Understanding Black Economy: Types and Impact on Indian Economy

Different Types of Black Economy

The black economy can be broadly divided into four main categories:

1. Illegal Economy – This includes income generated from activities that are in direct violation of legal statutes, such as smuggling and illegal gambling.
2. Informal Economy – This refers to economic activities that bypass the costs and do not benefit from the rights incorporated in the laws and administrative rules. Activities like home-based services or exchange of favors among friends and neighbors fall under this category.
3. Unrecorded Economy – These are economic activities that evade the institutional rules defining the reporting requirements of government statistical agencies. This could be due to deliberate concealment of information for legitimate or illegitimate reasons or due to practical challenges in data collection.
4. Unreported Economy – This category includes under-the-table employment and untaxed private transactions. This type of economy aims to evade the fiscal rules established in the tax code.

The Extent of the Black Economy in India

According to some economists' estimates, India's black economy is believed to constitute 62% of the GDP. This is a larger share than the combined income generated by the agriculture and industry sectors. It also surpasses the total spending of the Government of India. The consequence of this is that the Indian economy has been losing growth at an average rate of 5% since the 1970s.

The Size of India's Black Economy Based on a Study Commissioned by the Ministry of Finance

A confidential study commissioned by the Ministry of Finance concluded in 2014 that between 90% to 97% of India's unaccounted wealth was within the country, not abroad. This finding was a major factor that led the Government of India to implement demonetization, removing 85% of the currency in circulation. The study comprised reports from three different institutes. According to the National Institute Public Finance and Policy (NIFP), between 1997 and 2009, the outflow of illegal money from the country ranged from 0.2% to 7.4% of the GDP. Two other institutes estimated the outflow of illicit money out of the country to be between 2.8% to 10% of the Indian Economy. However, all three institutes unanimously reported that 97% of the illegal wealth was within India.

The Economic Model Followed in India

India follows a mixed economy model. As per the latest data, almost half of the country's workforce is dependent on agriculture, while approximately 30% is employed in the services sector. The services sector contributes to two-thirds of India's output. The productivity of this sector has led to a shift towards a market economy in India, marked by privatization, liberalization, and globalization in the 1990s.

The information provided above will be beneficial for candidates preparing for UPSC 2021 .

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