Black money conundrums

Arun Kumar 
Aleph Book Company
144 pages; Rs 399

Demonetisation was arguably the most direct assault on the black economy in India in recent times. It was a political gamble that went beyond the customary lip service expected of politicians on a perennially contentious issue.

Any analysis of whether demonetisation succeeded in making a significant dent in the stock of black money will first have to quantify the size of the black economy. There have been various attempts to ascertain the size of black economy in India, but given the paucity of data, it is understandably difficult to arrive at precise estimates. 

Understanding the Black Economy and Black Money in India by Arun Kumar, a former professor of economics at Jawaharlal Nehru University who has worked extensively on the issue of the black economy, attempts to do so. Presumably this well-timed book is a follow-up of his earlier book on the black money more than a decade ago.

According to Professor Kumar, the black economy in India is roughly equal to 62 per cent of the gross domestic product. He claims that the black economy has been costing India an average of 5 per cent growth since the mid-1970s. 

“If we add 5 per cent to the rate of growth over the past four decades or so, the size of our economy would be Rs 1,050 lakh crore or about $15 trillion. We would have become the world’s second largest economy, a middle income nation.”

This is a bold claim. But it is not clear how Professor Kumar arrives at this estimate. He says it is based on his earlier estimate of the black economy, 40 per cent in 1995-96, which has been projected to the recent period. But such extrapolations should be viewed with caution as they rarely hold. 

Although the broad thrust of the book appears to be right — that the black economy has a debilitating impact on the country — certain claims in the book are bound to elicit scepticism.  For one, Professor Kumar asserts that to avoid paying taxes, output is understated and capital is overstated so that the incremental capital output ratio (ICOR) of the white economy is overstated. 

Such claims aren’t backed by data. Merely pointing to the case of Satyam hardly constitutes conclusive evidence. It is also logically confounding. 

If ICOR is an overestimate, then it should follow that India is a far more efficient economy than is made out to be. So much for the country’s famed lack of competitiveness.

The author also tends to discount the widely accepted reasons for the rise of the black economy. He refutes the notion that black incomes, as a consequence of the low salaries of bureaucrats, police, judiciary and so on, are large. 

“Of the black incomes generated through committing an illegality, bribes often are in the range of 5 to 15 per cent,” he says. 

While this may well be true, Professor Kumar offers no insight into how he arrives at this estimate. 

On the role of the licence-permit raj, although he does acknowledge that laws need to be changed, his position verges on the dismissive. “Positing that controls and regulations are responsible for generation of black incomes is like saying that a law is its own cause of violation,” he says. 

It’s a pity that Professor Kumar chooses not to dwell on the fact that the root cause of large-scale corruption is the immense discretion in the hands of the state. Nor does he explore in detail how the state extracts its pound of flesh from the common man at every level of interaction. 

Instead, he blames the rise in the black economy on the triad of corrupt politicians-business-executive, arguing that “the cause of growing illegality lies in the desire of the elite to make incomes over and above what they can make legally”. 

His prescription of what may help curb the black economy rests largely on a combination of proposals that have been discussed  ad nauseam — greater transparency and access to information, institutional autonomy and reforming the organs of the government.  Some of his proposals merit mention. For instance, he proposes to levy a plethora of new taxes on the rich — wealth, gift and estate taxes. While this is bound to rile those who believe that lower taxes encourage compliance, the belief that simply levying a new tax would make the rich more tax compliant is naïve. 

Another proposal that seeks for property taxation to be based on site and services valuation is hardly feasible given the limitations of personal, not to speak of the discretion in the hands of the assessing officer. 

A more radical proposal seeks to ensure that half the legislators face elections every two and a half years, the logic being that a shorter term will ensure they fulfil their stated promises. 

Greater scrutiny of promises made by elected representatives is obviously desirable, but is merely reducing legislators’ terms a solution? Is two years enough for policies to be implemented? And if elections are held every two years wouldn’t political parties need more funds to compete? Doesn’t that increase the scope of corruption?

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel