How the Black Economy Grew in Post-Independence India

07 February 2017

Arun Kumar is an eminent economist who has been studying the black economy in India for close to four decades. His 1999 book The Black Economy in India is among the foremost accounts of the black-money problem in the country. 

In Understanding the Black Economy and Black Money in India: An Enquiry into Causes, Consequences and Remedies, released in February 2017, Kumar discusses the misconceptions around black money, the growth of the black economy and remedies to curtail it. “Suffice it to say that the demonetization has had little effect on the problem of the black economy,” he writes in the introduction to the book.  In the following extract from the book, Kumar explains the origin and growth of the black economy—a parallel or illegal economy, which encourages the rise of black money—after 1947. Kumar contends that this economy remains unaffected by demonetisation, and contributes to making socio-economic policies less effective. 

Independent India started with high aspirations but a weak democracy because the power was transferred from the colonial masters to a relatively unaccountable political class and a civil service that was accountable mostly to the ruling elite. As the democratic aspirations of the national movement weakened, the political class became more corrupt. The government of India report of 1956 argued for the need to keep the black economy in check so that more resources could be raised for development. It found businesses generating profits from black market activities in all sectors of the economy.

The Indian national movement understood that colonial rule was responsible for not only impoverishing the common man but was also the reason he was unable to better his lot. Therefore it was decided that society as a whole had to overcome these basic problems (poverty, education, health and so on) of the people and the state was given a large role in economic matters. The optimum utilisation of resources required, among other things, central planning, which required the licensing of capacity in industries. This reinforced the role of the state in the economy.

Due to deindustrialisation in India during colonial rule, Indian capitalists were too small to generate the capital necessary for the creation of the essential infrastructure for transportation and power, for example. They lacked the technology and capital to invest in basic goods like metals and petroleum, or in capital goods manufacturing. The corollary was that a large public sector was needed to support both the growth of the private sector and the planning process. This required the mobilisation of savings in a country that was poor. Consequently, consumption had to be restrained through taxation and limiting the production and importation of luxury goods. Imports were limited so as to conserve the foreign exchange required to import capital goods for development. A strategy of import substitution was adopted to boost industry and high customs duties were introduced for this purpose.

Arun Kumar is the Malcolm Adiseshiah Chair Professor at the Institute of Social Sciences, and was formerly a professor of economics at Jawaharlal Nehru University. He is the author of Demonetization and the Black Economy, and the forthcoming Ground Scorching Tax, both published by Penguin India.

Keywords: economy business growth crime black money Black income Indian economy Gold