Page 355 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 28: Parallel Economy

Guptas made use of Feige’s method of estimating the magnitude and growth of the black market. Notes
Feige assumed that the ratio of total transactions to total income was relatively stable. Therefore,
it would be more logical to calculate the total volume of transactions, both legal and illegal. The
Official GNP measures only the legal economic activity. Thus, if a proportional relationship
exists between transactions and income, then significant increases in this ratio would be due to
the expansion of illegal (or black) economic activity.
Feige’s methodology requires preparation of estimates of chequing transactions and currency
transactions. Chequing transactions are equal to the average stock to demand deposits multiplied
with their turnover rate (i.e., the average number of times the demand deposits turnover).
Transactions supported by currency (or cash) can be estimated by calculating the turnover of a
unit of currency and then multiplying it by the total currency with the public. A bench-mark
year is chosen where it is assumed that there was no illegal activity or black income generation
was zero. For this base year, the ratio of transactions of GNP is first obtained. Estimates of the
magnitude of legal and illegal activities in the succeeding years can be obtained by dividing the
total volume of transactions in each year by the base year’s ratio. Subtracting measured GNP
gives us the estimate of black income generated in these years.
According to this study, the absolute size of the black income in India increased from ` 3,034
crores in 1967-68 to ` 46,867 crores in 1978-79, i.e., by more than 15 times. The relative share of
the black economy was 9.5 per cent of GNP in 1967-68, but it has jumped to nearly 49 per cent
by 1978-79. According to Guptas : “Thus, currently almost half of the official income is being
produced outside the “legal” sector. Not only is the black economy a substantial proportion of
the regular economy but it has also grown at a rate faster than that of the official economy.”
The study further indicates that 1 per cent increase in overall taxes leads to more than 3 per cent
increase in the black income relative to the official economy.
(vi) NIPFP Study on Black Economy in India
National Institute of Public Finance and Policy conducted a study under the direction of Dr. S.
Acharya, formerly of the World Bank. Dr. Raja Chelliah was the overall supervisor of the Study.
The study defines black income as “aggregate of incomes which are taxable but are not reported
to tax authorities”. The study, however, gives a broader definition of black income and calls it
as “unaccounted income” for purposes of clarity. It is “the extent to which estimates of national
income and output are biased downwards because of deliberate, false reporting of incomes,
output and transactions for reasons of tax evasion, flouting of other economic controls and
related motives.”
28.1.2 A Review of the Various Estimates of Black Income
IMF staff survey on the unaccounted sector of the economy has estimated black money in India at 50
per cent of Gross National Product (GNP), which was ` 1,45,141 crores in 1982-83 at current prices.
On this computation, India’s unaccounted sector is of the order of ` 72,000 crores.
The estimate of black income prepared by Guptas indicates the highest proportion, i.e., 49 per cent of
GNP. As against it, other estimates indicate that black income was near about 10 per cent of GNP.
The question arises : which one of these estimates can be considered reliable ? Some economists have
expressed serious doubts about the validity of the estimate of Guptas. J.C. Sandesara writes : “The
estimation of black money, at any rate, for India is far too serious a business to be handled exclusively
by the tool of currency-deposit ratio, and/or to be left to monetary statisticians/economists.” The
main point of criticism is that the value of total transactions is affected by several factors, viz., the
degree of monetisation, the extent of vertical integration of the economy, the rate of introduction of
technical change, etc. It would be advisable to disaggregate the effect of these factors. To that extent,
there would be over-estimation. But there is a serious element of under-estimation which has not
been noted by the critics. A good number of transactions which are effected through ‘hundis’ or other
near money instruments which go unrecorded in chequing or currency transactions are not covered
in the estimate of total transactions. An upward adjustment on this account has to be made and it
may be noted that the number and size of such transactions is quite large.

LOVELY PROFESSIONAL UNIVERSITY 349