Estimation Of The Size Of The Black Economy In India, 1996-2012

The black economy is often discussed for political, social, and economic reasons because of its deleterious effect on the nation and its leadership. This is visible in institution such as legislatures, the judiciary, the services, and in education and health. It affects policymaking, directly and also by making it difficult to obtain correct data, thereby leading to policy failure. All macroeconomic variables such as the rate of growth, savings, and investment, and microeconomic variables such as the quality of education and health are affected by the black economy (Kumar 1999). Since the black economy vitiates data, it affects analyses carried out by

experts who rely on official data.

The extent of the effect of a black economy on a nation’s life depends on its size. If the black economy is small—as in the Scandinavian countries—its societal ramifications would be

negligible. However, if it is large—as in many developing

countries—its impact will be large and cannot be ignored.

Thus, estimating the size of the black economy, especially in

recent years, is important for analysis.

Unfortunately, few estimates of the size of the black economy

are available in India and in other countries (Kumar 1999)

Due to difficulties in estimation, lack of data, and, above all, the lack of interest among economists to do research in this area. Some experts argue that given the scarcity of data, carrying out research on the black economy is futile. This argument is flawed for two reasons. First, it is a catch-22 situation. If research is not done, data will not become available, and so researchers will not be done. Second, even if data are sketchy, theoretical work can be done, and that can spur empirical work. If data are not available, does it mean one can shut one’s eyes to the all-round consequences of the black economy?

Treating the economy as only consisting of the white economy ignores reality and leads to erroneous results. Theoretically, the black economy results in missing and mis-specifi ed variables, which lead to incorrect empirical analysis.

The argument is a kin to the response Baran gave in reply

to Kaldor’s criticism of his concept of “potential economic

surplus” (1973). Baran argued that brandy consists of water

and alcohol, and if we cannot separate the two, we cannot

say it is only water or only alcohol. Similarly, if we cannot measure the size of the black economy accurately, it does not mean that we can treat the economy as only consisting of the white economy. Even a crude estimate is worth it. After all, even the white economy is estimated and it has had many kinds if a large black liquidity exists beyond the control of the RBI.

The effect of tightening money supply is countered by the flow of black liquidity looking for opportunities to invest in commodities in short supply. Smuggling and hawala have been rampant in India and affect money supply (Chattopadhyay 2012), but the RBI has not published any studies on these activities and their effect on the economy. It has ignored them in its official pronouncements.