Parallel Economy - Meaning, Definition, Reasons of Growth, Impact, Consequences & Remedial Measures

Parallel Economy (Black Economy or unaccounted Economy)

Tables of Content

Meaning and Definition of Parallel Economy
Reasons for the existence of the Parallel Economy
Consequences or Impact of Parallel Economy
How to Control Parallel Economy
Parallel Economy in India: Meaning, Concept, Effects, Impact, and Consequences
Top Level Scams in India
Top Level Countries causing Parallel Economy
Objectives of Demonetization in India
Components or Aspects of the Black market Economy or Parallel Economy in India

Concept and Meaning of Parallel Economy:

Meaning of Parallel Economy or Black Money: The parallel economy is based on black money or unaccounted money. We can define the black economy as the money that is generated by activities that are kept secret, in the sense that these are not reported to the authorities. As such, this money is also not accounted to the fiscal authorities i.e., taxes are not paid on this money.

The parallel Economy is also termed as ‘black economy’, ‘unaccounted economy’, ‘illegal economy’, ‘subterranean economy’, ‘unsanctioned economy’ or 'hidden economy'.

Parallel economy often could be demonstrated as the hidden economy of a country. People or business entities, when do not show their exact income as per the government, rules the income comes under parallel economy

Definition of Parallel Economy:

Fiege Definition of the parallel economy: Feige define parallel the economy as “the hidden/parallel economy includes those activities that go unreported or are unmeasured by society’s current techniques for monitoring economic activity.”

NIPFP Definition o Parallel Economy: The National Institute of Public Finance and Policy (NIPFP) define black money as the aggregate of incomes that are taxable but not reported to the tax authorities.

Scneider & Este Definition of Parallel Economy: According to “Scneider & Este ““Parallel Economy includes all unregistered activities while contributing to the officially calculated GNP (Gross National Product)

The parallel Economy is tax evaded economy. It is possible to convert the illegal economy or black money into white money or vice – versa

What is Black Market?

Black Market Meaning : Black market is a market where all commerce is conducted without regard to taxation, laws, and regulations of trade. The goods acquired illegally may be cheaper than legal market prices. Because the supplier doesn’t have to pay for the production cost or taxes. Criminals steal goods and sell them below the legal market price.

As per an estimate of International Monetary Fund the Aggregate size of this underground market is between 2 to 5 percent of the World’s GDP.

Parallel economy exists due to various reasons

There are many reasons which are responsible for the parallel economy in India as well as in the whole world. Some of the reasons for the parallel economy are mentioned below

High tax rates implemented by the government are responsible for the parallel economy
Complicated taxpaying procedures and policies of the government.
People believe that their money is not going to be properly utilized by the government as their trust in government is less.
High inflation which puts taxpayers under high tax-paying brackets.
People do not get enough return on their paid taxes.
Involvement of government agencies and officials in corrupt practices.
Insufficient laws and their implementation to counter such activities

Consequences or the impact of black money or Parallel Economy:

There are many consequences and impact of parallel economy in India as well as in the whole world. Some of the impacts of the parallel economy are:

Loss of revenue to the government and running of parallel economy in the country
Black money causes a decrease in the quality of public goods and services
Black money results in higher taxation and inflation
Black money causes difficulty in the formation of monetary and fiscal policy
Black money results in increased criminal activities

How to control the black money or parallel economy:

There are various measures that can be taken to control the parallel economy. From time to time various measures are taken to control the parallel economy in India. Some of the techniques of controlling the parallel economy are:

convert the existing black money into white money through various measures
Voluntary disclosure of income scheme (VDIS): the government launched a Voluntary Disclosure of Income Scheme (VDIS) on June 18, 1997, whereby the tax-defaulters were given an opportunity to disclose their hidden incomes at the prevailing tax rates by giving them immunity from major laws relating to economic offenses from 01 July 1997

concept, meaning and definition of parallel economy

Parallel Economy or Black Money Market In India

Meaning and Concept of Parallel Economy or Black Money in India :

Parallel economy or black money is funds earned on the black market on which income and other taxes have been paid. According to Kaushik Basu, “the former chief economic adviser to the Indian Govt., says that the nation’s trade on of petty corruption helped India avoid the worst of the banking crisis that has crippled most other large economic few years.”

When people or business entities do not show their exact income as per govt. rules and regulations, the income comes under parallel economy or black money

The informal or parallel economy includes unreported income from the production of legal goods and services, either from monetary or barter transaction- hence all economic activities which would generally be taxable were they reported to the state ( tax ) authorities.

Effects or Impact / Consequences of Parallel Economy or Black Money in India:

- Revenue loss of Govt: Black money or parallel economy is not recorded and reported, so no tax is paid through income. Business-class doesn’t report their exact output, sales, and under-registration of property.

- Wrong Estimation of GDP: To evades taxes, manufacturers under-report their output and sales. This under-reporting leads to the underestimation of GDP.

- Difficult to frame policies: No paying of taxes results in decreasing the budgets of govt. and due to decreased budget, it is difficult to frame good policies and plans.

- Unequal distribution of Income: The persons who are earning well doesn’t PAY their taxes and those whose income is less, pay their taxes annually. This results in the unequal distribution of income.

- Political Corruption: There is a lot of corruption in the political sector. Various MLA’s , MPs and ministers and workers of the party collect money from businessmen and receive a high amount of donations from them.

- Unequal distribution of Wealth: The rich sector is becoming rich by not paying taxes and poor and becoming poorer.

- Investment in Unproductive Assets: If someone has black money they invest their money in foreign liquor factories and luxury housing.

- Widening the gap between the rich and the poor

- Deteriorate the general moral standards of the society

Top-level Scams in India :

The top 5 black money scams in India are:

1. 2G Spectrum Scam ( Mr. A. Raja_______ 1.76 lack crore)

2. Commonwealth Games Scam ( Mr. Suresh kalmadi________ 3500 crore)

3. Telgi Scam ( Mr. Abdul Karim Telgi_________ 20000 crore)

4. Satyam Scam (Mr. Ramalingam Raju_______ 14000 crore)

5. IPL Scam ( Mr. Lalait Modi and Mr. Shashi Tharoor)

Top-level countries which are generating black money:

The top 5 countries are generating black money or unaccounted money is:

1. India

2. Russia

3. U.K

4. Ukraine

5. China

Objectives of Demonetization in India :

- To get all currency into banks

- To increase the actual GDP and reduces black money in the economy

- To eliminate completely fake currency which is in circulation.

- Reduce the future generation of black money.

Components or Aspects of the Black market Economy or Parallel Economy in India :

There are various components through which the parallel economy runs in India. Some of them are:

- Arms and ammunition

- Currency exchange

- Hawala

- Swiss bank accounts

- Copyright media

- Corruption and bribery

- Drugs, alcohol, and tobacco

- Smuggling

- Fraud

- Money laundering

- Arms and Ammunition: There is a huge demand for weaponry items which cannot be obtained legally or may only obtain legally after obtaining permits and paying the fees. It is not easy to get weapons legally.

- Drugs, Tobacco and Alcohol: The illegal drug trade consists of the cultivation, manufacture, distribution and sale of illegal controlled drugs which includes alcohol and tobacco.

- Currency Exchange: There are various reasons for currency exchange. It is difficult or illegal for the citizens to own much or any foreign currency.

- Corruption and bribery: Bihar is the most corrupt state in India. In Bihar, more than 80 percent of the subsidized food aid to the poor is stolen. India is ranked 85 out of 179 countries in Transparency International’s Corruptions Perceptions Index

- Copyright Media: There is too much black marketing in copyright media

- Hawala : It is an alternative or parallel remittance system. It is developed in India, before the introduction of western banking practices. It is a major remittance system which is used around the world currently. The transfers of money take places based on Communication between members of a network of hawaldars or Hawala dealers.

- Swiss bank Accounts: According to the Swiss banking association report, 2006, India is on the top list of depositing money in Swiss banks.

Top 5 Countries which deposited money in Swiss banks are

- India – $ 1,456 billion

- Russia – $ 470 billion

- UK – $ 390 billion

- Ukraine – $ 100 billion

- China – $ 96 billion

Conclusion : The black money or parallel economy not only affected our economy. It has also affected morale, politics, public life in the country.