THE PARALLEL ECONOMY IN INDIA: CAUSES, IMPACTS & GOVERNMENT INITIATIVES.

Introduction

A nation's economy is made up of its economic system, labour, capital, and land resources, as well as the economic actors who engage in the manufacturing, trading, distribution, and consumption of commodities and services in that country. All occupations, jobs, economic actors, and economic forces contribute in some manner to the economy. Consumption, saving, and investment are the economy's three primary components, and they all contribute to market equilibrium. In contrast to formal economic activity, informal economic activity is defined as economic activity that is not taxed nor regulated by a government. As a consequence, the informal sector is excluded from the government's Gross National Product (GNP). It is a dynamic process that encompasses several components of economic and social theory, including the exchange of commodities and services, as well as regulation and enforcement processes and procedures.

The term "parallel economy" refers to the functioning of an unauthorised or sanctioned sector of the economy whose goals clash with and are in opposition to those of the official, sanctioned, or legal sector in issue. This phenomena has been referred to as the unaccounted economy, illegal economy, subterranean economy, and unsanctioned economy. The illicit economy is a tax avoidance economy. It is feasible to convert black money to white money and vice versa in the criminal economy. Consider a situation in which a person pays sales tax on a product but does not really obtain it. The man obtains black money in this situation because he is compensated for the sales tax he paid but did not buy the item. The money that has not been paid is referred to as black money in this case. The merchant in this case sells the same things to another person without presenting him with a receipt for the transaction, which now creates a chain of transaction which go undetected and are unaccountable.

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Black Money and Demonetization

(PDF) BLACK MONEY AND DEMONETIZATION | Rahul Deodhar - Academia.edu

Young Indian author Rahul Deodhar attempted to breakdown the bold step taken by our government back in 2016 to tackle the problem of Black Money from our economy and to eventually bring end to the parallel economy which has been deep rooted since decades. During the time of demonetization government revoked 500 and 1000 rupee notes in circulation as legal tender. As told by our respected prime minister that this move was to tackle black money, corruption and terrorism. To take in context black money is a widespread problem and demonetization is a single step towards it. Black money is the currency of black economy/ parallel economy. The biggest reason why government wants to crack down parallel economy is because parallel economy runs parallel to normal economy uses its resources but pays no cost and government has no control over it. There has been lots of research over the topic of black money and parallel economy by government backed and national institutes some of which are published and reported by various Finance minister at Budget session in parliament some of the notable ones are 1983 survey of estimates of Black Money which was further reported in 1985’s Aspects of black money . Then in 2012 Measures to tackle Black Money in India and Abroad and White Paper on Black Money. However these paper may not have given about how much exactly is black money in our economy but they do talk about measures on how to deal with it. There have been worldwide efforts to combat the "underground economy" or "shadow economy" in addition to those mentioned above from India. The fundamentals stay the same. Internationally, I find, they focus more on facilitating voluntary rather than enforcing the law Retaining public confidence and trust in the tax system has priority above anything else. Additionally, they suggest risk-based monitoring systems, revenue department cooperation, and employee education.

One of the most important things to do is eliminate the systemic misery that leads to the formation of black money itself. The tax division is to blame. "Black money" refers to cash that has been created via legal transactions but has been stowed away in order to avoid paying taxes in a "legitimate" economy. Typically, this is done with actual cash. Afterwards, this money must be processed in order to be used for either consumption or investment. The term "black economy" is used to describe a wide range of activities, transactions, and so on that aid in the processing of physical currency, provide returns on that cash, and/or allow consumption by way of that cash.

There are two elements to the second premise. The first thing to keep in mind is that not all cash transactions are black money transactions. Black money transactions only take place when they are kept out of the mainstream economy. As a result, a shopkeeper who doesn't offer a receipt but instead announces the transaction (this is just an example) doesn't generate any illicit funds. Contrary to popular belief, it is perfectly legal for shopkeepers to offer customers one invoice and then hand them a different receipt book to the tax authorities (this occurs all the time). Second, the illicit funds must be reintegrated into the normal economy at some point. The usage of user-created money that cannot be traded for local currency is thus prohibited. So it depends on legal tender. This indicates that somewhere in the chain, there must be a person who is legally able to spend some of this black money for his own use via legal channels. People like construction workers and other low-wage earners often take advantage of this loophole to avoid paying taxes on their earnings. There are illicit gold and diamond dealers who may turn this into valuable things that have a quasi-legal currency status, such as gold bars.

In the third place, we see that the black economy is sustained by smuggled portions of the white economy.

People who don't wish to encourage the use of black money are among those who contribute to it. Coercion or bribery are the two most common reasons for people to pay in cash, but they aren't the only ones. As a result, the first step is to keep white money from becoming black. Some of these methods are outlined in the report titled Measures to combat Black Money in India and elsewhere. The fundamental premise is to raise the expense of changing legal tender into cash (thereby diminishing the government's capacity to trace it), while simultaneously lowering the cost of electronic transmission.

Analysis

Causes of parallel Economy in India

There is no single way in which Black Money is made:

     I.         Illegal methods are used, such as drug trafficking, weapons trading, and illegal intimidation;

   II.         It is made by selling false or stolen goods; and

 III.         It is produced by using unlawful methods, such as drug trafficking, weapons trading, and illegal intimidation; and

 IV.         In other words, it's made in a legal way. As an example, concealing pay via the legal system and not disclosing the correct amount to the government to avoid penalties.

   V.         Engaging in illicit transactions or those that provide funding for criminal activities, including the purchase and sale of illegal goods and services.

 VI.         A loss of trust in the government owing to corruption or the absence of a right to information system about public expenditures may lead to tax evasion due to a variety of psychological and social causes, such as greed or the sense of being expl0ited.

VII.         Due to a huge number of dependants, people are unable to support themselves and their families while simultaneously paying taxes on acc0unted money.

VIII.         Tax filing and intricate procedures connected to the same might be difficult for those who are illiterate or lack the necessary knowledge.

 IX.         High tax rates: One of the most obvious reasons people avoid paying taxes is the high tax rates that are imposed on them. Individuals' efforts to evade paying taxes have ushered in the era of black money. Because of the high tax rates imposed by the public authority, avoiding tax payments is essential in duty instalments, such as yearly expenses, organisation charges, extract requirements, transactions and administration charges, and so on.

   X.         When it comes to producing black money, both financial managers and religious leaders have access to new terrain thanks to the privatisation of business. As a result, it is reasonable to predict that numerous schemes for smuggling in undeclared funds will be discovered.

 XI.         There is a lack of infrastructure in India to keep track of qualified citizens, citizen cash, charges collected from citizens, and so on, which makes it difficult to carry out tax assessment enactments effectively. Unreasonable evasion of taxes and the accumulation of untraceable funds are the results of this.

Effects of Parallel Economy

     I.         Government income loss: Since black money isn't tracked, no tax is paid. Business-class under-reports yield, transactions, and property under-enlistment.

   II.         The producers under-report their yield and agreements to avoid penalties. This under-revealing causes GDP under-estimation.

 III.         Policy formulation: Tax evasion reduces the government's budgetary objectives. Also, limited funds make it difficult to develop outstanding strategies and programmes.

 IV.         Inequality of Income: Others who earn much do not pay taxes, while those who earn less do. As a result, money is inconsistently distributed.

   V.         Political Corruption: There is much debasement in politics. Difficulty in getting money from financial experts.

 VI.         Inequality of wealth distribution: the wealthiest become richer while the poor get poorer.

VII.         Investment in Non-Productive Assets: People with money invest in unproven alcohol manufacturing facilities and luxury hotels.

VIII.         Widening the wealth gap.

 IX.         Weaken societal good ideals.

   X.         Uncontrollable inflation: When the government anticipates the quantity of money in the system to be lower. This drives up commodity prices beyond normal. As a consequence of wealthy people spending more money on certain products. Even if the government takes essential steps to manage the credit flow in the market, the quantity of black money present disrupts the motion, putting pressure on the economy.

 XI.         With rich pockets, individuals are willing to pay more for a piece of property, which tends to enhance the price of surrounding land, artificially inflating the values of a region. Criminals are willing to pay more for land because it helps them convert their c0l0ured money into lawful money.

XII.         Lack of Technology: The prevalence of black money causes capital loss in India. This directly affects the advancement of technology in all fields. The main cause is the parallel economy.

Government Initiatives

Anti-black money measures have been implemented by the government. The Income Tax Department is conducting searches, seizures, surveys, and examinations of income tax returns. In addition, the Finance Act 2004 has been amended to increase measures to combat black money. Fraudulent bookkeeping and taxing gifts above Rs.25,000 to non-family members are among the penalties. Voluntary Disclosure of Income (VDIS) has undergone two changes since its inception, allowing black earnings and assets to be reported, tax to be paid at current rates, and amnesty to be granted. The following methods are recommended to address the threat posed by the parallel economy in order to keep the economy running smoothly.

     I.         Voluntary Disclosure Schemes : under this scheme many people came forward after they saw a flaw in the system that they were only being charged income tax not wealth tax

   II.         Demonetization : government banned 500 – 1000 rupee notes to fight black money but according to RBI 97% black money has returned back in Parallel Economy

 III.         Measures to Check Tax Evasion : new tax reforms were needed which were introduced and still are being implemented slowly

 IV.         Special Bearer Bond Scheme : bonds are issued so that money which is sitting unproductive in the parallel economy can be pooled back in the Nations Economy.

Conclusion

In India, it is not a new problem which has emerged as "parallel economy." But there is a tremendous growth in the "parallel economy" in India. There were five commissions set up by the government of India to estimate the country's black economy: Kaldor, Wanchoo, Rangnekar, Chopra and Gupta. The development of the economy is influenced by a variety of elements, such as the licencing and control system, higher tax rates, a lack of efficient enforcement of tax laws, inflation, and political party funding, among others. The quantity of black money in India is steadily rising, which is having a negative influence on the country's economic progress. To deal with this new kind of money, the Indian economy must adapt. Black money has a negative impact on the Indian economy by underestimating GDP, increasing inequality of wealth, and promoting illicit activities, such as drug smuggling and arms trafficking. In the previous 50 years, the government has offered a variety of plans to bring black money to the surface, but they haven't been very successful. The introduction of the Special Bearer Bonds plan, the demonetization of large denomination currency notes, strict raids, and the voluntary disclosures scheme are some of these measures. The black economy is predicted to shrink as a result of the use of these devices.