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India’s Uncontrolled Black Economy Is Choking Real Economy

By Nantoo Banerjee

The government may disagree, India’s economic performance in the last eight years has proved to be rather lacklustre. It has been facing a real challenge from the ever expanding black economy, substantially eating up the revenue income of both the national and state governments. Unaccounted money with the rich is hurting the government and the common man. It is a major contributor to the price inflation. The government’s demonetisation and digitisation measures have had little impact on the dark economy’s growth. The failure to contain the black economy is hurting the entire society. The government appears to be clueless about the size of the black economy in the absence of a reliable assessment of the situation. However, the rectification of the system may prove to be an uphill task as it will call for policing on politicians in power, the police and government officials who are behind the black economy’s prosperity.

Black money is surging. So are illegal mining, smuggling and asset building and transfer. The latest CBI and ED raids in certain non-BJP governed states — though termed political by the opposition — show the massive growth of black money transactions, Benami asset transfers, real estate transactions, smuggling and illegal mining. India’s GDP in the last eight years averaged a growth of around five percent. Bharatiya Janata Party (BJP) stormed India’s political stage with a thumping mandate in 2014 an 2019 promising more jobs, prosperity, less red tape, black money control and big bang reform. They have remained mostly on paper. In fact, the country’s parallel black economy may have done much better in recent years. The government’s avowed GDP target – a $5 trillion economy by 2025, or roughly $3 trillion after adjusting for inflation – would appear to be a pipe dream now. Eight years ago, when BJP came to power it also promised to recover black money from safe havens abroad and ensure a deposit of Rs.15 lakh in every Indian’s bank account.

In the government’s own admission, the demonetisation of Rs.500 and Rs.1,000 currency notes in November, 2016, followed by a massive push for digitisation, had little impact on cash money circulation. Cash continues to remain the king. Black money is expanding. The Narendra Modi government had expected demonetisation to extinguish at least Rs 3-4 lakh crore of black money. However, RBI data showed that 99 percent of the money that was invalidated by demonetisation returned into the banking system. Of the invalidated notes worth Rs.15.41 lakh crore, notes worth Rs.15.31 lakh crore returned. Former RBI governor Raghuram Rajan had stated that he never supported the idea of a note ban and felt that the short-term impact of the exercise could outweigh the long-term gains. The RBI data suggests that demonetisation was a failure in unearthing black money in the system. In November 2016, when Prime Minister Narendra Modi announced the demonetisation of high currency notes, he said he had taken the step primarily to fight black money.

The government also failed to contain the growth of fake money circulation in the market. The growing presence of counterfeit bank notes continues to be a cause of worry. The RBI detected a 101.93 percent rise in fake notes of Rs.500 denomination, while fake notes of Rs.2,000 increased more than 54 percent during 2021-22. The RBI annual report showed that there was an increase of 16.45 and 16.48 percent in counterfeit notes of Rs 10 and Rs 20, respectively, in FY22. Fake Rs.200 notes rose 11.7 percent. Counterfeit notes detected in denominations of Rs.50 and Rs.100 declined 28.65 and 16.71 percent respectively, the report showed. Of those, 6.9 percent were detected at RBI while the rest 93.1 percent at other banks. Advances in technology may have created some of the most sophisticated, counterfeit-proof currencies in history, but counterfeiters are fast on the trail of the latest wave of security improvements and attempts to keep the counterfeiters at bay. Fake Indian Rupee notes are said to be printed mostly in India, Pakistan and Bangladesh.

Illegal mining and quarrying continue to be a major contributor to the growth of India’s black economy. A Union Environment Ministry report listed 4,16,000 incidents of illegal mining between 2013 and 2017. There are at least one lakh incidents of illegal mining in the country every year. “Every month, there were 8,833 cases of illegal mining, every day 294 and every hour 12 incidents”.  Some of the country’s rivers and hills are dug illegally. India’s mineral wealth is openly looted. The cases of illegal mining rarely reach the police or the court. For instance, 1,07,609 cases of illegal mining were reported in 2016.  Of them, the FIRs with the police were registered only in 6,033 cases. The mining mafia is too strong to be fixed. The offenders manage to escape easily using such commonly practiced tools as bribery, hooliganism and collusion with ruling political party satraps, police and government officials. There is little public discussion or debate on the issue.

Unofficial reports suggest that hawala gangs mint more profit than what is gained through gold smuggling. Their business is to channel the hawala money from Saudi Arabia to different parts of the world. The business continues to grow helping illegal money transfers among cash-rich people. Hawala activities are also commonly used for money laundering, terrorist financing, and drug trafficking. The Hawala transfer system is fast, efficient, and anonymous. Across the world, the hawala system has come under scrutiny in recent years as it is frequently used to finance terrorist activities.

Even the United Nations has enacted regulations to try to control the hawala system and prevent it from being used to finance terrorism. The system has long been popular in India for money laundering, terror funding and fund transfer between people living in the country and their contacts abroad. A traditional money transfer system, hawala is popular in West Asia, North Africa and South Asian countries, including India, Pakistan and Bangladesh. The system is based on trust and personal relationships between hawala brokers and hawaladars. India’s record in controlling hawala transactions has been very poor. Little is reported on the growing hawala racket.

India’s white economy is inextricably linked with its black economy. It was well explained by economist Arun Kumar in his book, The Black economy in India,  published in 2017. Where in 1991, the black economy constituted about 35 percent of the national economy, it had reportedly increased to 62 percent by 2013. The pernicious effects of black income or illegal asset creation and transfers on the macroeconomy and the resultant inefficiency in society are known. Only a strong political will can control the system. Unfortunately, this seems to be totally missing in the country.  (IPA Service)

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