Parallel Economy in India

Relevancy

  • G.S. Paper 2
  • Objective questions- features of parallel economy
  • Subjective questions- impact and depth of parallel economy

What is parallel economy?

  • Black economy is referred by more than 30 different names across the globe as per some international studies. The other names of black economy are parallel economy, black money, informal economy etc.
  • The parallel economy consists of all the activities in which black incomes are generated and black incomes are factor incomes, property incomes, not reported to direct tax authorities.
  • Parallel economy in its broadest sense may consist of –
    • Illegal economy, such as money laundering, smuggling, etc;
    • Unreported economy including tax evasion;
    • Unregulated economy i.e. Economic activities outside law and regulations.

History Of The Parallel Economy In India:

  • The British East India Company in late 18th century laid the foundations of both a corrupt bureaucracy and a parallel economy during World War II.
  • The black economy has grown from about 3% in the mid-50s to 20% by 1980, to 35% by 1990, and 40% by 1995.
  • The Indian black economy is immense, lucrative, widespread, and has grown significantly since independence.
  • Supreme Court asked the central government to appraise it of steps taken to implement the recommendations of the Special Investigation Team (SIT) on retrieving black money and to curb the menace of unaccounted wealth.

Reasons behind the growth of the black money in the country?

  • As a percentage of GDP, the black economy is larger than both the industrial and agricultural sectors. Corruption is widespread from the lowest to the highest levels of public administration, law enforcement, judiciary, public enterprise, bureaucracy, and elected officials.
  • People earning income generated from illegitimate as well as legitimate activities avoid paying taxes because of excessive taxation, greed and perception that government is corrupt and won’t use it for public good.
  • Tax structure, Control and licensing system, donation to political parties, and generation of black money in the public sector, deterioration in the moral and civic standards are the influential factors in parallel economy.
  • After the ‘Gandhian and Nehruvian era’, officials who lacked their idealism, and were more likely to engage in corruption and rent- seeking practices entered into the government.

Implications Of Parallel Economy

  • Cybercrime:
    • Crypto-currency and unrecorded cash transaction in e-commerce are also emerging means to supply resources to hostile elements in the country.
  • Economic terrorism:
    • Pakistan has been flooding the country with counterfeit currency with a view to subverting its economy and funding terrorist activities in different parts of the country.
    • It is estimated that Pakistan pumped in 16 billion worth of FICN into India in 2010, a figure that rose to 20 billion in 2011 and 25 billion in 2012.
  • Religious or ideological extremism:
    • Parallel economy is greatest source of financial help to extremists.
    • Financial incentives lure unemployed youth towards antinational activities in the name of particular religion or ideology.
  • Organised crime:
    • Organised crimes in India especially in metro cities such as Mumbai and Delhi are rising due to flourishing parallel economy.
    • Such organised criminals also fund for radicalisation of youth and terrorist attacks.
  • Armed violence:
    • Armed violence which was hitherto legacy of Maoists or insurgencies is now taking a new form throughout India especially in the form of right wing extremism.
    • Recently there has been reports of seizure of illegal weapons and public firing by individuals. Black money is easy source of illegal arms trade in India.

Strategy for recovering black money

So far the Government has adopted a five-pronged strategy to tackle the sensitive issue of Black Money –

  • Setting up Institutions to Deal with Illicit Funds such as Income Tax Overseas Units.
  • Joining the Global Crusade Against Black Money
  • Imparting Skills to the Manpower for Effective Action
  • Manpower of FT&TR Division in CBDT has been doubled.
  • Creating an Appropriate Legislative Framework using DTAA and Tax Information Exchange Agreement (TIEA)

Recommendations for Black Money Recovery

  • Creation of effective credible deterrence by Setting up an investigation unit with Enforcement Directorate as the nodal coordinating agency to remove problem of lack of coordination; CAG should audit on suspicious exports vulnerable sectors like Real estate, jewelry, financial markets, have Time frame for Income Tax and CBEC for completing cases.
  • Reducing disincentives by Rationalization of tax rates, reduce tax terrorism (retrospective amendments), pass GST and Reducing transaction costs by providing internet-based services to pay tax;
  • Establishment of a central KYC (Know Your Customer) registry to deal with the problem of multiple identities of an individual in financial transactions.
  • Amend PMLA, FEMA and Make Tax evasion a serious “criminal offence. Reform political funding in India.
  • To pressurize Swiss authorities to give name of US citizens who have opened numbered bank account in Swiss Banks, US arrested senior bank officers of Union Bank of Switzerland on charges of espionage. India also has Swiss bank branch offices in Mumbai.
  • To ensure that banks, on a real time basis, report all suspicious transactions, SIT must seek a report from the Financial Intelligence Unit (FIU) of the Indian government on what it has done about suspicious transactions reported by banks.

What Type of Economy is followed in India?

  • Almost 50% of the country’s workforce is dependent on agriculture.
  • Approximately 30% of the workforce is employed in services sector.
  • 2/3rd of the India’s output comes from Services sector.
  • The productivity of this segment resulted in India shifting more towards market economy.
  • In the 1990s it opened its economy with privatization, liberalization, and globalization.
  • Thus we can say, India has a mixed economy.