Let me begin on a

tangent…
 Parallel Economy
and
measures to control it

Suraj Pujari (09467)

Girik Dave (09503)
Gaurav S. Kudtarkar (09505)
Sailesh Sridhar (09515)
“Would you tell me please, which way I ought to go
from here?”

“That depends a good deal on where you want to get to,”

said the Cat.

“I don’t much care where,” said Alice.

“Then it doesn’t matter which way you go,” said the Cat.
-Lewis Carroll, Alice in Wonderland
 Parallel Economy - Definitions

• “Those economic activities which go unreported or

are unmeasured by the society’s current techniques
for monitoring economic activity.”
- Fiege
• Characteristics:
– Bias inclusive.
– Measurement Error inclusive.
• “All unregistered economic activities which
contribute to the officially calculated or observed
GNP (Gross National Product).”
- Schneider and Enste

• Characteristics:
– Parallel economy as unrecorded income.
 The Components…
Underground economy

Criminal
Irregular
Parallel
Economy
Informal
Household

Informal economy
The Parallel economy includes…
• Black market

• Smuggling

• Corruption

• Fraud

• Black money
 How does the parallel economy
work?
• Overtly or covertly cornering and subverting the law
of the land.

• Running tandem vis-à-vis such law and its

jurisprudence.

• Taking advantage of the loose ends in the

jurisprudence.
Why treat the parallel economy
like an alternate economy?

“The strategies that it deploys, the currency and

produce that it controls, and the socio-economic
consequences that it brings about, form a definite
branch of applied economics.”
- S. K. Ray, The Parallel Economy, PHI, 1991.
Spark igniting the parallel fire…

• Flaws in E-laws

That is…

• Flaws in Economic laws.

 The Flaws…
• Economic laws hold good for aggregates and not for
individual circumstances or entrepreneurships.

• Economic laws are not perfect and cannot determine

future developments.

• An economic law, once formulated, becomes so rigid

that it ceases to be applicable in actual fiscal,
developmental, planning and monetary policies.
 Size of the Parallel economy…
• Monetary approaches.

• Labour Market Methods.

• Accounting methods.

• Compound methods.
 Size does matter…
• India’s parallel economy was Rs. 1, 95, 200 crores in
1992. This was 90% of the GDP at 1980-81 prices.

• Growth from 3% of GDP in the 50’s to 50% today.

• Black money in 1967-68 was Rs. 3034 crores. In

1978-79, it was Rs. 46867 crores. (Jump of > 15
times in 12 years)
- Growing faster than the speed of light!
 Aspects of Parallel Economy

Black market Black money

―Smuggling ―Money laundering

―Corruption ―Hawala
―Fraud
―Currency exchange
Black market
Contd..

• Business transactions carried out without any regards for rules

and regulations of trade.

• Goods acquired illegally

• No record of the transactions that was carried out and no taxes

paid

• Black market manifests itself in the following forms:

> adulteration
> imitations and fakes
> false packaging
> production of spurious commodities
Components of black market
1. Smuggling

Supply of items that cannot be

obtained legally
e.g. arms and ammunitions from one
country to the other

Illegal drug trade among nations and

inside the country

Illegal drug trade involves cultivation,

manufacture distribution of illegally
controlled drugs and tobacco
Corruption
• Corruption arises due to the
tendency of greed

• Corruption - a vicious cycle

• Private sector v/s public sector

e.g. police constable

• Morally correct attitude towards

corruption as a result more
officers are becoming corrupt
Fraud

• A fraud may be committed in terms of its assets, bank

balance, investments etc.

• Involves the tampering of investments, cash and other

assets

• Fraud may include misappropriation and falsification

of accounts with illicit objectives

• Also includes the transfer of assets to other party

without the appropriate authorisation.
Currency exchange
• Trading of money itself in the black market
which may be due to the following reasons:

– Illegal ownership of foreign currency

– Tax on exchange of currency
– Counterfeit currency
– Illegally acquired currency
 Black Economy (Money)

• A hidden sector of the economy where private cash

transactions go unreported. It is a sector of economic
activities involving illegal economic activities
including buying and selling of drugs.

• That part of an economy that is hidden from the

government and on which taxes are not paid.
 Sources of black money
• Import licenses

• Selling license for iron

• Transaction in heavy industries

• Government and commercial transactions

• Forged currency
 Swiss Banking Association report

TOP 5 COUNTRIES

1. India - $1,500 billion

2. Russia - $470 billion
3. UK - $390 billion
4. Ukraine - $100 billion
5. China - $96 billion
 Is India Poor?
Some facts….
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.
• India with $1500 billion or $1.5 trillion has more
money in Swiss banks than rest of the world
combined.
 Money laundering
• Money laundering is an illegal practice which
engages in specific financial transactions, in order to
conceal the identity, source and destination of money.

• The aggregate money laundered in the whole world

could be approximately $800 billion to $2 trillion
each year.
 How It Happens

• The basic concept of money laundering originated in

U.S.

• It basically consists of three steps i.e. placement,

layering and integration.
 Steps in money laundering
• In placement, money derived from criminal activities
is introduced into the financial system

• In the layering stage, the money launderer

manipulates the illicit funds to make them appear as
though they were derived from a legitimate source.
(Eg: Hawala transfers leave a sparse or confusing paper trail if
any)
• Integration means re-injection of money after it has
been laundered in a way that it looks as if it is
proceeds from normal business activities.
 What is the volume of black
money?
• Black money in India is estimated to be around 40%
of the GDP.
Top seven money laundering in
corporate sector of India
Name of the Person Rs. In Crores
Ramalinga Raju 8000
Harshad Mehta 4000
Ketan Parekh 1250
C R Bhansali 1200
Dinesh Dalmia 595
Abdul Karim Telgi 171
The UTI Scam 32

(Source: http://www.drishtikone.com/?q=blog/indias-top-10-scams)
 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.
 What is different?
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.
 How does Hawala work?
• Hawala works by transferring money without
actually moving it
• For 31------------------------------------ 154,225
• For 35------------------------------------ 166,250
• For 37------------------------------------ 180,000
 There are two related issues to be addressed:

1. The relationship between Yasmeen and Ghulam

2. The second is how Ghulam 'recovers' the money

that he paid to Mohammad on Abdul's behalf
Why would one prefer Hawala?

– Cost effectiveness

– Efficiency

– Reliability
 Contd…
– Lack of bureaucracy

– Lack of proper trail

– Tax evasion
 Why hawala works

• Low overhead

• Exchange rate speculation

• The rates cited reflect a difference of 12-19% over the

official rate.
Most affected markets…

Source: http://www.indianmba.com/Faculty_Column/FC177/fc177.html
Reasons for the perpetuation of the parallel
economy.

Source: http://www.indianmba.com/Faculty_Column/FC177/fc177.html
 Reasons…
• High tax rates implemented by the government.

• Complicated tax paying procedures and policies.

• Unfair taxes.

• People do not get enough return on their paid taxes.

• High inflation which puts tax payers under high tax

paying brackets.
 Reasons…
• Involvement of government agencies and officials in
corrupt practices.

• Insufficient laws and their implementation to counter

such activities.

• People believe that their money is not going to be

properly utilized by government.
 Reasons…

• Inflation.

• Greater flexibility in remuneration to employees.

• Bypass Trade Union vigilance.

• Lack of political will.

 Reasons for Black Money…

• Illegal forex deals, gifts and remittances.

• Real estate murkiness.

• Election spending.
 Impact of Parallel Economy.
• Formulation of faulty economic policies.
- The Unobserved Income Hypothesis (UIH).

• Wrong macroeconomic data.

• Affects government finances.

• Erosion of public confidence in the government.

 Impact of Parallel Economy.
• Hurts capital allocation.

• Hurts investments.

• Distorts systematic resource allocation.

• Widens rich-poor divide.

• Misuse as a political weapon.

 STRATEGIES TO COMBAT
PARALLEL ECONOMY

l i ng
ug g
Black money White money
Sm
 COMMON STRATEGIES
• Law enforcement

structuring of tax laws

form separate department

• Incorporate heavy fines and legal actions

• Co-operation among countries

• Encourage bank transactions

STRATEGIES FOR BLACK MONEY
 STRATEGIES FOR BLACK MONEY
• VDIS Scheme
• Issue of Zero coupon bond
• Reprinting / Changing currency
• Taxing Agriculture
• Authorizing opening of Swiss type bank a/c’s
• Vigorous searches and seizures
• Getting rid of Direct taxes
 Recent measures undertaken by
govt.
• Revision of Double Taxation Avoidance
agreement with 25 countries.
• Agreement with Swiss bank to disclose
account details for tax purposes.
(2011-12)
• Using technology to identify groups.
From defective control system to preventive
control system
STRATEGIES AGAINST
SMUGGLING
 Combating smuggling
• Law enforcement

• Public Awareness
 guarding the border is difficult
 public will not be eager to oppose smuggling
because of low prices
 Bribes by revenue officers
 Revenue officers don’t take risk in attacking band of
smugglers
 STRATEGIES AGAINST
CORRUPTION AND FRAUD
 Strategies against corruption and
fraud

• PREVENTION OF CORRUPTION Act 1947

• Role of Media

• Agencies( SC, EC, CVC, CBDT, Customs, Excise)

THANK YOU