India and the shadow economy
The Underground Economy results from inefficient market stipulations and trade in goods and services that are illegally concealed from public authorities and includes all the activities through which black incomes(i.e., incomes that aren't reported to the tax authorities) are generated. However, it's not always about illegal drug marketing, smuggling, thefts, etc., that are outside the purview of the government (tax authorities); the shadow economy also includes all those who don't disclose or pay associated levies for their income. Besides this, the shadow economy could be attributed to people (whose income is legally earned) indulging in tax avoidance. To dodge the obligation of social security contribution and wealth redistribution, people might have unreported income, which can add up to a significant economic difference. The underground economy grew most rapidly in the 1960s.
The informal economy accounted for 43.1% of GDP during the last decade. Countries like the United States, U.K, Singapore, Canada, etc. have much lesser percentages for the same, ranging between 7.3% to 10.4%, with the U.S. accounting for the least, i.e., 7.3%.
However, when one says "informal economy," it also includes people below the threshold level, i.e., The government does not levy an income tax for those with low income levels. Hence, a part of it cannot be considered a component of the shadow economy per se. Comparing India's underground economy with the U.S., the recent (in the last three to four years) U.S. figure estimates account for 11% to 12% of GDP, totaling $2.8 trillion. In India, around the same period, it is 17.22% of GDP, totaling about Rs. 26,15,800 crores. If these transactions were legalized and accounted for the Gross Domestic Product, India's GDP would've been higher by this percentage.
How important are policies to shape an economy?
India's GDP rose from 1.1% in 1991 to around 7.5% in 2015-16.
What has contributed to this sharp growth?
The answer is "policy reforms". That's how influential and essential policies are to boost a country's GDP.
Often, unreported transactions in the shadow economy have significant impacts on employment rates and labor statistics. Governments should know precise unemployment rates, per capita income, etc., to undertake robust and fully effective fiscal and monetary policies. The biggest problem is to quantify the size of black markets. Thus, policy effectiveness and, ultimately, the country's growth are significantly determined by the size of its black market.
One of the most significant initiatives undertaken by the Government of India to mark an end to black money and, ultimately, the underground economy is the "Note ban." In 2016, the Indian Government announced demonetizing all Rs. 500 and Rs. 1000 banknotes. It also announced issuing new Rs 500 and Rs. 2000 banknotes in exchange for the demonetized banknotes. The government estimated that ₹5 trillion, or approximately 20%, of the demonetized banknotes, would be permanently removed from circulation.
"The Prime Minister claimed that the action would curtail the shadow economy, increase cashless transactions, and reduce illicit and counterfeit cash use to fund illegal activities."
Also, GST, which occurred in 2017, has successfully removed black market businesses. As a result, the number of income tax returns filed also increased from 43.3 million to 52.9 million.
Written by Tharuni Mudumby | Proofread by Yasmin Uzykanova
