Presentation on

parallel economyITS ORIGIN, SIZE AND IMPACT ON THE

MAINSTREAM ECONOMY

By : Harshit gupta Shreya kalra Akshay singhal

MONEYthe most important element in the life of every individual. From a top businessman to a worker, from a sports athlete to a politician, from a burglar to a policeman, all people have value for money. Ever since money has been introduced as the medium of trade, the priority and objectives in people’s lives has been bounded by earning money for food, shelter, health, luxury etc. Every organization and every individual contribute towards the economy of a country. A country where the workforce gives taxes gives the country a chance to prosper, develop and grow. But there is a dark brutal force which hurts and hinders the progress and development of a nation- Black Money.

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 ECONOM

Y

ARMS & AMMUNITION

CORRUPTION & BRIBERY

DRUGS, ALCOHOL & TOBACCO

COPYRIGHTED MEDIA CURRENCY EXC

HANGEHAWALA

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.

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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 EXCHANGEMoney 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.

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.

CORRUPTION & BRIBERY

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.

HOW DOES HAWALA WORK?

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

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 COUNTRIESIndia - $1,456 billionRussia - $ 470 billion

UK - $390 billionUkraine - $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.

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.

YOU ME & BLACK MONEY

Its our faultDespite 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?