Parallel Economy - Meaning, Definition, Reasons of

Growth, Impact, Consequences & Remedial

Measures
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

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

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)

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

1. India
2. Russia
3. U.K
4. Ukraine
5. China
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

Steps to curb black money: Some recent developments

Different steps has been formulated to curb the menace of black money in India. There
were co-ordinated efforts from the part of government, RBI, and Supreme court. Steps
taken include:

 Formation of Special Investigation Team (SIT) by SC during the UPA government

tenure while considering a case filed by former Law Minister Shri. Ram Jetmalani.
 The government passed The Undisclosed Foreign Income and Assets (Imposition of
Tax) Bill, 2015
 RBI initiated the process of taking back the currency notes issued before 2005 to
reduce the level of counterfeit notes and also to curb the menace of black money to a
greater extent.
 The government is mulling for a dual strategy in the form of framing policies to bring
back the illicit money stashed abroad and also making domestic laws stringent to
locate and identify the black money in India.
 Tax reforms in the form of tax deduction at source (TDS) , increasing tax base than
merely increasing tax rates, voluntary disclosure schemes etc.
 Government and RBI are promoting the cashless economy. The government has
either slashed taxes or surcharge on online / card transactions to make transfers
accountable and try to bring the money into the normal banking system.
 Government has scrapped Rs.500 and Rs.1000 notes and changed the cash
withdrawal limits from banks and ATMs.
  India joined FATF ( Financial action Task forece) in 2005 to combat against
financing terrorism through the black money route. We also framed AML / PML
laws in 2003 for combating money laundering activities in our country.
 Prevention of Corruption Act and Binami Transactions Act were other such steps
in the right direction.
 Under pressure from India and other countries Switzerland and other tax havens have
agreed in principle to share the details of accounts to the public authorities on a case
to case basis.
 Making PAN number mandatory for real estate and bullion purchases.
 The government is in a process of renegotiating DTAAs with countries which we have
already signed.
 Limitation of benefits clause needs to be invoked in appropriate areas where it deemed
necessary.

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

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