The black economy in India

Can Indiaýs black economy be curbed? In 1990-91, according to various estimates, the black economy constituted thirty-five per cent of the national economy, which was larger than either its primary or secondary sectors. Since then, black income generation has increased not only through ýlegalý activities like real estate transactions and the share market, and ýillegalý ones like the hawala, financial scams and gold smuggling, but via instances of corruption like bribes paid to the police, inflated election expenses, capitation fees and tuitions, among others. The New Economic Policies expected to counter its growth have been unsuccessful in containing it. This long and perceptive essay by public finance analyst Arun Kumar, member of the National Institute of Public Finance and Policy study on the black economy (1982-85), critically examines the standard explanations for the causes and consequences of black money generation and the methods suggested for curbing it. Among the issues addressed here are: the role of high taxation and excessive controls in fuelling tax evasion and hence black income; the adverse effects of black income on the macro economy; the resultant inefficiency, waste and sub-optimality in the economy and society; the limited success of technical remedies like the VDIS; and the need for structural remedial measures to curb speculation in real estate and electoral reform. The author pleads for recognizing the role of criminalization and the emerging nexus of the businessman, politician and bureaucrat in perpetuating the black economy.