Recalling the economically shady picture of India pre-2014, featuring large hue and cry around black money, corruption and retarding economic growth. As the country fought Global Recession, the parallel economy tamed by corruption, illicit money and unaccounted wealth prospered. General Elections 2014 were fought around these issues, and Bharatiya Janta Party under the leadership of Shri Narendra Modi promising ‘sabka saath sabka vikas’ registered an unpredented democratic victory. On May 26, 2017, the NDA Government celeberates its third anniversary, showcasing several achievements and reforms undertaken. The biggest initiative of the government, may not be so popular amongst the common citizenry is actually a fight-back package against parallel economy.
What is Parallel Economy?
‘Parallel economy’ is the wider concept, of which ‘black money’ is a component includes all the unaccounted wealth of the country. Parallel economy has political, commercial, legal, industrial, social and ethnic aspects. There are legitimate and illegitimate sectors under parallel economy, the objectives of both certainly confront one-another (Sarkar, 2010)[i]. Talking about the estimates of parallel economy, so far there have six reports been given between 1953-54 to 1987-88 only. Yes, the last one being published in 1992, and none after that.
Taking the scope of parallel economy defined by the widely acclaimed, NIPFP’s ‘Aspects of Black Economy in India’[ii] (1985)[iii], it is learnt that other than incomes generated through illegal activities like smuggling, black market transactions, bribes, extortion money, etc, there are unaccounted incomes generated like factor incomes through under reporting of output/sales in production of goods and services, capital receipts like in real estate sector through underreporting the value, incomes generated in export-import through underpricing, overpricing respectively, etc. is black income (Dutt, Mahajan. 2014), which forms a large part of parallel economy.
All this contributes to huge tax-evasion in the country and unaccounted wealth, which pampers corruption, demonstration effect in consumer market, causes accumulation of savings in black liquidity, money laundering, and the worse – terrorism, drug menace, extremism. In 1988, the estimate of such economy was around 50% of the then GNP (Gupta, 1992). With the multi-dimensional expansion in economic activities in India, especially after 1991 reforms, this estimate must have surpassed Mt Everest in past two and a half decades.
NDA’s ailment cure package
In order to unearth this unaccounted wealth, several initiatives have been taken so far – in the direction of checking tax evasion (particularly, in indirect taxes), demonetization (1946, 1978, 2016), voluntary income disclosure schemes, issuing govt bonds for unaccounted money (1981)[iv], etc. Taking any one of these measures in singularity to trap the flow of parallel economy will not yield effective results; rather a comprehensive policy package will hit the bull’s eye.
The NDA government under the leadership of PM Narendra Modi in past 3years has expressed its commitment to catch the bull by its horn, right from setting up the Special Investigation Team to nab down undisclosed wealth stashed abroad in 2014. The government took series of initiatives to unearth and restrain parallel economy– (P.S. Read more about each initiative.)
- The Undisclosed Foreign Income and Assets (Imposition of Tax) Act, 2015 – A comprehensive new law to specifically deal with black money stashed away abroad and taxing them at flat 30% rate. Around Rs16,000 crore worth were disclosed in first 20months of which 635 declarations worth Rs4160 crore was illegal wealth[v]. The Act also provides 90% tax on consistent non-disclosure of foreign wealth.
- Gold Monetization Scheme 2015 – This primarily aims at reducing gold hoarding culture in the country, and mobilising the gold stock into producitve use, ultimately reducing gold import burden. In process of mobilising gold stock, the scheme doesn’t become an immunity for black money hoarders in form of gold, as tax is levied on deposit of gold more than 500gms held out of unaccounted income[vi].
- The Real Estate (Regulation and Development) Act, 2016 – The enactment seeks formalization and transparency in the real estate dealings, curbing unaccounted income generation in the market.
- Benami Transactions (Prohibition) (Amendment) Act, 2016 – This amendment restricts black money investments by widening the scope of benami transactions, curbing flow of black money. Show cause notices for provisional attachment of benami properties have been issued in 140 cases involving properties of the value of about Rs. 200 crore[vii].
- Demonetization 2016 – the bitter pill. Rs500, 1000 denomination currency notes cease to be a legal tender w.e.f November 8, 2016 – replaced by new Rs500 and Rs2000 currency notes.
- Income Disclosure Scheme – Of all provisions brought to restrict black money conversion, the government also gave opportunity to comply norms and disclose unaccounted wealth to people. Similar to Income Declaration call made after Black Money Act enactment, after demonetization, Pradhan Gareeb Kalyan Yojana was putforth.Overall, it is reported that around Rs70,000crore unaccounted and undisclosed wealth has been declared till April 2017 under all such initiatives undertaken[viii]
Reviving the economy
These several initiatives to unearth unaccounted wealth and control hoarding of black money in other forms, deeply impact the economic activity in the country. Therefore, in order to revive and keep the world’s fastest growing economy moving the government took several actions.
- Goods and Services Tax – The multiplicity and complexity of the indirect tax system invites massive indirect tax evasion. NDA government with the motto of ‘one nation one tax’ pushed for Goods and Services Tax and the framework has been passed by the Parliament. GST will be applicable in India w.e.f July 1, 2017 making the Indian tax structure more rationalist and transaparent.
- Hitting Economic Terror – Indian Statistical Institute report (2016) says 15-20% of every Rs10lakh notes in circulation in India are fake, and Rs70crore fake currency is infused into the system every year. The report clearly mentioned that Rs1000 banknote constituted 50% of total value of fake notes. The money mainly pumped in by ISI-Pakistan, flows from Nepal, and Bangladesh too. This (FICN) currency has been funding terrorism in the country[ix]. Such funds were also used in economically nurturing extremism across the red-corridor belt. Demonetization 2016 adversely affected the FICN network.
- Remonetizing – It is said, demonetization is not a solid step to restrain the parallel economy, as there is no guarantee that the new legal tender pumped in the economy won’t be counterfeited. However, it must be noted that because this time the volume of currency demonetized in India is huge, it would widely trap the wealth in parallel economy. India Ratings and Research estimate say that by demonetizing the govt has destroyed 12% of the black money[x]. Demonetization moves towards ‘Remonetization’in India, with NDA pushing towards creating a less-cash economy, i.e. reducing the volume of paper currency in the economy and emphasizing digital transactions. The government promoted the use of Unified Payment Interface (UPI) and launched BHIM (Bharat Interface for Money) App. Post demonetization with government keenly promoting digital transactions, volume of Rupay debit card usage on both Point of sale and eCommerce platform jumped from 5.2 million in 2014-15 to 140million in 2016-17, and 0.8 million to 62million in 2016-17, respectively. Similarly, mobile banking in terms of volume of transactions grew more than 40 times in last 3-years (2013-14 to 2016-17). Even, digital payments shot up more than 3times in terms of volume of transactions between 2013-14 to 2016-17.
- Operation Clean Money –
Post demonetization it is reported that around 91 lac new Tax payers have been added to the system. In addition to all the measures taken to nab tax-evaders, the government also launched Operation Clean Money in May, 2017, which is an online portal to assist honest taxpayers and systematically scrutize evasion tendencies of tax-payers in high, medium and low categorised.
- Digital Governance –
With an eye on tax-evasion, unaccounted and undiscloser wealth in the country, the government in its fight against parallel economy also acts against systemic leakages. The financial inclusion drive annexed with JAM trinity not only aims at financial empowerment of the person last mile, but also put forwards a system directly delivering social security benefits to them weeding out pilferage and corruption. The success of PAHAL DBTL is the most remarkable achievement in this regards. Similarly, the benefits of financial mainstreaming have been clubbed with digital governance to curtail leakages, and 1.6crore fake/ghost beneficiaries out of PDS system and more than a crore fake/ghost beneficiaries from NREGA were weeded out.
Towards Clean New India
In the backdrop of all initiatives listed above, it can be said that NDA government is action-oriented, bold and decisive to fight back the parallel economy. In the history of economic reforms in independent India, no government has been so committed in destroying the parallel economy, which has been debilitating the Indian economy since long.
The series of reforms undertaken by the NDA government are indeed a bitter pill which will kill the cancerous elements of parallel economy. But ofcourse, it isn’t the last nail in the coffin, as there would be series of more reforms required to support the cause at various levels. Particularly, opening the economy to the digital world, in the backdrop of poor digital literacy, infrastructure, sub-standard digital security and absence of regulations makes the economy vulnerable to a new form of parallel economy.
The reforms and revival package intend to change the transaction habits of country – the spending culture in other words. And change always comes with resistance to change, which is often exaggerated by political beliefs. The short-term inconveniences overshadow the long-term benefits of policy decisions in this course. Only timely action against such hoaxes, stringent measures to nab the opportunists (hoarders, etc), strong laws and regulations and spreading know-how and awareness around remonetization, is the strong point of action for the entire state-machinery. And the government is attempting the same in its revival initiatives.
However, the responsibility has to be shared by the community, in its capabilities. This is indeed a fight against corruption, black money and economic terror. Also, it is an effort to empower the informal sector of the economy, the marginalized sections of the society and making India a healthy economy.
[i] Available at http://indianstrategicknowledgeonline.com/web/black%20economy.pdf
[ii] Study conducted under the direction of Dr S. Acharya, and supervision of Dr R. Chelliah, published in March 1985.
[iii] Available at http://www.nipfp.org.in/media/pdf/books/BK_14/Aspects%20Of%20The%20Black%20Economy%20In%20India.pdf
[iv] Dutt & Mahajan, ‘Indian Economy’, Ch. Parallel Economy, 2014 Edition.
[v] Refer http://economictimes.indiatimes.com/news/economy/finance/undisclosed-income-worth-over-rs-16000-crore-detected-in-20-months/articleshow/50293034.cms
[vi] Read more: http://www.ibtimes.co.in/gold-monetization-scheme-deposits-above-500grams-without-naming-sources-be-taxed-647193
[vii] Refer http://pib.nic.in/newsite/PrintRelease.aspx?relid=159882
[viii] Refer http://economictimes.indiatimes.com/news/economy/finance/black-money-haul-rs-65250-crore-disclosed-through-income-declaration-scheme/articleshow/54626799.cms
[ix] Recent evidence in this regards are revelations made by David Headley during NIA investigation of 26/11 Attacks.
[x] Refer http://timesofindia.indiatimes.com/business/india-business/Demonetisation-will-destroy-12-of-black-money-India-Ratings-says/articleshow/55756798.cms