Page 361 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 28: Parallel Economy

can be brought within manageable limits so that it does not pose a threat to the very objectives of Notes
national economic policies. On the other hand, there is another group of economists who believe that
mixed economy is only a euphemism for capitalist system and there is no hope of controlling black
economy in the framework of the mixed economy that prevails in India.

Fundamentalist View
Since tax evasion is basic to the phenomenon of black money generation, the question arises : What
motivates tax evasion ? Meena Gupta and Thavaraj provide an answer : “It is obvious that tax evasion
is a disease associated with an economic system based on private property. The disease assumes
epidemic proportions when environmental pollution affecting the social, political, administrative
and ethical systems exceeds the limits of tolerance.”A similar view has been expressed by Dr. V.M.
Dandekar in the following words : “If one had any notions on this point, one would have suggested
that if large incomes do not pay taxes they should, the remedy is not to lower the tax rates but abolish
altogether incomes above a certain limit.”
Sunanda Sen goes a step further and calls for a change in the character of the state since mixed
economy does not provide the requisite framework for the purpose. She writes : “The failure of the
government’s recent drive to curb smuggling is illustrative of the self-defeating nature of controls in
a partially planned economy... attempts to control such evasion through a manipulation of instruments
open to the state in a mixed economy are not likely to meet with much success unless the reforms are
extensive enough to change the character of the state itself.”
The fundamentalist view, therefore, does not see any merit in making certain marginal adjustments
in tax rates because this will not serve any useful purpose in controlling black money, nor does it see
any merit in removing all controls, but it feels that if tangible results have to be achieved, the abolition
to private property or at least fixing a ceiling on property is essential so that the motivation for
acquiring more wealth itself is blunted.
The Moderate View
There are two variants of the moderate view. One is typified by Kabra who considers the
fundamentalist view as “naive, one-dimensional view of the state in as much as it fails to recognise a
need for partial, effective controls, without necessarily changing the character of the state in its
essentials.” It would, therefore, be inadvisable not to initiate measures within the framework of the
mixed economy. In support of their contention, they advance the argument that there are mixed
capitalist economies in which the extent of black money is much smaller, which are much better
managed and in which ethical standards in politics are much better. They, therefore, plead for internally
consistent but extensive controls, so that they are relatively strong in comparison with the forces
operating the parallel economy. As a consequence, the control mechanisms should make the economy
perform much better, not only in the narrow sense of acquiring more revenue or making certain essential
goods available, but in the broader sense of creating a social order based on equality and justice.
Prem Shankar Jha who represents the other variant, believes that “by far the worst effect of the
regime of controls is that it has perverted the operation of the profit motive in the economy. Instead
of being harnessed to increasing production, it is now harnessed to the exploitation of shortage.”
Four sets of reforms that can have a dramatic effect on the parallel economy, according to Prem
Shankar Jha are : (i) lifting of price controls on all products except a few basic consumer goods (where
dual pricing is in any case preferable to controls); (ii) the exemption of savings from taxation; (iii) the
indexation of direct tax rates to the cost of living; and (iv) the liberalisation of the tax laws governing
the depreciation allowance, to permit firms to write off capital at a rate of their own choosing. Jha,
broadly speaking, represents the view of the private sector lobby which believes that controls are at
the root of prevailing shortages and the operations of the free market mechanism will be able to
usher in an era of plenty, remove shortages and thus reduce the size of black market economy.
In the light of these two broad view-points, we discuss in the following section the concrete measures
suggested for controlling the parallel economy in India.
(i) Rationalisation of tax structure : Various suggestions have been made by different groups of
economists in this regard. Most of them are aimed at reduction of tax rates. For instance, it has

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