Following Prime Minister Narendra Modi’s demonetisation of Rs 500 and Rs 1,000 notes on November 8 last year, there has been a heightened interest in the phenomenon of black money, an issue with which we in India seem to be obsessively concerned. Modi’s key objective was to rid the country of kala dhan in the hands of the rich and the powerful. There were other associated objectives like eliminating counterfeit currency to fund illegal activity and terrorism. It is widely believed that in terms of political posturing, this was a masterstroke. Modi was able to sell the idea that this move would principally hit the rich, and even though common folks endured great hardship and queued for long hours to withdraw their own money from ATMs, they all seemed to be largely supportive of Modi’s bold step.
But what we need to ask is this: is good politics good economics? By a wide margin, the answer would seem to be in the negative. Taking advantage of the topicality of this issue, Arun Kumar, recently retired from JNU, has come out with a slim volume to address the phenomenon of black economy and black money, and there is even a discussion of Modi’s demonetisation.
Kumar has been interested in the issue of the black economy for a long time. He was a member of the National Institute of Public Finance and Policy (NIPFP) study on the black economy. This study, published in 1985, was led by Shankar Acharya, later chief economic advisor to the government of India. It contained an estimation made of the black economy by AVL Narayana and Raja Chelliah, founder of NIPFP and doyen of Indian public finance.
The NIPFP study is possibly the most comprehensive and authentic treatment of the subject to date. Kumar seems to have had some strong disagreements with the analysis that was carried out in this work, and he later came out with his book, The Black Economy in India (1999). The work under review seems to bear a strong stamp of his previous work. Among other notable studies in the area are the Wanchoo Committee Report of 1971 and the 1992 book, Black Income in India, by the late Suraj Bhan Gupta of the Delhi School of Economics.
It is crucial to make a clear distinction between black income, a flow concept, and black wealth, which may be held in the form of currency, a stock concept. The terms “black money” or kala dhan are often confusingly used to refer to both black income and black wealth. One may define black income as that income (i) which is illegal, (ii) which evades tax, or (iii) that which escapes inclusion in national income estimates.
Kumar defines black incomes to be factor incomes and property incomes that are not reported to the direct tax authorities. Depending on the definition used, one would obtain alternative estimates of the extent of the black economy. Without going into the details, here it may be mentioned that there are four major ways — the survey method, the input-output method, the monetarist approach and the fiscal approach — by which black income may be computed. These are usefully detailed in the appendix. While the method most widely used globally is the monetarist approach, the one most commonly used in the Indian context is the fiscal approach, which was initiated in the 1950s by the Cambridge economist, Nicholas Kaldor.
There is a widespread misconception that the phenomenon of black income is unique to the Indian setting and that the rest of the world, particularly the advanced capitalist countries of Europe and North America, are free of it. The large body of work of scholars like Friedrich Schneider, who has looked at global data, may provide some comfort to Indian readers by noting that the phenomenon is by no means absent in those regions, with the extent of the shadow economy as a percentage of GDP for the following selected countries being: Belgium 21.3, Finland 17, Greece 26.5, Italy 26.8,
Norway 18, Portugal 23, Spain 22.2, Sweden 17.9, UK 8.4 and USA 16.1. The figures pertain to the year 2007 and for the same year, the figure for India is 20.7, Pakistan 33.6 and China 11.9. India is by no means an outlier.
The NIPFP computation had put the extent of the black economy in India at 18 to 21 per cent of GDP, computed with 1983-84 data. It is entirely possible that the extent of the black economy may well have increased significantly over the past three decades, largely owing to the growth of the services sector and the phenomenon of over and under-invoicing in foreign trade. Kumar goes on to assert, without showing the computations, that at present the black economy is estimated to be 62 per cent of GDP. He then goes on to draw the somewhat startling conclusion that if the black economy were to be dismantled and turned into a part of the white economy, the country’s growth rate would be 12 per cent. It is not clear how he arrives at this result.
The book is a racy read and anyone interested in the innards of the underground economy should have a look at it.