From (Vivek Mukherjee (Mukherjeeviku1@gmail - Com) ) - ID (15) - BLACK MARKET ECONOMY

Economics Project – I TRIMESTER
BLACK MARKET
ECONOMY
-A DETAILED
ANALYSIS
Table of contents
Black Market Economy Page 1

TOPIC PAGE NO.
Introduction ……………………………………………………..3
Causes of existence of a black market economy………………...4
How big is the black market economy?........................................6
Black market economy in different countries………..………….7
Country rankings(black market size)……………………………9
How a black market economy works………………………..….10
Effects of black market economy……………………………….12
Emergence of black market…………………………….………..13
Nature of black market and its formantion………………………13
Constituent elements of black market……………………………14
Advantages of black market economy……………………..….….15
Disadvantages of black market economy……………………..…15
Black market economy in India……………………………….....16
Measures taken by the government……………………………….17
Reasons for ineffectiveness of policies……………………….….18
What government should undertake………………….………….18
The Swiss bank controversy-Black money stockpile…………….22
Solutions suggested to bring black money back to economy……..24
Conclusion , bibliography , acknowledgement…………………….24
INTRODUCTION
In economics theoretically there exists three types of economy namely free market, planned
and mixed economy. But there also exist a fourth dimension of economy which is black
economy or underground economy. This type of economy does not follow the rules and
regulation set forth by the government and is illegal in nature. There are several reasons why
this kind of economy exists at first place and why is it mushrooming at such a fast pace.
Certain solutions will also be suggested in the end with burning examples.
What is an economy?
The English words "economy" and "economics" can be traced back to Greek words which
means"one who manages a household" (derived from "house", and "distribute (especially,
manage)"), "household management", and "of a household or family". The first recorded
sense of the word "economy", found in a work possibly composed in 1440, is "the
management of economic affairs", in this case, of a monastery. Economy is later recorded in
more general senses including "thrift" and "administration". The most frequently used current
sense, "the economic system of a country or an area", seems not to have developed until the
19th or 20th century.
An economy is the sum total of all ‘commercial activities.’ It includes buying, selling,
distributing, giving, taking and such other activities. It does not include activities such as
reading a book. But if you were reading the book after paying a certain fee then this will be a
part of economic activity. Similarly while gazing soulfully at a landscape is not a part of the
economy, it does become one if it is part of a paid tour.
What is a black market economy?
A black market is one where the buying and selling of products and services take place in an
illegal manner. A black economy is a highly organized and vast market where the regular
taxation rules and norms of trade are not adhered to. A black market is known by several
names, including black economy, underground market, shadow economy, underdog and
parallel economy

The black market (sometimes known as underground or black economy) is trade, goods and
services that are not part of the official economy of a country; this may be legal activities
where taxes are not paid, or illegal activities, such as drug dealing and prostitution.
In modern societies, the underground economy covers a vast array of activities. It is generally
smaller in countries where economic freedom is greater, and it becomes progressively larger
in those areas where corruption, regulation, or legal monopolies restrict economic activity in
various goods, services, or trading groups
Your rightful indulgences like shopping, eating out, going to movies, most certainly have a
bolstering effect on the economy. But, there exists a dark side which cleverly evades taxes to
generate what is colloquially referred to as ‘black money’.
This ‘sin’ economy, comprising fake and counterfeit products, smuggled and pirated goods,
unauthorised gambling, bribery and prostitution, among a host of other sinister activities that
go unaccounted, has a draining effect on the economy.
Causes of existence of a black market economy.
Having successfully attempted a workable definition of black market economy, let us

try to investigate into the causes that lead to its origination. The most important
cause of black market economy is undoubtedly high taxes which create obvious
incentives to get off-the-book income. The other significant cause is the burden imposed
by government regulations and restrictions. If one scans the economic literature
on the subject, there is an over emphasis attached to the above two factors as
the ones leading to the growth of hidden economy. It is no doubt that high tax
rates and pervasive regulation provide the incentive for hidden activity, but the
opportunity to actualize such incentive depends upon other factors such as level
of development, social structures, public acceptance of compliance (or tax
morality), etc. Thus focusing on the two factors alone is likely to produce neither
complete diagnosis nor appropriate prescription. Mofelsky in his essay in “The

Underground Economy in the United States” cites avoidance of losing
government benefits as an additional reason for participation in the black market
economy. Thus we have the social security fraud in Germany where social
security benefits drive many people not to report income or employment in order
to avail such benefits. Forte and Del Banco mention two more reasons as a) to
achieve greater flexibility in the remuneration and employment of labor and b) to
bypass trade union vigilance. Both the reasons are extremely significant for
nations with rigid labor laws, like India.
Perhaps the most exhaustive set of reasons for the incidence of the parallel
economy is given by Guntmann who attributes the subterranean economy to
the following additional causes:
 Inflation which pushes the taxpayers into higher income brackets who in
turn try to push part of the cost of inflation onto the government by getting
off-the-book income
 Immensely complex tax system, requiring inordinate tax-payer time, paper
work and expense
 The increase in the size of government which leaves smaller share of
national output for direct consumption by wage earners
 Perception of government as wasteful and inefficient by the public making
inadequate use of their hard earned money
One reason for the hidden economy to prop up in developing countries is the

shortage situation due to inappropriate industry structures or insufficient capacity.
A relevant example would be the cement black market in India over the 1961-82
period when the country suffered from chronic cement shortage owing to the
regime of controls that was in place then. Estimates have put the amount of black
money generated during this period by the cement sector alone as high as Rs.
7.85 billion
A historical yet interesting perspective about the origin of Black market economy is
given by Bawly: “One of the main causes of the many emigrations, revolts and
revolutions so frequent throughout history was public reaction to the imposition of
what people believed to be unfair taxes. Passive resistance, in the form of
increasing evasion, is the modern expression of such hostility”
How big is the black market economy?
While there are no authentic figures, economists feel that it is in the region of 40% of India’s gross
domestic product (GDP). Professor of economics, Jawaharlal University, Arun Kumar, who has
written one of the most authentic books on the subject, ‘The black economy in India’, puts the figure
at around 50% of the GDP.
According to the latest estimate of Central Statistical Organisation (CSO), the size of the Indian
economy is around Rs 61,64,000 crore. Thus, the size of the black economy, taking it at 40% of GDP,
is around Rs 25,00,000 crore or around $500 billion.
If black money is declared by individuals or corporate houses as income, it becomes legal and would
be taxed at 30%. If all the estimated black money is declared, it could generate a tax revenue of Rs
7,50,000 crore for the government! This is more than total tax collection at Rs 6,41,000 crore for
2009-10. Kumar puts the potential tax revenue figure much higher at around Rs 10,00,000 crore.

Surely, the government can make better use of this amount. Additional tax income to the government,
said Kumar, would not only have helped the government to expand its welfare programmes, but also
enabled it to take up more infrastructure projects.
Besides, revenues of individual sectors get impacted by counterfeit products. Take the fast-moving
consumer goods (FMCG) industry for instance. It loses 6-7% of its turnover due to counterfeit
products and illegal imports. The size of the FMCG industry is around Rs 1,00,000 crore, which pegs
the losses to the sector from counterfeiting at Rs 7,000 crore. With the excise rate applicable on
personal care products being 8%, the duty evasion is well over Rs 500 crore annually. “Spurious and
counterfeit products is a cause of serious concern. It not only affects the industry but, more
importantly impacts, consumer interests,’’ said a HUL official. Pharma is no different. According to
Ranjit Shahani, vice-chairman and managing director, Novartis India, what is more alarming is the
economic value loss, which is multifold.
Of the drugs tested in a countrywide survey conducted by the Drug Controller-General of India, 0.4%
were found to be spurious. The size of India’s pharmaceutical industry is Rs 90,000 crore. Thus, the
estimated size of the counterfeit market is around Rs 360 crore. Apply a multiplier effect of ten, and
the economic value loss would be in excess of Rs 3,000 crore.
Black market economy in different countries.
 In India
The black economy in India is gaining in prominence by the day. Much of this could be
attributed to the negligent attitude of the concerned authorities. Over the years, black
economy has had substantial impact on the size of the Indian economy. The high rates of
inflation and taxation in India has been a result of the increasing powers and activities of the
black economy.
 In Pakistan
The condition of black economy is as acute in Pakistan as India. It has been assumed by the
State Bank of Pakistan. In fact, the size of the black economy in Pakistan is equivalent of half
of a formal economy. The entire situation is pretty critical as the black economy there could
have a negative impact on the public welfare plans in Pakistan. The black economy in
Pakistan has grown throughout the years as a result of the immense amount of unethical and
unlawful practices that have exploited the lack of documentation in Pakistani economy.
 In Thailand

In Thailand there are many public markets carrying pirated goods. Most of these are imitation
high-end handbags, jeans, watches, sports shoes, football jerseys, t-shirts, sunglasses, DVDs,
CDs, software, jewelry and more.
This is not just common in Thailand, but much of SE Asia. However, Thailand has a
reputation for pirated products, as the authorities do little or nothing to stop them from being
sold. The market in Malaysia is very similar to the market in Thailand.
 In Singapore
This vendor of pirated clothing is selling on the black market in Singapore.
Currently, it is very difficult to find anything sold on the black market in Singapore. The
people of Singapore have a reasonable amount of faith in the government's ability to enforce
laws and are detered of most illegal activity.
Although as late as August of 2008 there have been reports of illegal sportswear vendors
selling clothing in the downtown financial district of Raffles Place during lunchtime. In the
late 90s, however, CDs, VCDs, DVDs, watches and apparel were common in most outdoor
markets and in some indoor shops. After the government started enforcing strict intellectual
property laws, most or all of these products ceased to be sold in public.
In Eastern Europe and the former Soviet Union
In these former communist countries, black markets developed as a way to fill economic
needs that the state government could not or did not address. [1]
Former-Soviet countries with large black economies are:
 Georgia
 Azerbaijan
 Ukraine
 Belarus
Country rankings (size of black market)

Havocscope Black Market Country Ranking Total: $1.546 Trillion
World Average: $20.34 Billion
1. United States - $460.6 Billion

2. China - $158.5 Billion
3. Spain - $123.39 Billion
4. Mexico - $123.2 Billion
5. Italy - $111.05 Billion
6. Japan - $108.3 Billion
7. Canada - $77.83 Billion
8. United Kingdom - $61.96 Billion
9. Germany - $39.67 Billion
10.South Korea - $26.2 Billion
11.Russia - $26.156 Billion
12.Peru - $22.04 Billion
13.Brazil - $17 Billion
14.Philippines - $15.120 Billion
15.Indonesia - $14.724 Billion
16.Venezuela - $14.218 Billion
17.Morocco - $12.7 Billion
18.India - $12.697 Billion
19.Iran - $10.64 Billion
20.France - $10.4 Billion
How a black market economy works?( Demand and supply approach)

How can we show what happens when a product is made illegal using supply and demand analysis?
What does a black market look like on a typical supply/demand chart?
Great question! Black markets are a subject which seem to come up in every freshman course.
To show what happens when a good is made illegal, we first need to illustrate what the supply and
demand for the good looked like in the pre- black market days. We can do so by arbitrarily drawing a
downward sloping demand curve (blue) and an upward sloping supply curve (red), as shown on this
graph. Note that price is on the X-axis and quantity is on the Y-axis.
Further , we will show what happens when the government makes the product illegal, thus creating a
black market.

Now when a government makes a product illegal, such as marijuana we tend to see two things
happen:
A sharp drop in supply, as the penalties for selling the good causepeople to shift into other industries
A drop in demand, as a prohibition of posessing the good deters some people from wanting to buy it
Typically the supply side effects dominate the demand side ones when the government creates a black
market. When this happens, we have the situation as shown in the picture, where the supply drops
(shifts to the left) a fair deal, and the demand drops (shifts to the left) slightly. This is shown with the
new dark blue demand curve and the new dark red supply curve.
The shift in supply and demand causes the quantity consumed of the black market good to decrease,
while the price rises. If the demand side effects dominate, we will still see a drop in quantity
consumed, but we will also see a corresponding drop in price. This does not typically happen in a
black market - we normally see a rise in price.
The amount of the price change and the change in quantity consumed will depend on the magnitude of
the shifts of the curve, as well as the price elasticity of demand and the price elasticity of supply.
Effects of black market economy
It's a government's job, among other things, to regulate business when necessary. Sometimes, people
are not happy with those rules, leading them to conduct business without the standard accountability
involved in other businesses. (These include tax returns, work safety laws and more.) Invariably,
black markets have effects that are both positive and negative, depending on your opinion.
People Get What They Want
In a black market, people end up getting what they want, even if they're not supposed to have it.
During Prohibition, the United States government tried to prevent people from obtaining alcoholic

beverages. The black market was able to meet the demand. During Prohibition, people made their
own alcohol (bathtub gin) and imported it from countries like Canada. If there is great enough demand
for something, odds are that someone will want to provide a supply.
People Learn to Break the Law
As a result of engaging in black market transactions, people begin to feel diminished respect for the
law. (This is one reason that governments must be careful when deciding what to ban.) According to
the Mackenzie Institute, in 1997, 11 to 30 percent of all alcohol consumed in Ontario was supplied
illegally. This means that ordinary, otherwise law-abiding citizens were deliberately disregarding the
law, which can lead to more general disregard.
Inflated Prices, No Tax Revenue
When a good that lots of people want is made illegal, the price goes up because of the higher risks
being taken by the supplier. It also precludes the government from receiving tax revenue from the
item, as it would with any other consumer good. According to Havocscope, black market products
have a total value of 985.85 billion dollars; none of this money goes into government coffers.
Marijuana is the number one black market product, with a value of 141.8 billion dollars.
Fuzzy Data
The more of the economy that is underground, the greater the disparity in economic and other
numbers. For example, Front Page Magazine notes the black market employment provided to both
citizens and illegal immigrants makes it hard to gauge several important numbers: the American
population, the unemployment rate, the GDP and more. These figures influence policy and the black
market complicates them, making them estimates.
Lack of Regulation
When a product is made illegal and supplied on the black market, it is not put through the same
checks as other products. For example, black market steroids aren't as safe as legal medicines
regulated by the FDA. Further, medicines that are used on the black market are not administered
under the supervision of a doctor, who would be able to ensure the patient is using them safely.
Affects public revenues
Degenerates the investable surplus
Delimits the national productivity
Drains the balance of payments

Distorts equity and equality concepts of economic distribution
Emergence of black market
The period 1946-61 was one of the intense creativity. A black or parallel economy emerged both in
the wake of the Second World War and the expansion of the economic activity in the post-
independence period. Incentives were provided through the taxation laws to promote savings and
investment; this made the tax laws more complex. Then, there was the need for larger revenues to
finance the plans of economic development. Thorough investigations were, therefore, conducted into
the structure of taxation not only with a view to widen the base of income tax but also to look for new
taxes and to prevent tax evasion and avoidance. The Income-tax administration came under heavy
strain due to the increase in the volume and complexity of its work.
Nature of black market and its formation.
There are two powerful ethical props for a different view than the one the court has taken.
1. It is a plain fact that many high-earning persons evade income tax by ruthlessly exploiting the
loopholes in the laws. Black money is the outcome of this practice. And neither the income tax
department has mounted an effective campaign to hunt out these tax cheats, nor has the court, any
court, felt provoked to order a comprehensive crackdown.
2. The widespread ruse of doling out big money to top executives and others by describing it as
reimbursement.
A parallel or a black market is an illegal structure that is created in response to government

intervention, which produces excess supply or demand for a product. When the price of foreign
currency is set below the market-clearing rate, an excess demand is usually generated for acquiring
foreign currency. The government has the choice of either devaluating the currency, or maintaining
strict controls over exchange, such as setting quotas on the purchase of foreign exchange. Such
currency controls are designed by governments in order to limit the use of foreign exchange in
transactions. This parallel economy, or black market, emerges through the manipulation of the
economic forces of supply and demand for both currency and commodities. A black market also
emerges when trade and industry create an artificial situation of scarcity or glut, and in the process
amass high returns on their investments by profiteering. As a result of profiteering activity, the black
market generates unreported income and wealth, which escape detection by official statistics. Much of

the strength of the black market can be attributed to the resale of officially allocated foreign exchange
holdings and to the incentive to under invoice and smuggle exports. He argues that an increase in the
black market rate, given the official exchange rate, creates an incentive for residents abroad to channel
their remittances through the black market. This raises their private receipts in terms of home
currency and deprives the central bank of this foreign exchange. Economists studying black market
activity in developing countries advocate that it is best to keep the black market premium rate as low
as possible. By influencing the determinants of the black market exchange rate, developing counties
can keep the black market premium rate low and increase their official foreign exchange currency
holdings.
Constituent elements of black market
1. Legal activities that are not reported to the tax authorities and the income which goes untaxed and
unreported. For instance: it is not illegal to clean someone's house, to feed people or to drive them. It
is, however, illegal to hide the income generated by these activities and not to pay tax on it. In most
countries of the world, this is a criminal offence, punishable by years in prison.
2. Illegal activities, which needless to say, are also not reported to the state (and, therefore, not taxed).
The money generated by these activities is largely held in foreign exchange outside the banking
system or smuggled abroad (even through the local banking system).
Advantages of black economy
The black economy has many more important functions:
 The black economy is a cash economy.

 It is liquid and fast.
 It increases the velocity of money.

 It injects much needed foreign exchange into the economy and inadvertently increases the
effective money supply and the resulting money aggregates. In this sense, it defies the dictates
of "we know better" institutions such as the IMF.
 It fosters economic activity and employs people.
 It encourages labour mobility and international trade. Black economy, in short, is very
positive. With the exception of illegal activities, it does everything that the official economy
does – and, usually, more efficiently.
 The black economy is especially important in times of economic hardships. Countries in
transition are a private case of emerging economies, which are a private case of developing
countries that are called (in less politically correct times) "Third World Countries". They
suffer from all manner of acute economic illnesses. They lose their export markets, they are
technologically backward, their unemployment skyrockets, their plant and machinery are
dilapidated, their infrastructure decrepit and dysfunctional, they are lethally illiquid, they
become immoral societies (obligations not honoured, crime flourishes), their trade deficits
and budget deficits balloon and they are conditioned to be dependent on handouts and dictates
from various international financial institutions and donor countries.
 It enhances exports (and competitiveness through imports), it encourages technology
transfers, it employs people, it invests in legitimate businesses (or is practiced by them), it
adds to the wealth of the nation (black marketers are big spenders, good consumers and build
real estate), it injects liquidity to an otherwise dehydrated market.
Disadvantages of black market
 It is exploitative. Other parts of the economy, which are not hidden (though would have liked
to be), are penalized for their visibility. They pay taxes. Workers in a factory owned by the
state or in the government service cannot avoid paying taxes.
 The money that the state collects from them is invested, for instance, in infrastructure (roads,
phones, electricity) or used to pay for public services (education, defense, policing). The
operators of the black economy enjoy these services without paying for them, without bearing
the costs and worse: while others bear the costs. This encourages them, in theory to use these
resources less efficiently.
 And all this might be true in a highly efficient, almost ideal market economy. The emphasis is
on the word "market". Unfortunately, we all live in societies, which are regulated by
bureaucracies that are controlled (in theory, rarely in practice) by politicians. These elites
have a tendency to misuse and to abuse resources and to allocate them in an inefficient
manner.
Black market economy in india

It is said that black money in India accounts for 20 % of GDP. If this is true, then black money
generated every year must be around Rs 400,000 crore or $ 80 billion. This is a huge amount, more
than the entire budget of the government at the Centre. We have a government that spends about Rs
350,000 crore a year, most of it on itself, and asks for accounts of every paisa. On the other side, we
have black money worth Rs 400,000 crore every year, which is just guesswork, and there are no
accounts. This money goes into property, which is why real estate prices are so high, and of course
five-star hotels. If the government could have all this money, or even a small fraction, there would be
no need for revenue or fiscal deficits, and no need for huge borrowings to make two ends meet.
How big is $ 100 billion? It is bigger than you think. It is worth Rs 500,000 crore, which makes it
bigger than the central budget. It is more than twice our annual exports. It is equivalent to 30 times
what Enron is supposed to have invested on its Dabhol project. It is more than what the US
government is expected to pay those who have suffered from the September 11th smash. And, if you
must know, it is a fifth of our annual GDP, which is itself a big figure.
The CBDT is hopeful of collecting more than Rs 7,000 crore (Rs 70 billion) as income tax area, the
target indicated by Finance Minister P Chidambaram for the current financial year. The board has
already collected Rs 3,400 crore (Rs 34 billion) during the first six months of the current fiscal year,
compared to Rs 2,700 crore (Rs 27 billion) in the same period a year earlier.
Finance Minister P Chidambaram's Budget speech for 2004-05 shows there were only 27 million
taxpayers in the country on the date of the presentation of the Budget. This indicates the tax evasion
rampant in the country.
The economy keeps growing and so does the deficit, while the revenues do not increase in the same
proportion as the economy grows. There could be a number of reasons for the shortfall, which may
vary from year to year like recession in the industrial sector or shortfall in agricultural production. But
one factor that has been constant for the last five decades is the tax evasion. There are so many
loopholes in the tax system that allows people and organizations to evade taxes with impunity. There
are no reliable estimates of the extent of the tax evasion in this country. But some studies show that
the size of black money has grown significantly over the past many years If this tax evasion were
checked, the Finance Minister would never be faced with shortfall in tax collection and would have a
very low fiscal deficit. Therefore, the Finance Minister instead of resorting to increase in tax rates or
coming out with amnesty schemes should find other means to increase the revenue collection. One
such way is to plug the loopholes, which encourages tax evasion. Most of the tax evasion occurs when
transactions are done in cash and never recorded. This has been the experience of many countries and
they have come out with measures that discourage cash transactions and encourage recorded
transactions. One such mechanism has been the use of debit and credit cards combined with payment
through banking mechanism. The Finance Minister should come out with such a provision, which
encourages cashless transaction.
As a first measure it may be made mandatory that all salaries above Rs 10,000 per month, both in
public and in private sectors, be directly credited to individuals' accounts in their respective banks.
Secondly, payments above a certain amount may also be made mandatory through debit / credit cards
and through cheque or bank drafts. With electronic banking gaining importance, transfers through
banking mechanism will become as easy as receiving or making payments by cash. In most of the
countries the use of debit and credit cards for making and receiving payments has reached a point that
for buying even one small ball pen payment is made through credit / debit card.

Similarly, payments for the sale and purchase of immovable property, various kinds of consumer
goods and services beyond a certain stipulated amount should also be made mandatory through
banking channels. While doing so, the Finance Minister will not only be plugging one of the biggest
loopholes leading to tax evasion but would also reduce the need for ready cash and hence the printing
of currency notes on a large scale.
The biggest chunk of black money is invested in real estate and gold. The circulation of black money
in the housing sector is beyond imagination. Since the house tax is based on the current purchase price
only one fourth of the money is paid by cheque and the rest in unaccounted cash. Even an honest
buyer of flats / houses is forced to pay in black money if he wants to acquire one
Measures taken by government

In a unique drive launched a few days before the presentation of the Union Budget, the CBI has
registered 36 cases against 112 government officials and others after search operations across the
country in a bid to unearth black money amassed by them. The drive conducted under a team of joint
directors of the agency, has reportedly been able to unearth black money amounting to lakhs of
rupees, CBI sources said here today. He said simultaneous searches were carried out on 109 official
and residential premises of accused or suspected persons. In these cases 21 accused / suspected
persons belonged to the Union Bank of India, the Reserve Bank of India, Sikkim Bank, the United
Bank of India and private firms located at Mumbai. These cases pertained to cheating, export fraud,
abuse of powers and falsification of records resulting in wrongful loss to the banks and public
institutions. Cases taken up for investigation were of the Anti-corruption division, the economic
offences Wing and the special crimes division.
Although the stamp duty department maintains a list of rateable value properties in Mumbai, the main
concern is that in most of the cases the rates are much higher than the actual transacted rates for the
actual property. However, instead of addressing these irregularities, authorities have increased the
stamp duty rates!
It is a well known fact that because of high stamp duty, buyers have been quoting their property much
below the actual transacted value. This is mainly because it enables the buyers to save substantial
amount on the stamp duty outgo, since stamp duty is charged on the value of the property. This
practice of undervaluing property is not ethical and moreover it leads to accumulation of black money
in the economy, which is not good. For instance, there are cases where builders / sellers ask up to 40
% of the transacted value of the property as black money. This gives a distorted picture of the real
estate price, as there is a huge difference in the transacted price and the rate list maintained by the
stamp duty authorities.
Reasons for ineffectiveness of policies

Now the Supreme Court has ordered that dearness, house rent and city compensatory allowances are
income and attract tax. Theoretically, the ruling covers only the employees of the government and
those of public sector undertakings and the two nationalised insurance companies since the original
dispute arose from their petition. But the judgement is so general in nature that every salaried
individual receiving any allowance of this nature has to pay tax on it if he or she is not already doing
so. It is an old demand of those with a regular income that those payments which are compensatory in
nature should be tax-free if the underlying idea is not to be perverted.
The government is likely to announce a scheme to channel black money into a dedicated fund, which
could be used for funding the government's social sector programme. The fund, which may be
announced in the Budget for 2005-06, could be modeled on the lines of the Prime Minister's Relief
Fund. Government sources said the revenue department was contemplating various other strategies.
One option would be to issue bonds to raise funds for infrastructure and social sectors, which would
not yield any returns in the initial few years. An official said a scheme on the lines of the Voluntary
Disclosure of Income Scheme 1997, launched during P Chidambaram’s previous stint as finance
minister, was ruled out.
What government should undertake
All citizens should be obliged to file annual, personal tax returns (universal tax returns, like in the
USA). This way, discrepancies between personal tax returns and other information can lead to
investigations and discoveries of tax evasion and criminal activities.
All citizens should be obliged to file bi-annual declarations of personal wealth and assets (including
real estate, vehicles, movables, inventory of business owned or controlled by the individual, financial
assets, income from all sources, shares in companies, etc.).
All retail outlets and places of business should be required to install – over a period of 3 years – cash
registers with "fiscal brains". These are cash registers with an embedded chip. The chips are built to
save a trail (detailed list) of all the transactions in the place of business. Tax inspectors can pick the
chip at random, download its contents to the tax computers and use it to issue tax assessments. The
information thus gathered can also be crossed with and compared to information from other sources.
This can be done only after the full implementation of the recommendations in the section titled
"Databases and Information Gathering". (While it increases business costs – it is not likely to prevent
cash or otherwise unreported transactions).
All registrars should be computerized: land, real estate, motor vehicles, share ownership, companies
registration, tax filings, import and export related documentation (customs), VAT, permits and
licenses, records of flights abroad, ownership of mobile phones and so on. The tax authorities and the
Public Revenue Office (PRO) should have unrestricted access to ALL the registers of all the
registrars. Thus, they should be able to find tax evasion easily (ask for sources of wealth- how did you

build this house and buy a new car if you are earning 500 DM monthly according to your tax return?)
The computer system should constantly compare VAT records and records & statements related to
other taxes in order to find discrepancies between them. Gradually, submissions of financial
statements, tax returns and wealth declarations should be computerized and done even on a monthly
basis (for instance, VAT statements).
Tax inspectors and customs officials should receive police powers and much higher salaries
(including a percentage of tax revenues). The salaries of all tax inspectors – regardless of their
original place of employment – should be equalized (of course, taking into consideration tenure,
education, rank, etc.) Judges should be trained and educated in matters pertaining to the informal
economy. Special courts for taxes, for instance, are a good idea. Judges have to be trained in tax laws
and the state tax authorities should provide BINDING opinions to entrepreneurs, businessmen and
investors regarding the tax implications of their decisions and actions
All contracts between firms should be registered in the courts and stamped to become valid. Contracts
thus evidenced should be accompanied by the registration documents (registrar extract) of the
contracting parties. Many "firms" doing business in Macedonia are not even legally registered.
A special inter-ministerial committee with MINISTER-MEMBERS and headed by the PM should be

established. Its roles: to reduce bureaucracy, to suggest appropriate new legislation and to investigate
corruption.
Bureaucracy should be pared down drastically. The more permits, licenses, tolls, fees and documents
needed – the more corruption. Less power to state officials means less corruption. The One Stop Shop
concept should be implemented everywhere.
To impose a VAT system. VAT is one the best instruments against the informal economy because it
tracks the production process throughout a chain of value added suppliers and manufacturers. The Tax
code needs to be simplified. Emphasis should be placed on VAT, consumption taxes, customs and
excise taxes, fees and duties. To ensure progress, the government should directly compensate the poor
for the excess relative burden.
Special tax courts should be established within the existing courts. They should be staffed by
specifically trained judges. Their decisions should be appealed to the Supreme Court. They should
render their decisions within 180 days. All other juridical and appeal instances should be cancelled –
except for an appeal instance within the PRO. Thus, the process of tax collection should be greatly
simplified. A tax assessment should be issued by the tax authorities, appealed internally (within the
PRO), taken to a tax court session (by a plaintiff) and, finally, appealed to the Supreme Court (in very
rare cases).
White Sugar is often imported as brown sugar. One way to prevent this is to place sugar on the list of
LB (import license required) list, to limit the effective period of each license issued, to connect each
transaction of imported brown sugar to a transaction of export, to apply the world price of sugar to
customs duties, to demand payment of customs duties in the first customs terminal, to demand a
forwarder's as well as an importer's guarantee and to require a certificate of origin. The same goes for
Cooking Oil (which – when it is imported in a package – is often declared as some other good).
Simplicity in tax laws is certainly a desirable objective. US tax laws are 5 times the size of Indian tax
laws, in terms of the number of clauses! Yet, the US tax laws are considered simpler than Indian tax
laws. There is only one reason - constant change, and lack of continuity, in Indian tax laws, creating

uncertainty on the applicability of different tax provisions. Add to that, the multiplicity of inspectors,
the voluminous records to be maintained, the limited role of computerisation, the vagueness in
wordings of rules and regulations, leading to subjective interpretation, and, thereby, the uncertainties
with respect to compliance - and you have a level of complexity beyond what rocket scientists ever
encounter!
 Simplicity
 Stability and Continuity
 Certainty
 Reasonable tax rates
 Ease of Compliance
Unfortunately, in the past, for checking evasion, stress had mostly been on legislative measures,
forgetting that equal importance is to be given to administrative aspects. In the discussion to follow,
some suggestions for checking evasion, through legislation, and for improving compliance to tax laws
are being mentioned. As indicated earlier, the problems need to be tackled in two ways -- by
legislation and taking effective administrative measures. Other measures for checking tax evasion
through legislation could be:
 Taxing big and prosperous agriculturists' incomes and wealth.

 Introducing donee-based gift tax.
 Permitting tax officials to have power of door-to-door survey.
 Claims for losses / expenses relating to undisclosed or illegal incomes should not be
recognised for tax assessments while taxing incomes from such sources.
In countries like Belgium, Greece and France, there is provision for confiscation of personal rights
like arms or driving license of persons found guilty of dealing with black money or resorting to tax
evasion. Similar law should be made in India too. Such persons should also be debarred from holding
any elective offices, including directorships in companies.
More emphasis must be laid on these aspects instead of floating amnesty schemes and issuing bearer
bonds. It needs to be borne in mind that such schemes merely tackle that too to a very limited extent,
the problem relating to 'stock' concept in black money and do not provide solutions for checking the
onslaught of black money generation -- the flop concept.
Among administrative aspects, strict measures can only create impact. Some suggestions in this
context are:

 Tax laws should permit wide publicity through media regarding persons found guilty of tax
evasion.
 Social conscience needs to be aroused amongst people against tax evasion, for attaching
social stigma for tax evaders and to work as sentinels for identifying black marketers and tax
dodgers.
 The most important measure for checking evasion is to establish credibility of the government
regarding its own integrity before exhorting persons to pay their taxes correctly.
Some other measures, of an administrative nature, could be:
 Disentitling tax evaders / defaulters to avail of the facility of payment of taxes in the
installments and getting credit facilities from banks.
 Streamlining procedure for speedy determination of tax disputes. Special courts for this need
to be set up.
 Paying special attention towards training for detection of tax frauds, evasion and black money
generation, including deputation of IT officers to other countries for training to tackle cross
border tax evasion.
 Providing adequate security to tax officials, conducting search and surveys.
 Improving morale of the tax department officials by providing them adequate infrastructure
and other facilities, by recognition of their merit and giving them the place that they deserve
in the overall government set up.
The Swiss bank controversy-black money stockpile
Indian money stashed in the Swiss Bank has become a focal point of debate.It is because the domestic
black money is used in our economy and to that extent it is productive. But the money kept in Swiss
banks is neither useful to India nor does it benefit Indians.
The media has a very important role to play. At the moment it seems like most part of the media is
more interested in the diet of an actress. Pressure by the media needs to be built up on this issue and
remember that a lot of Indians don't just go to Switzerland to ski.
Indian economy will phenomenally improve if the black money is brought back.India will be in the
top five league if all the ill-gotten money is brought back.It will change the Indian scenario.

In 2006, the most recent Global Financial Integrity study, developing countries lost an estimated
$858.6 billion (about Rs 43 lakh crore) to $1.06 trillion (abot Rs 51 lakh crore) in illicit financial
outflows. Even at the lower end of the range of estimates, the volume of illicit financial flows coming
out of developing countries increased at a compound rate of 18.2 percent over the five-year period
analysed for the study. On average, for the five-year period of this study, Asia accounts for
approximately 50 percent of overall illicit financial flows from all developing countries.
This report shows that the average amount stashed away from India annually during 2002-06 is $27.3
billion (about 136,466 crore). It means that during the five-year period the amount stashed away is
27.3x5=136.5 billion (about 692,328 crore). It is not that all these amounts went to Swiss banks. It has
gone to different tax and secret shelters. The share of Swiss banks in dirty money being a third of the
global aggregate, some $45 billion out of the 136.5 billion stashed away from India would have been
hoarded in these years in Swiss banks.
The important point is that this is only for five years. More amounts were stashed away during the
Nehruvian regime. So the loot for 55 years will be several times higher. In fact, in those days the
rupee commanded a better value per dollar. So fewer rupee could get more dollars. So the estimation
that the Indian money stashed away may be of the order of $1.4 trillion (about Rs 71 lakh crore).
Double Taxation Agreement ( DTA)
In a major step towards the government getting hold of details of Indian money stashed in Swiss bank
accounts, a revised agreement with Switzerland will allow investigators to access information relating
to not just tax fraud but evasion as well.
The reworked double taxation agreement ( DTA), signed by India and Switzerland, will mean Indian
authorities can seek information about account-holders in Swiss banks from January 2011 as long as
they have a case
The government claims the tax pact signed with Switzerland should help track illicit Indian funds
parked in Swiss bank accounts.
But Mr. Pranab Mukherjee is of the opinion that the pact would not be so effective as it is not
retroactive but prospective.
Details of various tax heavens where the Ill-gotten wealth of indian businessmen and politicians
are stashed and some well-trodden paths chosen to do so.
There are presumably more than 70 tax havens in the world. Indian wealth could be more in
Switzerland and various British /US islands. At least 40 countries market themselves aggressively as

tax havens [Source: Internal Revenue Service USA on Abusive Off-shore Tax Avoidance schemes
Talking Points Jan 2008]. The well-known tax havens are Switzerland/ Liechtenstein/Luxemburg/
Channel Islands etc.
There are several methods/reasons to choose this path. They are as follows :-
 Under invoicing/over invoicing of exports and imports and getting the balance stored abroad.
 Kickbacks from major defense/civilian contracts.
 Not bringing the earnings abroad.
 In the old days smuggling of gold and illegal money.
 Transactions done abroad and not reported here.
 Hawala funds.
 Funds earned by artists/ entertainment industry /sports people and stashed abroad.
When you want to indulge in adharma, hundreds of ways are open!
Involvement of politicians in the stacking of black money in swiss bank-

Deterrent effect on government making policies.
The fact that there is a great involvement of politicians in stacking black money in
Swiss banks, is a burning issue for the government as these politicians will try their
best to act as a hurdle to the government in making any policy for the disclosure of
Swiss bank accounts.
But, public pressure will make them do it. Plus, the evolving global situation against
tax havens. The money belongs to the poor farmers and unorganised workers of India.
Also, Indian businessmen have a lot of their ill-gotten gains in these banks. The world
situation is such that Indian businessman will want to bring it back now given the
attractive returns in India
Solutions suggested to bring black money back to the economy
 Put it on the Global Agenda.
 Put it in G-20.
 Put it in the International Monetary Fund.
 Put it in Egmont Group.

 Also take a lead among all developing countries.
 Support US /German/French efforts.
 Demand all the Indian black money in Swiss banks
Conclusion –Thus, it can be concluded that a black market economy has a

deterrent effect on the growth of the economy on the whole so ample and
prolonged effort should be made by the government to supress the black market
.
Bibliography
 Arun kumar, The black economy in India,Penguin Books
 James Patterson , Black Market ,
Sources
 Black market , www.wikipedia.com
 Country rankings ,www.havocscope.com
 News articles, http://timesofindia.indiatimes.com/
Acknowledgement - I feel immensely happy to make this project and conclude

it successfully which would have never been possible without the help and
support of respected professor Mr. C Rajasekhar.

From (Vivek Mukherjee (Mukherjeeviku1@gmail - Com) ) - ID (15) - BLACK MARKET ECONOMY

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Economics Project – I TRIMESTER

Black Market Economy Page 1

TOPIC PAGE NO.

Causes of existence of a black market economy………………...4

How big is the black market economy?........................................6

Black market economy in different countries………..………….7

Country rankings(black market size)……………………………9

How a black market economy works………………………..….10

Effects of black market economy……………………………….12

Emergence of black market…………………………….………..13

Nature of black market and its formantion………………………13

Constituent elements of black market……………………………14

Advantages of black market economy……………………..….….15

Disadvantages of black market economy……………………..…15

Black market economy in India……………………………….....16

Measures taken by the government……………………………….17

Reasons for ineffectiveness of policies……………………….….18

What government should undertake………………….………….18

The Swiss bank controversy-Black money stockpile…………….22

Solutions suggested to bring black money back to economy……..24

Conclusion , bibliography , acknowledgement…………………….24

What is a black market economy?

Black Market Economy Page 3

Causes of existence of a black market economy.

Having successfully attempted a workable definition of black market economy, let us

by government regulations and restrictions. If one scans the economic literature

of development, social structures, public acceptance of compliance (or tax

complete diagnosis nor appropriate prescription. Mofelsky in his essay in “The

Black Market Economy Page 4

Underground Economy in the United States” cites avoidance of losing

government benefits as an additional reason for participation in the black market

achieve greater flexibility in the remuneration and employment of labor and b) to

nations with rigid labor laws, like India.

economy is given by Guntmann who attributes the subterranean economy to

the following additional causes:

 Immensely complex tax system, requiring inordinate tax-payer time, paper

work and expense

 The increase in the size of government which leaves smaller share of

national output for direct consumption by wage earners

 Perception of government as wasteful and inefficient by the public making

inadequate use of their hard earned money

Black Market Economy Page 5

shortage situation due to inappropriate industry structures or insufficient capacity.

revolutions so frequent throughout history was public reaction to the imposition of

what people believed to be unfair taxes. Passive resistance, in the form of

increasing evasion, is the modern expression of such hostility”

How big is the black market economy?

Black Market Economy Page 6

Black market economy in different countries.

Black Market Economy Page 7

This vendor of pirated clothing is selling on the black market in Singapore.

In Eastern Europe and the former Soviet Union

Former-Soviet countries with large black economies are:

Country rankings (size of black market)

Black Market Economy Page 8

Havocscope Black Market Country Ranking Total: $1.546 Trillion

World Average: $20.34 Billion

1. United States - $460.6 Billion

How a black market economy works?( Demand and supply approach)

Black Market Economy Page 9

Black Market Economy Page 10

Effects of black market economy

People Get What They Want