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Indian Economic Policy

Notes A review of the various estimates clearly reveals that the Kaldor’s method of concentrating attention
on official GNP seriously under-estimates the size of black income generated in the economy. There
is a serious under-reporting of production and there is enough evidence about it. By corrupting
excise department officials, the capitalist classes are able to evade the reporting of a significant
proportion of total production.
It would not also be fair to discard the monetary approach altogether because this also serves as a
cross-check on the other estimate. It is probable that truth lies somewhere between the two extremes.
In that sense, more research has to be directed in this regard. If only 9-10 per cent of GNP is generated
as black income, it cannot pose the threat as suggested in the phrase “Parallel economy”, but if the
magnitude is much larger as many economists believe, then the threat of “parallel economy” is real.
Moreover, it would be more relevant if the size of black income is compared not to total GNP but to
GNP minus income from the agricultural sector (Y–Ya), as Chopra has done. Such an approach is
more useful for an underdeveloped country like India where agricultural income constitutes about
40 per cent of GNP.
The main findings of the various studies on black income are :
(i) The amount of black money has not only been growing in absolute terms, but also in relative
terms as a percentage of GNP.
(ii) Black income which was less than 10 per cent of GNP upto 1975-76 began to grow at a much
faster rate thereafter. According to NIPFP estimate for 1983-84, it was in the range of 18 to 21
per cent of GNP, though as per the estimate of Dr. Suraj B. Gupta, it was about 46 per cent of
GNP in 1983-84 and rose further to about 51 per cent in 1987-88.
(iii) The rate of growth of black income generation is faster than the rate of growth of Gross National
Product.
(iv) Higher rates of taxation motivated businessmen and industrialists to go for massive tax evasion.
(v) The political system winked at the growth of black income but did not take effective measures
to curb the growth of unaccounted income.
28.1.3 Impact of Black Incomes on the Economic and Social System
The creation of a parallel economy as a consequence of the growing proliferation of black money in
every sector of the economy has very serious and in a number of ways pernicious influences on the
working of the Indian economy. It would be of interest to study their impact on the Indian economic
and social system.
First of all, the direct effect of black income is the loss of revenue to the state exchequer as a consequence
of tax evasion, both from direct and indirect taxes. Moreover, tax evasion does not include loss of
revenue resulting from unreported production or illegal economic activity. Since the Government is
not able to plug the leakage of tax evasion, it has to resort to other avenues of raising funds. So it
imposes more taxes on commodities or raises the existing rates of taxation on commodities. As a
consequence, India developed a regressive tax structure. Direct Taxes Enquiry Committee in this
connection mentioned : “Black money and tax evasion, which go hand in hand, have also the effect of
seriously undermining the equity concept of taxation and warping its progressiveness. Together,
they throw a greater burden on the honest taxpayer and lead to economic inequality and concentration
of wealth in the hands of the unscrupulous few in the country.” It is the salaried person (who cannot
escape taxation) who suffers and the dishonest tax-payer is able to get away and then use the evaded
income in luxurious and ostentatious consumption. Emphasizing this fact, D.K. Rangnekar mentions
: “So while the tax paying public finds its own income falling, the non-tax paying public is having a
free run of swelling concealed incomes thereby adding a new dimension to the problem of inequality
of incomes and wealth.”
Secondly, the availability of black incomes with businessmen and capitalists and the consequent
inequalities of income place a large amount of funds at their disposal. Easy money as it obtains, finds
ready outlets in non-essential articles of conspicuous consumption. This has a demonstration effect
on all classes of people. As a consequence, the consumption pattern is tilted in favour of the rich and
elite classes, at the cost of encouraging the production of articles of mass consumption. A rise in the

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