Parallel Economy connotes the functioning of an unsanctioned sector in the economy with the avowed social objectives. It emphasizes a confrontation between the objectives of the legitimate & illegitimate sector. It is also known as Black Economy, Unsanctioned Economy, Subterranean economy etc.

The emergence of Black Economy started during the Second World War when due to shortages experienced in certain essential goods, controls & rationing had to be introduced. Now, the black sector has begun to play a dominant role in moulding the state policies, in changing the structure & composition of output etc. and thus, has resulted in the establishment of a parallel economy.

The money involved in illegal transactions is massive & no concrete quantification of black incomes can be made. A study in 1992 puts the size of black money size at over 50% of GDP. The rate of growth of black income generation is faster than the growth of GNP. In 1994-95, black money amounted to the tune of Rs.3,00,000 crore at 1980-81 prices while the GDP was Rs. 2,50,000 crores.

Reasons for Existence

Legacy of world War-II: There was crisis for all national economies. Hyper inflation, price escalation created a psychology of making money.

Post-war period : In spite of planned use of scarce resources, the goods were not delivered. It bred corruption. Bribes were used to secure permits, quotas, licenses etc. This led to artificial shortage. This affected variety of goods, manufacturers. The prices were above the official price. These excess prices swelled black money.

1.   Unreasonable rates of taxation & defective tax structure leads to tax evasion.

2.   Faulty & corrupt system of controls, permits and quotas also results in the spread of parallel economy. The National Institute of Public Finance Policy observed that for most substantial public sector contracts, significant cuts & kickbacks to key decision-makers have become the law.

3.   Ineffective enforcement of tax laws.

4.   Unhealthy nexus & shady dealings between politicians , businessmen & bureaucracy. Money required for fighting elections is provided by the rich businessmen.

6.   Transactions in real estates: When real estate is brought and sold, both parties find advantages in declaring lower price and setting the rest in cash the seller is tempted to evade wealth tax, and capital gains tax. The buyer is benefitted by evading wealth tax, stamp duty for registration of property, house property tax. In case of rented buildings, evils creep in at the time of change in tenants.

7.   Moral standards of people are also declining.

Adverse affects

1.   Loss of revenue to state exchequer as a consequence of tax evasion.

2.   Easy money with businessmen & capitalists leads to more conspicuous consumption.

3.   Holding black money in cash leads to an abundance of liquidity, which winders govt.’s attempts to control excess demand with the measures of credit control or rationing.

4.   Through violation of foreign exchange regulations, massive funds are transferred from India to foreign countries.

5.   It has corrupted our political system in a vicious manner. National policies are being bent in the favour of big businessmen.

6.   The unseen but real affect is on the ‘values’ of society where dishonesty is paying and trickery is regarded as better than hard work.

Steps to control it

1.   Rationalisation of tax structure-e.g.-marginal tax rates on higher incomes should be reduced.

2.   Appropriation of the gains of investment of black money in real estate.

3.   Expansion & improving the efficiency of public sector as a countervailing power.

4.   Effective check on donations to political parties & electoral reforms. A floor level state funding of elections expenses of candidates for loksabha& state assemblies.

Government measures

1.   The voluntary disclosure scheme 1951, 1968, and 1975 those declaring their concealed income were given amnesty. Amount disclosed-Rs. 1000 crore.

2.   VDIS (voluntary disclosure of income scheme) 1997. Salient features were : immunity from any further enquiry regarding disclosed income-amnesty covering both movable and immovable properties-no question about year or nature of source of funds-concessional rate of interest 30% for individuals and 35% for corporate. This scheme was distinct from the previous one in that those getting the amnesty were taxed at 30% compared to existing 40%. Moreover it was open for longer period from 1 July 1997 to 31, December, 1997.

3.   Demonetization of Rs. 1000 notes in 1978. The demonetized notes were to be exchanged with new currency. Rs. 1000 notes amounted for Rs. 145 crores were offered for re-coinsation.

4.   Non Resident investment scheme: Its objective is to attract savings of Indians settled abroad by way of repatriation of their money to India. To an extent, may have attracted black balance held abroad.

5.   Reduction in tax rates

6.   Raising tax revenue through administrative measures: These consist of simplifying tax laws, tax procedures, and tax raids.

7.   Exemption of penalties on undeclared wealth: This was operational in 1986-87.

Though the Wanchoo Committee said,” Black Money is like a cancerous growth in the country’s economy, which, if not checked in time, is sure to lead to its ruination”. These measures are all steps in right direction within the socio-economic framework of mixed capitalist economy.