An Account of India’s Attempts to Curb the Black Economy, and Why They Don’t Work

08 November 2017
Moves such as demonetisation, which target cash alone, fail to curb the black economy because it is based on the incorrect premise that people hold large amounts of black cash.

Exactly a year ago, on the evening of 8 November 2016, Prime Minister Narendra Modi announced in a surprise broadcast that beginning midnight, currency notes of Rs 1,000 and Rs 500 denominations were to be pulled from circulation, and would be rendered invalid for any transactions. On 7 November this year, ANHAD, a non-governmental organisation run by the social activist Shabnam Hashmi, and 32 other organisations released a report titled Demonetisation: Exorcising the “Demon.” Over January and February, ANHAD conducted a survey of 3,647 respondents across 21 states and union territories in the country, on the public perceptions of demonetisation, and its aftermath. In addition to the findings of the survey, the report also includes the analyses of several issues that arose out of the policy decision, such as its effectiveness in dealing with the initial goals of eliminating black money, counterfeit currency, and terror financing; the government’s shifting narratives on the motive behind demonetisation; and the impact on people across the country.

In the following extract from the report, the economist Arun Kumar, one of India’s foremost researchers on the black economy, details common misconceptions regarding its functioning. Kumar details why moves such as demonetisation, which target cash alone, fail to curb the black economy. “It is a technical step that does not resolve the political problem,” he writes.

Currently, the black economy is estimated to be 62 percent of GDP [the Gross Domestic Product]. That is, on top of the white economy of Rs 150 lakh crore, there is an extra Rs 93 lakh crore of black income. Thus, the size of the economy is Rs 243 lakh crore. This is much less than the potential size of the economy of Rs 1,050 lakh crore but significantly above the white-economy size declared by the government.

If the current Rs 93 lakh crore of the black incomes were white and not black, the government would have collected about 40 percent of it as additional taxes and would have had Rs 37 lakh crores of taxes. This would have given enough resources for education, health, power and so on. These points to the twin problem due to the black economy, namely, shortage of resources for development and the poor utilisation of what is spent.

Concretely, if we are today spending Rs 100 on sanitation, we could have spent Rs 250 on it. Today, when the Rs 100 is sent to the field it is wasted and eaten away, so that only Rs 15 reaches the ground. Thus, if the black economy was not there, today the benefit would be 17 times more than it is.

Arun Kumar is an economist. He formerly taught at the Centre for Economic Studies and Planning at Jawaharlal Nehru University.

Keywords: demonetisation black money black economy Swiss account