Monday, April 25, 2005

Black then...how a parallel economy evolved

Black is the colour of the other Indian economy. Black or the parallel economy is the undercover economy. It is an open secret. Nobody denies its existence, everybody acknowledges its existence, yet all are at a loss on how to tame it. Contrary to popular belief, the black economy not rooted only in smuggling. It encompasses all sorts of pilferage, adulteration and evasion.

It all started from a beast called the Licence raj in Indias socialist days where anybody needed a licence to do anything and the government was the chief authority to issue licences. Licences meant restrictions on capacity, often absurd. Anything that was produced over 'licenced' capacity went into the black market, since these were unaccounted and showed up in industrial accounts as low productivity. These goods typically were products of tax evasion and money from these goods flowed in cash, with no audit trail.

To pass these goods into the market, officials at various levels were paid a portion of the profits, in cash, not through cheques. A further incentive to hoard cash were due to the insane tax rates (refer comment by Madman below) in force at certain points in time, which saw personal tax rates go upto 97.5% (yes, there is no typo). Strict customs restrictions meant smuggling fed the markets appetite for foreign goods (Goods produced in India were of vintage quality and reputations, to say the least, with a few notable exceptions). Draconian foreign exchange regulations meant that foreign repatriations found their way into the market through the parallel foreign exchange market, hawala. Import of gold, which had another set of restrictions provided arbitrage opportunity and was another easy target for smugglers given a large coastline within sailing distance of the Middle East. Second to gold, the easiest place to invest cash was in real estate. Thus real estate came into the ambit of black money. The other place where large sums of money could be used was films financing.

Where there is such a lot of money, mafia cannot stay away, thus they too are part of the murky story of the black economy. Money earned in smuggling often got pseudo legitimised in real estate and films. In between, oil (petrol) got adulterated with ethanol/kerosene and the siphoned off petrol was sold off in the (where else) black market. Kerosene and Foodgrains meant for some place (Public distribution system or relief or plain stolen) are siphoned elsewhere.

With such a leaky bucket, its a wonder that Indias official economy exists at all. In part II we will explore if things have changed today post liberalisation of the Indian economy in the 90s.

7 comments:

MadMan said...

A factor you've missed is the insane income tax rates during Indira Gandhi's regime. At one time, the peak income tax rate was 97.5%

When a person is handing over pretty much all his money to the government, a huge parallel economy is the likely outcome.

Abi said...

Many of the underlying causes you have mentioned are on their way out; licence raj is on its last legs, gold imports and foreign exchange markets are quite open, and marginal tax rates on both personal and corporate income are down.

Other things are being done, too. The securities transaction tax and the value added tax are meant, among other things, to get information about investors and traders, respectively, who might otherwise be doing business without getting into the tax net.

That leaves real estate and perhaps a few others. Perhaps a day will come when this is also cleaned up (or, its propensity to indulge black money is minimized).

My questions are:

(a) Since the time of liberalization (1991 onwards), has there been a decline in black money?

(b) when we (sort of magically) tackle the black money sloshing around in the real estate market, how much will it reduce the black money?

AkaRound Peg said...

Interesting blog.

Talking about black money and the real estate boom in Bangalore you mention elsewhere, there is this office cum residential complex coming up about 3 kms off the Hebbal flyover towards Whitefield and which boasts of blue chip multinationals as clients. An enquiry last November had them quoting rates of Rs 1,200 per sqft where you paid Rs 400 in white and Rs 800 in black !! We backed off even tho the complex itself is very good and well located. WE might have cought up the money if it was all in white or even mostly in white. The guy in the office nodded sympathetically and agredd many people backed off for the same reason.

They went on to boast saying the residential plots were bought by 'high class' people like IAS officers. If a IAS officer can shell out some 35 lakhs in black money what can you say? And I am sure everybody that needs to know knows this group is creating a whole lot of crores in black money (they same a couple of hundred plots to sell) and yet nothing is happeneing and since June they have begun quoting prices upwards of Rs 2,000....

Anonymous said...

hi... i'm a student in mumbai and i'm currently doing a project on black money and impact on investment. incase you could help me out my email add is moonchild2206@yahoo.co.in

Anonymous said...

hi do u know any group / individual who is registered as a charitable trust. They take cheques from people as donation and gives then 99% of the money back in cash and a tax exemption certificate. Pls contact me on nutcracker17@rediffmail.com

Jessica said...

Hi ,
Nice to read some interesting Info here,
Good post :-) I must say that i am impressed to read some gud stuff here. I look forward to read more stuffs from you. I am a poor commenter though and do not comment a lot but just felt of commenting at this very post. I will digg some post of yours as and when i get time so that the posts get more visiblity. Totally enthu about this website. Wish you good luck for your future endeavors.
Regards,
Jessica,
Texas, United States.
www.makemoneykingdom.com
www.forexfreedownload.com
www.bobsbanter.com

Tom said...

Now that we are in a full economic crisis, what is the potential of the development of a parallel economy in the US?