Page 353 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 28: Parallel Economy

geared that the progressive forces dominate and are able to subjugate those who attempt to frustrate Notes
the efforts of the state to establish a social order based on equality and justice for all, more especially
for the downtrodden.
With the attainment of independence and the advent of planning, more avenues of investment in a
large number of industries were opened. The concept of the mixed economy envisaged the co-existence
of a public sector and a private sector. Both were expected to promote investment and output. The
criterion in the public sector was social gain and thus it concentrated on the creation of economic
infrastructure in the form of roads, railways, irrigation and hydro-electric works, etc., the development
of heavy, basic and defence industries and the provision of better education and health facilities. The
rest of the economy was left to be developed by the private sector.
With the expansion of economic activity in the post-independence period, the magnitude of the black
sector has grown and proliferated to such an extent that it has begun to play a dominant role in
moulding state policies, in changing the structure and composition of output, in promoting a class
which derives its maximum source of power from black money. Obviously, the magnitude of
operations of the black money operators has resulted in the establishment of a parallel economy.
D.K. Rangnekar rightly mensions : “If the “Parallel economy” poses a serious threat to stability and
growth of the official economy, surely it stems from the fact that the magnitude of “black money” is
large and rigged deals are growing in volume and complexity at an alarming rate. Apart from the
wide ramifications of the “parallel economy”, one might also be alive to the fact that “black incomes”
are accentuating the inequalities in income and wealth and breeding a new class of “black” rich in a
society which is already harshly stratified. The inequalities are no longer below the surface. The
conspicuous consumption of the new “black” rich, their vulgar display of pomp and opulence, their
unlimited accessibility to finance, their nest-eggs in various places and countries, their influence in
important places, all these are now common knowledge”. To understand the impact of black economy,
it is essential to have an estimate of ‘black income’ over a period of time.
28.1.1 Estimates of Black Income in India
Several attempts have been made to quantify black incomes in India. Broadly speaking, the various
estimates of black incomes made so far follow two approaches : (i) Kaldor’s approach of quantifying
non-salary incomes above the exemption limit of income tax and (ii) Edgar L. Feige’s method of
working out transaction-income on the basis of currency deposit ratio and from it deriving the black
income of the economy. Kaldor’s method has been used in the report on Indian Tax Reform, and later
by the Direct Taxes Enquiry Committee with some modifications. D.K. Rangnekar, former Editor,
Economic Times, used the same technique with some more modifications and later Mr. O.P. Chopra
developed a series of black income by further modifying the Wanchoo Committee’s assumptions.
Feige’s method has been used by Poonam Gupta and Sanjeev Gupta. It would be of interest to study
these methods in some detail.

Estimates of black income based on Kaldor’s approach
(i) Kaldor’s estimate : N. Kaldor in his report on Indian Tax Reform estimated the non-salary
income on the basis of the break-up of national income into (a) wages and salaries, (b) income
of the self-employed, and (c) profit, interest, rent etc. Excluding wages and salaries from the
contributions to net domestic product, he derived total non-salary income. For various sectors
of the economy, on the basis of assumed proportions of non-salary incomes above the exemption
limit. Kaldor estimated non-salary income above the exemption limit. An estimate of the actual
non-salary income assessed to tax was made for each sector in order to arrive at the total non-
salary income assessed to tax. The difference between the estimated non-salary income above
the exemption limit and the actual non-salary income assessed to tax measures the size of the
black income. (Refer table 1).
(ii) Wanchoo Committee’s Estimate : Direct Taxes Enquiry Committee (Wanchoo Committee)
followed the method adopted by Kaldor with suitable modifications. According to Wanchoo
Committee, “the estimated income on which tax has been evaded (black income) would probably
be ` 700 crores and ` 1,000 crores for the years 1961-62 and 1965-66 respectively. Projecting this

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