India's mushrooming black economy

Indian capitalism leads the world in its integration of 'formal' and 'informal' economies, 'legal' and 'illegal' institutions, and (although this analytically anodyne Asia Times Online article forgets to say so) class-based policing of the nonexistent threshold.  Especially interesting (though also undeveloped here) is the warning that a 'black' economy boom is inflationary, i.e. affects 'formal' credit flows.  As if the denizens of the techno-financial ether were aware of ultimately being in thrall to a 'real' (as in malarial) world of everyday 'informal' looting...

India's mushrooming black economy By Indrajit Basu

KOLKATA - As India's economic ministers patted one another's backs last week, taking credit for the country's gross domestic product (GDP) recording its second consecutive year of more than 9% growth, attention turned to the problem of the parallel "black" economy - the one that remains off the books and beyond the reach of the taxmen.

The black economy, which "quintessentially was the phenomenon of the 1970s, is back and booming", said Business World, a leading business magazine, adding that it is distorting the legal economy, pushing up stock and property prices, causing inflation and even making the rupee unusually strong against the US dollar, all of which is taking its toll on the country's industries and taxpayers.

Indeed, it is an economic problem that India has been fighting for decades. Yet even as successive governments have claimed that the aggressive liberalization of the past 18 years has been able to weed out much of the black economy, it is still thriving and the country can't really function without it.

There are no hard numbers on its size, since black money is generated by both legal and illegal activities. However, according to Arun Kumar, a professor at Jawaharlal Nehru University in New Delhi, author of Black Money in India, the black economy has assumed huge proportions and it keeps growing. His estimates suggest it is worth a whopping US$500 billion - almost half the size of the official economy - but some say it is even larger and could be as high as 70% of the official economy, if parallel activities undertaken outside the country are considered.

"Don't forget that parallel economic activity pertaining to the Indian economy does not just happen within the [country's] borders," said Sanjay Kapoor, a tax consultant based in Delhi. "For instance, a lot of real-estate deals are struck in Indian rupees in Dubai, and rupee-denominated business deals are not unusual even in New York."

Kumar said: "An Indian is affected at every step by the black economy. The education of a child, a visit to a doctor, policemen who extort money ... electricity or water departments all demand black payments."

But the black economy is a global problem. The Economist magazine, for instance, estimated that in 1998 the world's black economy accounted for a missing $9 trillion worth of output - a volume of output almost equivalent to that of the US.

Later, a study by Friedrich Schneider, an economics professor at Johannes Kepler University in Linz, Austria, attempted to measure the size of the black economy in no fewer than 76 developed and emerging economies, revealing that underground activity is equivalent to 15% of officially reported GDP, on average, in rich economies, and about one-third of GDP in emerging ones.

But the difference in India is that while most of the underground economy elsewhere in the world revolves around criminal or illegal activities, the major contributors to the black economy in India are legal businesses and the government.

According to the New Delhi-based think-tank Indian Council for Research on International Economic Relations (ICRIER), legal businesses controlled by the government, government expenditures and taxes have also been the "major source of black-money creation".

For instance, say officials from ICRIER, no real-estate deal in the country is done without the involvement of at least 40% unaccounted-for money, and a large portion of the billions of dollars in foreign-exchange inflows that India sees every year is actually the returning black money that went out of the country in the high-tax regime before liberalization began.

ICRIER adds that the government control and licensing system reached its peak during the 1970s and resulted in the infamous license permit-quota raj. And though a gradual process of de-control started in the 1980s, with a major spurt taking place in the early 1990s, has resulted in the dismantling of that licensing regime, the process is far from complete.

But is black money really all that evil?

Some feel the black economy may provide benefits. T C A Ramanujam, a former chief commissioner of the Income Tax Department, for instance, prefers to call the black economy a "parallel economy", since "the hidden or informal economy operates alongside or underneath the visible formal economy", and says it is an integral part of the modern or capitalistic economic model. "Much of the investments in real estate would not have been possible without the informal sector participating in a big way," he said.

And Sanjay Kapoor, the tax expert from Delhi, highlights the upside of the black economy from another angle by arguing that "had it not been for the shadow economy, India's dream of funding the $150 billion worth of investments may well have remained a dream".

The black economy is perhaps not India's biggest problem; a bigger problem for the Indian economy is that "we already see signs of overheating", said Charles Kramer, division chief of the Asia and Pacific department of the International Monetary Fund. Indeed, many fear that the economy is so hot that its current pace of expansion is not sustainable.

According to experts, although consistent double-digit growth in manufacturing and services saw the country record an 18-year high in GDP, fourth-quarter GDP growth was slower than what was seen (more than 10%) in the same period a year ago, chiefly because of slower growth in agriculture, construction, and financial and social services, all of which indicate deceleration of the growth momentum.

Despite optimism, added The Economist magazine, the fact is "demand is outpacing supply and hence the pace of growth is unsustainable". To support its argument, The Economist said that in spite of the fact that oil prices have been lower lately, wholesale price inflation has risen to 6%, which is above the 5.5% upper limit set by the Reserve Bank of India, the country's federal bank.

"India's capacity for growth has certainly increased over the past decade, thanks to earlier reforms," said The Economist. "Yet given widespread signs that India is already exceeding its speed limit, there is a high risk that if the economy continues to grow at 9% or more, it will get ever hotter."

Moreover, N R Narayananurthy, founder and former head of India's poster-boy information-technology company Infosys, said, "The dilemma [in the Indian economy] is that although India is now really taking advantage of globalization and is highly integrated into the global economy and growing very rapidly, it has not so far been able to create opportunities for the 650 million people living in rural India and earning a tiny income every day."

Therefore, experts suggest that instead of making the economy run "beyond its safe maximum speed", policymakers and the government should concentrate on clearing the path of hurdles that lie ahead. According to ICRIER, the need of the day in India is not a scorching economy but "better infrastructure and education, which are needed to make the rural poor more mobile" as well as improved public services, which can not only increase growth, but also spread the rewards.

Indrajit Basu is a Kolkata-based journalist.