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Without black money, India can be $9 tn economy

It may seem like an unpalatable truth to the powers that be in the country, but the fact is the unholy nexus between politicians, bureaucrats and businessmen has ensured that a black economy continues to thrive in India.

"At least $70-80 billion goes out every year. The cost of India's black economy is 5 percent of GDP growth sacrificed every year since the mid-70s. But for this, India's size of the economy would have been $ 9 trillion," says Prof. Arun Kumar, professor of economics at the Jawaharlal Nehru University (JNU) and author of the book 'Black Money in India'.

 Without black money, India can be  tn economy

As much as Rs 32 to 35 lakh crore is generated in this parallel economy every year. Reuters

According to an article by Prof. Arun Kumar in The Hindu, India could have grown faster -by about 5 per cent- since the 1970s if it did not have a black or parallel economy. Consequently, the Indian economy could have been the second-largest in the world. Per capita income could have been seven times larger; India would then have been a middle-income country and not one of the poorest, he argues.

The professor says that over the years, India has been witnessing unprecedented growth in its black economy, now estimated to constitute an alarming 50 percent of the country's GDP. The government reckons that there are no reliable estimates of "black money" inside or outside the country. "As much as Rs 32 to 35 lakh crore is generated in this parallel economy every year," Kumar says.

Failed Policies

Because of the existence of a substantial parallel economy, planning, monetary and fiscal policies frequently do not achieve the desired results, both at the macro- and micro- level. The black economy is largely responsible for the inequality in the country. Although black income is concentrated in 3 percent of Indian households, Kumar estimates that 97 percent of people have been affected.

"The economy does not lack resources but faces resource shortage," he adds. A large portion of investments goes into wasteful and unproductive channels, like holding gold or real estate abroad. Targets for education, health and drinking water are, therefore, not achieved. So, while a large part of the nation takes pride in sending their children to videsh, which in most cases means the city, it is not unusual for people like Hasan Ali to have huge assets including Swiss Bank accounts.

The parallel economy also results in higher-than-required costs for the economy -raising the rate of inflation. If capital is over-invoiced by a project to earn more profits, the cost of setting up industry is higher. If poor-quality grain is sold in the public distribution system, people tend to buy it from the market, where the price is higher. If children needtuitionsbecause of poor teaching, the family's cost of education increases.

So what does that lost $9 trillion mean to India?

The black economy, which has caused India to lose 5 percent of its GDP over the last 30 years, is also the opportunity cost of not having India become the world's second-largest economy, just after the US.

Supporters of Anna Hazare, pose with fake rupee notes signifying corruption. AFP

With the additional money, India could have provided enhanced social infrastructure with better health care services, larger educational facilities and employment opportunities. We could have had the potential to feed 90 percent of the hungry mouths in the country. It means every family could have had a home, and we probably wouldn't have to witness the distressing sight of a half-clothed child getting drenched in the rain.

At the social level, the parallel economy has made people lose faith in society. Its persistent existence is today compelling the aam-admi to angrily ask: "What the hell is happening?" Perhaps without it, we would have a far more transparent and technologically efficient economic system. We could have edged ahead of the US and China together in terms of production vis-a-vis consumption. Instead, we now have a generation that is primarily consumption-driven, partly production-driven and wholly caught up in corruption. More importantly, we would not have had to witness the Anna Hazare movement to root out corruption if we didn't have a black economy.

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Updated Date: Dec 20, 2014 05:35:31 IST