary disclosure schemes in the past for checking evasion and black money, but no perceivable results have come. Rather, the quantum of black money in circulation has increased substantially in volume. A major factor contributing to the increasing level of black money and there are Global reasons like Continuation of tax heavens.

Black money is 60 times the annual revenue from income tax in the Union Budget, only committees after committees are setup, w/o concrete action; Failure of agencies i.e. lack of coordination as said by SIT that government departments are not ready to share information and thus hindering investigation.