Parallel economy

ITS ORIGIN, SIZE AND IMPACT ON THE
MAINSTREAM ECONOMY

WHAT IS A PARALLEL ECONOMY?
 Feige: “the hidden/parallel economy includes
those activities that go unreported or are
unmeasured by the society’s current techniques
for monitoring economic activity.”
 Scneider & Enste: “parallel economy includes
all unregistered economic activities which
contribute to the officially calculated GNP (Gross
National Product).”

Simply put, parallel economy often could be
demonstrated as hidden economy of a country. People
or business entities when do not show their exact
income as per government rules the income comes
under parallel economy.
The informal economy includes unreported income
from the production of legal goods and services, either
from monetary or barter transactions - hence all
economic activities which would generally be taxable
were they reported to the state (tax) authorities. In
general, a precise definition seems quite difficult as
the informal economy develops all the time and
adjusts to changes in taxes, sanctions from the tax
authorities and to general moral attitudes.

Parallel economy exists due to various reasons and
they are as follows:
High tax rates implemented by the government.
Complicated tax paying procedures and policies.
People believe that their money is not going to be
properly utilized by government as their trust on
government is less.
High inflation which puts tax payers 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.

BLACK MARKET
 The black market is a market where all commerce is
conducted without regard to taxation, law or regulations of
trade.
 It is generally smallest in countries where economic
freedom is greatest, and becomes progressively larger in
those areas where corruption, regulation, or legal
monopolies restrict legitimate economic activity.
 Goods acquired illegally may be cheaper than legal market
prices. The supplier does not have to pay for production
costs or taxes. This is usually the case in the underground
market for stolen goods. Criminals steal goods and sell
them below the legal market price, but there is no receipt,
guarantee, and so forth.

The amount of money laundered in the whole world is close to
$2.85 trillion per year. As per an estimate of International
Monetary Fund the aggregate size of this underground and
illegitimate market is between 2 to 5 percent of world’s gross
domestic product.
The range of activities that takes place in black economies is
vast, spanning from the innocuous (t-shirts and shoes) to the
edgy and dangerous (sex, drugs, and guns). Also, much of a
black market is legal business being conducted in an effort to
evade tax authorities.
It is a challenge for economists to accurately measure, or
even estimate the size of many black economies. This is because
they may be illegal, and therefore are not reported to tax
authorities or stock exchanges. The money that changes hands in
such an economy are never recorded and no taxes are ever paid.

COMPONENTS OF A BLACK MARKET
ECONOMY
BLACK
ECONOMY
ARMS &
AMMUNITION
CORRUPTION &
BRIBERY
DRUGS,
ALCOHOL &
TOBACCO
COPYRIGHTED
MEDIA
CURRENCY
EXCHANGE
HAWALA
SWISS BANK
ACCOUNTS

ARMS & AMMUNITION
The black market supplies the demands for weaponry that can not
be obtained legally, or may only be obtained legally after
obtaining permits and paying fees. This may be by smuggling the
arms from countries where they were bought legally or stolen, or
by stealing from arms manufacturers within the country itself,
using insiders. Those who may buy this way include criminals,
those who wish to use them for illegal activities.
Illicit arms trafficking fuels civil wars, contributes to sky-
rocketing crime rates and feeds the arsenals of the world's worst
terrorists.
SA/LW account for an estimated 60-90% of the 100,000+
conflict deaths each year (Small Arms Survey 2005) and tens of
thousands of additional deaths outside of war zones. They are
also the weapons of choice for many terrorists.

 Value of Conventional Arms Transfers in 2008
(Deliveries, Worldwide): $44.75 billion
 Authorized Small Arms Sales (Worldwide, Annual): $5
billion (estimate)
 Illicit Arms Sales (Worldwide, Annual): 10-20% of the
total trade in small arms (estimate)
The figures clearly indicate the effects of illegal arms &
ammunition trading. These have not only affected
economies around the world through promotion of terrorism
but the money exchanging hands goes unaccounted which
is further put to use in the destruction of world heritage.

DRUGS,ALCOHOL&
TOBACCO
 The illegal drug trade is a global black market consisting
of the cultivation, manufacture, distribution and sale of
illegal controlled drugs including alcohol & tobacco.
 The UN report said the global drug trade generated an
estimated $400 billion in 2008.
 The black market trade of drugs means a loss of 2.5-5% in
government revenues. The black market for illegal drugs
accounts for 8% of the world's trade revenue, according
to United Nations estimates.
 Best estimates conclude that government interdiction
captures only one-third of the illegal drugs that smugglers
try to bring into the country; the two-thirds of the narcotics
that do cross the borders supplied an estimated $60-billion-
a-year retail market in 2000.
 The WHO says the trade in illegal drugs is valued around
45 billion euros ($66.22 billion) and represents some 10
percent of the pharmaceutical industry.

CURRENCY EXCHANGE
Money itself is traded on the black market. This may happen for
one or more of several reasons:
 difficult or illegal for the citizens to own much or any foreign
currency.
 taxes levied on exchanging the local currency with other
currencies, either in one direction or both (e.g. foreigners are
taxed to buy local currency, or residents are taxed to buy
foreign currency)
 currency is counterfeit.
 currency has been acquired illegally and need to be laundered
before the money can be used.

CORRUPTION & BRIBERY
 India is ranked 85 out of a 179 countries in Transparency
International's Corruption Perceptions Index. Hong-Kong based
Political & Economic Risk Consultancy Ltd., has rated India the
second most corrupt country in Asia, with a corruption index grade
of 8.9 on a scale of 10 just behind Indonesia.
 In July 2008 Washington Times reported that nearly a fourth of the
540 Indian Parliament members faced criminal charges,
"including human trafficking, immigration rackets, embezzlement,
rape and even murder".
 In Uttar Pradesh Assembly elections 2002, candidates with criminal
records won the majority of seats. In Bihar, more than 80% of the
subsidized food aid to poor is stolen.
 A 2005 study done by Transparency International (TI) in India found
that more than 50% of the people had firsthand experience of paying
bribe or peddling influence to get a job done in a public office.
 Transparency International estimates that trucks plying on Indian
roads pay annually $5 billion in bribes.

 A 2009 survey of the leading economies of Asia, revealed Indian
bureaucracy to be not just least efficient out of Singapore, Hong
Kong, Thailand, South Korea, Japan, Malaysia, Taiwan, Vietnam,
China, Philippines and Indonesia; further it was also found that
working with the India's civil servants was a "slow and painful"
process.
 According to Transparency International, judicial corruption in India
is attributable to factors such as "delays in the disposal of cases,
shortage of judges and complex procedures, all of which are
exacerbated by a preponderance of new laws".
 The TI India study estimates the monetary value of petty corruption
in 11 basic services provided by the government, like education,
healthcare, judiciary, police etc., to be around Rs.21,068 crores.
 Bihar is the most corrupt state in India.

HAWALA
 an alternative or parallel remittance system.
 exists and operates outside of, or parallel to 'traditional'
banking or financial channels.
 developed in India, before the introduction of western banking
practices, and is currently a major remittance system used
around the world.
 components that distinguish it from other remittance systems
are trust and the extensive use of connections such as family
relationships or regional affiliations.
 makes minimal (often no) use of any sort of negotiable
instrument. Transfers of money take place based on
communications between members of a network of
hawaladars, or hawala dealers.

WHY DOES HAWALA WORK?
 Cost effectiveness
 Efficiency
 Reliability
 Lack of bureaucracy
 Lack of proper trail
 Tax evasion

CONSEQUENCES
 Narcotics Trafficking
 Terrorism
 Smuggling
 Welfare Fraud
 Insider Trading
 Customs & Tax Violations
 Gambling & Betting

SWISS BANK ACCOUNTS
Is INDIA Poor???

 With personal account deposit bank of $1500 billion in
foreign reserve which have been misappropriated, an amount
13 times larger than the country’s foreign debt, one needs to
rethink if India is a poor country?.
 With this amount 45 crore poor people can get Rs 1,00,000
each. This huge amount has been appropriated from the
people of India by exploiting and betraying them.
 Once this huge amount of black money and property comes
back to India , the entire foreign debt can be repaid in 24
hours.
 After paying the entire foreign debt, we will have surplus
amount, almost 12 times larger than the foreign debt. If this
surplus amount is invested in earning interest, the amount of
interest will be more than the annual budget of the Central
government.

Black money in Swiss banks - Swiss Banking Association report,
2006 details bank deposits in the territory of Switzerland by
nationals of following countries:
TOP 5 COUNTRIES
India - $1,456 billion
Russia - $ 470 billion
UK - $390 billion
Ukraine - $100 billion
China - $ 96 billion
India with $1456 billion or $1.4 trillion has more money in Swiss
banks than rest of the world combined.
What about other international banks?

YOU ME & BLACK MONEY
 India's parallel economy has risen from a mere 3% of the GDP in the
mid 50s to around 50% today. The annual rate of growth of black
money is higher than the annual growth-rate of GDP.
 India’s black money economy is ranked fifth highest at $22bn-
$27bn a year, coming in behind Russia ($32bn- $38bn), Mexico
($41bn-$46bn), Saudi Arabia ($54bn-$55bn) and China ($233bn-
$289bn).
 There are only 27 million taxpayers in the country. Black money
possession and use is only concentrated in a thin slab of 3% of the
Indian public.
 The country has lost $150 billion in gold imports and another $100
billion in capital flight since Independence.
 Pilferage of electricity in Delhi has resulted in a booming Rs. 1,250
crore industry.

Its our fault
Despite its side effects we Indians are involved in this black
money market in one way or another. Some of the ways in
which we contribute to this black market are:
 Bills
 Chai Paani
 Property for Sale
 Tax Evasion
 Vote Bank Politics

So, how does this black money affect you and me?
 It leads to the misdirection of precious national resources.
 It has enormously worsened the income-distribution.
 Black money has corrupted our political system in a most
vicious manner.
 The money available through hawala and other means have
aided acts of terrorism which effect both the integrity as well
as the economy of the country.
 The country becomes a de facto lender of aid and capital to
economically advanced and wealthier nations, with the
concealed outflow of funds.
 The existence of a big-sized unreported segment of the
economy is a- big handicap in making a correct analysis and
formulation of right policies for it.

Its time we ACT
 Voluntary Disclosure of Income Scheme
(VDIS)
 Currency
 Decrease tax evasion

So, the ultimate question is: can we put an end to this black
money market, which is affecting us badly. The unfortunate
answer seems to be “no” as it would require an Herculean effort
from all of us, and we are used to getting everything the “simple”
way. Corruption is so deep in our system that every Indian – from
a politician to a rickshaw puller- is a part of it in some way or the
other. However, it is always our choice to not be a part of it. This
simple step, however, will require a lot of determination and
courage on our part. The onus now solely rests on us. Are we up
to it?

PRESENTED BY:
Abhishek Kumar (061022)
Aneesh Chandran (061058)
Vikas Guleria (061454)
Vishal Malik (061470)

Parallel economy

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