Economic Journal of Development Issues Vol. 11 & 12 No.

1-2 (2010) Combined Issue

TheParallelEconomy...

THEPARALLELECONOMYININDIA:CAUSES,
IMPACTSANDGOVERNMENTINITIATIVES

SukantaSarkar*

Abstract
The study has made an attempt to assess the overall profile of parallel economy in India,
particularlyintermsofcauses,impactsandgovernmentinitiatives.Theresultsindicatethat
paralleleconomyhasbeenexpandingveryrapidlyinIndiaaswellasindevelopingcountries.
ItisevidentfromthestudythatgovernmentofIndiaalreadyintroducedvariouscommissions
forestimatingblackeconomybutestimationreportsarenotsame.Indiangovernmentismore
concernedabouttheprevalenceoftheparalleleconomyandvariouscommissionsareformedfor
controllingitbutresultsarenotsoimpressive.Thus,thepapersuggeststhatrecommendations
ofthecommissionsorlawsshouldbeimplementedcorrectlyforreducingbadeffectsofblack
economy.

Keywords:blackmoney,inflation,privatization,realestate,India

Inpopularparlance,theunofficialeconomygoesbythenameofblackmoneyandtheofficial,
ofwhitemoney.Blackandwhitearealsovariouslysubstitutedbynumbertwoandnumberone,
unaccountedandaccounted,unreportedandreported,unrecordedandrecordedandsoon.
Prof.J.C.Sandesara

INTRODUCTION
Economyconsistsofeconomicsystemofacountryorotherarea,thelabor,capitaland
land resources, and the economic agents that socially participate in the production,
exchange,distribution,andconsumptionofgoodsandservicesofthatarea.Allkind
ofprofessions,occupations,economicagentsoreconomicactivities,contributetothe
economy.Consumption,savingandinvestmentarecorecomponentsintheeconomy
anddeterminemarketequilibrium.Aninformaleconomyiseconomicactivitythatis
neithertaxednormonitoredbyagovernment,contrastedwithaformaleconomy.The
informaleconomyisthusnotincludedinthatgovernmentsGrossNationalProduct
(GNP).Informaleconomicactivityisadynamicprocesswhichincludesmanyaspects
ofeconomicandsocialtheoryincludingexchange,regulation,andenforcement.

Paralleleconomymeansfunctioningofanunsanctionedsectorintheeconomywhose
objectivesrunparallelandincontradictionwiththeobjectivesofofficialorsanctioned

* Mr.SarkarisLecturerofeconomics,DepartmentofManagement,ICFAIUniversityTripura,Agartala,
Email:[email protected]

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or legitimate sector in the same economy (Rajaram, 2006, 577). This is variously
referred to as unaccounted economy, illegal economy, subterranean economy,
or unsanctioned economy. According to the D.K.Rangnekar (as cited by Datta &
Sundharam, 2004, 376), If the Parallel economyposes a serious threat to stability
andgrowthoftheofficialeconomy,surelyitstemsfromthefactthatthemagnitude
ofblackmoneyislargeandriggeddealsaregrowinginvolumeandcomplexityat
an alarming rate. Apart from the wide ramificationsof the parallel economy, one
might also be alive to the fact that black incomesare accentuating the inequalities
in income and wealth and breeding a new class of blackrich in a society which is
alreadyharshlystratified.

Illegal economy is taxevaded economy. It is possible to convert illegal economy or

blackmoneyintowhitemoneyandviceversa.Forexample,whenapersonmanages
to get the receipt from the shopkeeperby paying the salestaxfor a commoditybut
doesnotpurchaseitactually,hegeneratesblackmoneyasreimbursementismadeto
himagainstthereceipt.Themoneynotactuallypaidistheblackmoneyinsuchacase.
In such case, the shopkeeper sells the same commodity to another person without
giving him any receipt for it. On the other hand, if a person purchases something
(say,ascooter,oraVCR,etc.)andplaysRs.15,000foritoutofwhitemoneybutgetsa
receiptofonlyRs.10,000,thebalanceofRs.5,000becomesblackmoneyfortheseller.
Inthiscase,thewhitemoneybecomestheblackmoney(Ahuja,2007,489).

The parallel economy has political, commercial, legal, industrial, social and ethical
aspects. There are wide confrontations between the objectives of the legitimate and
illegitimatesectorsunderparalleleconomy.D.R.Pendse(ascitedbyLekhi,2003,191)
argued that there are two possible sources of black money. Firstly, it may originate
fromillegitimatesourceofincomearisingoutofillegalgratificationsuchaspayment
ofSelamiorPagriorincomefromsmuggling,briberyetc.Secondly,itmayoriginate
fromlegitimateandlegalsourcesofincomebutconcealedfromtaxauthoritiesoutof
taxevasion.

The basic objectives of this paper are to analyze the causes of parallel economy, its
impactontheeconomyandvariousinitiativesofIndiangovernmentforsolvingthis
problem.

INTERNATIONALEXPERIENCE

Parallel economy or black economy is existing in both developed and developing

countries. Thereisanabundanceofliteratureavailableuponmeasurementtechniques
andaboutestimatesofparalleleconomy.Avarietyofmethodshavebeenusedandthe
differentmethodsappeartogeneratewidelydivergentestimates.Thisissummarized
inTable1.
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Table1:ParallelEconomyEstimatesinDevelopedCountries
Country
ParallelEconomy(as%of
GDP)
Greece,Italy,Spain,PortugalandBelgium
2430%
Sweden,Norway,Denmark,Ireland,France,The
1323%
Netherlands,GermanyandGreatBritain
Japan,USA,AustriaandSwitzerland
810%
Source:http://www.crisil.com/youngthoughtleader/winners/topic4_Jyoti_Agarwal_IIm_CAL.PDF

Table1showthatparalleleconomyexistsinvariousdevelopedcountriesallthough
theirvariousinitiativeshavebeentakinggovernments.

Theestimatesofparalleleconomyinthecontextofsomeofthedevelopingcountries
arepresentedinTable2.

Table2:EstimatesofParallelEconomyinDevelopingCountriesPeriod:199093

Country

Parallel Economy(as
%ofGDP)

NigeriaandEgypt

6876%

TunisiaandMorocco

3949%

Africa

CentralandSouthAmerica
Guatemala,Mexico,PeruandPanama

4060%

Chile,CostaRica,Venezuela,Brazil,Paraguay&Colombia

2535%

Asia
Thailand

70%

Philippines,SriLanka,Malaysia&SouthKorea

3850%

HongKong&Singapore

13%

Source:http://www.crisil.com/youngthoughtleader/winners/topic4_Jyoti_Agarwal_IIm_CAL.PDF

Therearevariousdevelopingcountrieswhereblackmoneyisincreasingveryquickly.
It occurs at all levels of society, from local and national gove rnments, civil society,
judiciaryfunctions,largeandsmallbusinesses,militaryandotherservicesandsoon.

INDIANEXPERIENCE
VariousattemptshavebeenmadetoassesstheblackmoneyinIndiafromtimeto
time.Majorfewofthemareaspresentedhere:
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I.

KaldorsEstimate:AlthoughtheTaxationEnquiryCommissionhadexamined
the structure of Indian Taxation, a review by Prof. Nicholas Kaldor was
desired by the Government in late 1955 in view of the larger dimensions
assumed by the problems of resources for the plan since the commission
reported(ImportantEvents194661).Prof.N.KaldorinhisreportonIndian
Tax Reform estimated the nonnational income (i) wages and salaries (ii)
income of selfemployed and (iii) profit,interest and rent.Aftermaking the
roughadjustmements,accordingtoWanchooCommittee, theestimated
incomeincomeonwhichtaxhasbeen(blackincome)wouldprobablybeRs.
700croresandRs.1000croresfortheyears196162and196566respectively.
Projectingthisestimatefurtherto196869onthebasisofpercentageincreasein
nationalincomefrom196162to196869,theincomeonwhichtaxwasevaded
for196869,theincomeonwhichtaxwasevadedfor196869canbeestimated
atafigureofRs.1800crores(Datt andSundharam,2004,378379).

II.

WanchooCommittees Estimate:ShriK.N.Wanchoo,retiredChiefJustice
of the Supreme Court of India, as chairman explained what the term black
moneymeantinitsfinalreportsubmittedinDecember,1971.Thiscommittee
estimated nonsalary income for 196162 of amounting Rs. 2686 crores and
nonsalaryincomeactuallyassessedtotaxasRs.1875crores,thus,taxescaped
forRs.811crores.Therefore,in196162,blackmoneywasofamountingRs.
700croreswhichrosetoRs.1000croresin196566andfurtherRs.1400crores
in196970.Verylatelyitwasaccountedtobe4.4percentofGNP(Dhar,2003,
719).

III.

Rangnekars Estimate: D.K. Rangnakar as a member of the Wanchoo

Committee submitted his report in 1982 (India Today, 2005). According to
Rangnekar,taxevadedincomefor196162wastheorderofRs.1,150crores,
ascomparedtotheDTECestimateofRs.850crores.For196566,itwasRs.
2,300crores,asagainstRs.1,216croresestimatedbyDTEC.Theprojectionsof
blackmoneyfor196869and196970wereRs.2,833croresandRs.3,080crores
respectively(DattandSundharam,2004,378).

IV.

ChoprasEstimate:ACommitteeunderO.P.Choprawasformedin1982for
measuring black money in India (India Today, 2005). O.P.Chopra prepared
a series of estimates of black income where it increased from Rs. 916 crores
(6.1 percent of GDP) in 196162 to Rs.8098 crores (10.5 percent of GDP) in
197677(Dhar,2003).Thestudyshowedthatabuoyanteconomyoffersmore
opportunitiesforunaccountedincome.Duringperiodsofrecession,itmaybe
difficultforproducerstoexactunaccountedmoney.Chopraalsocorroborates
the hypothesis that tax evasion is more likely the higher the rate of tax.
His findingsalso support the hypothesis that increase in prices leads to an
increaseinunaccountedincome.Further,hefoundthatfundsaredivertedto
agriculturetoconvertunaccounted(black)incomeintolegal(white)income
(DattandSundharam,2004,379).

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V.

Guptas Estimate: Government of Indiaformeda committeeunder Poonam

GuptaandSanjeevGuptain1981forcalculatingblackmoneyinIndia.They
usedFeigesmethodoftransactionincomeratiotoestimateblackmoneyina
country.Theyusedaverageofthreeyearsviz.194950,195051and195152as
thebenchmarkforestimatingblackmoneyfortheyearof196768to197879.
They estimated that it was 19.8% of GDPat market price. The black money
increased for Rs. 3034 crores in 196768 to Rs. 46867 crores in 197879. The
mainfindingsofstudiesonblackmoneywere:(a)Abuoyanteconomyoffers
more opportunities for unaccounted income; (b) The ratio of unaccounted
incometoassessablenonsalaryincomehasgoneupafter197374;(c)Increase
in prices leads to an increase in black money; (d) Funds are diverted to
agriculture to convert black money into white money; and (e) One per cent
increase in overall taxes leads to more than 3 percent increase in the black
economyrelationtotheofficialeconomy(Lekhi,2003,192).

TheNationalInstituteofPublicFinanceandPolicyestimatedthatin1985amountof
blackmoneyinIndiawasnearlyRs.1,00,000crore,whichisapproximately20percent
ofthenationalincome.In1996,theestimatedblackmoneywasbelievedtobemore
thanRs.4,00,000crore(TheHindustanTimes,January20,1997).

Most of Indias black money estimated to be about US$1 trillion (Dh3.67tn) is

believedtobeparkedinbankaccountsinSwitzerland.AccordingtotheSwissBankers
Association, Swiss law and tax agreements prohibit third countries from general
searches for possible tax evaders, or namefishing.The Indian government hopes
thatsituationwillchangeafteritstaxtreatywiththecountryisrevised(Chopra,2010) .

CAUSESOFGENERATINGBLACKMONEY
TherearemanyreasonsforthecreationofbackmoneyinIndia.Someofthemareas
follows:

i.

Controls and licensing system: Black money is increasing in India for the
reasonsofcontrols,permits,quotasandlicenses.

ii.

HigherRatesofTaxes:Higherratesoftaxeshasresultedagrowingtendencyof
taxevasionamongthetaxpayers.Taxevasioniscommoninincometax,corporate
tax,corporationtax,unionexciseduties,customduties,salestax,etc.

iii.

Ineffectiveenforcement of tax laws: In India, the enforcement of tax laws

inrespectofincometax,salestax,exciseduty,stampdutyetc.isquiteweak.
Thishasledtoenormousunrestrainedevasionoftaxesandpilingupofblack
money.

iv.

Fundingofpoliticalparties:Thereisanupwardtendencyofsupportingof
politicalpartieswiththehelpofblackmoney.Bigtradehousesaredonating

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an enormous amount of black money to the political parties, especially the

rulingpartywiththesoleobjectivetotamethepoliticalleadershipforderiving
undueprofitbymanipulatingpolicydecisions(Lekhi,2003,193).

v.

SecondWorldWarafterinfluence:DuringthetimeofSecondWorldWar,a
lotoftheIndianindustryfoundcircumstancesfavourableforblackmarketing.
Supply industrial goods from the traditional supplies of the West were cut
off, which resulted severe shortages in many essential fields. This formed
thesentimentofmakingofmarketingmoneyoutofshortagesandnotoutof
extensionofthebusinessactivities.

vi.

Inflation:Theadditioninpricesofcommoditieslikepetrol,etc.ininternational
market, boost in prices of commodities due to high increase in duties and
taxes imposed by the government, the conspicuous utilization created by
people with unaccountable money, diverting resources from manufacture
to speculation all these is the root of inflation which in turn creates black
money.

vii.

AgriculturalIncome:Thereluctancetobringagriculturalearningsintherealm
ofincometaxhasalsocontributedtocreationofblackmoney.Bigindustrial
houses,overthepastfewdecadeshaveenteredtheagriculturesectorinabig
waybyacquiringbigfarms.Theblackmoneyaccruedfromothersourcesis
soughttobetransformedintowhitebyviewingitontheagriculturalreturns
account.

viii.

Privatization:Privatizationhasopenedupanewareatotheprivatesectoras
wellastoministersandbureaucratsformakingblackmoney.Itisexpectedthat
manyscamscometolightformakingblackmoneythroughprivatization.

ix.

Transactions in Urban Real Estates: Real estate transaction is a significant

sourceofgeneratingblackmoneyinIndia.

x.

OtherFactors:GenerationofblackincomeinacountrylikeIndiaalsoresults
from other different activities like smuggling, property deals, bribery, kick
backs,commissions,concealmentofincomebyprofessionals,artistsetc.Inthis
wayanenormousamountsofblackincomeincessantlyresultsinenhancement
oftheareaandactivitiesofparalleleconomy(Lekhi,2003,194).

ImpactofBlackIncomeontheIndianEconomy
Generationofblackincomeandtherebyestablishmentofparalleleconomyhasbeen
creating the following serious impacts on the social and economic system of the
country.

BlackincomehasbeencausingunderestimationofGDPinIndiaasanenormous
volumeofincomeisdivertedtothisunaccountedsectorresultingingrowing
continuationofparalleleconomyofthecountry.
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Thedirecteffectofblackincomeisthelossofrevenuetothestateexchequeras
ataxevasion.

Blackmoneyhasresultedinthediversionofresourcesforthepurchaseofreal
estateandluxuryhousing.

BlackmoneyhasresultedintransferoffundsfromIndiatoforeigncountries
throughclandestinechannels(Dhar,2003,721).

The availability of black incomes with businessmen and capitalists and the
consequent inequalities of income place a large amount of funds at their
disposal.

Apartoftheblackincomesisheldincashandasaresultthereisanabundance
ofliquiditywhichbecomesavailablethroughtheadditionofsavingsheldinthe
formofcash,bullion,gold,silver,etc.

Moneyevadedbyillegitimatewayisspentinundesirableandvulgarmanner.
Virtueslikehardworkandhonestyareunderestimated.

Thustheexistenceofparalleleconomyhastotallydistortedanddisruptedtheplanning
oftheeconomyofthecountry.

GOVERNMENTINITIATIVES
Thegovernmenthastakenanumberofstepstocurbblackmoney.Searches,seizures,
surveys, and scrutiny of income tax returns are being done by the Income Tax
Department.AmendmentshavealsobeenmadetotheFinanceAct2004tointensify
efforts to curb black money. These include prosecution for falsification of books of
accountsandtaxingofgiftsworthmorethanRs.25,000tounrelatedpersons.There
have been two amendments of the Voluntary Disclosure of Income Scheme (VDIS)
underwhichblackincomesandassetscouldbedeclared,thetaxpaidatcurrentrates
andamnestyavailedfrompenaltyandprosecution.Forthesmoothfunctioningofthe
economy,thefollowingmeasuresaresuggestedtocombatthemenaceoftheparallel
economy:

i.

Demonetization:In1946,demonetizationwasresortedtobuttheDirect
Taxes Enquiry Committee in its interim report observed, Demonetization
wasnotsuccessfulthen,becauseonlyaverysmallproportionoftotalnotes
incirculationweredemonetizedin1946anditsworthwas Rs.1,235.93
crores.OnJanuary16,1978demonetizationofhighdemonisationnoteswas
introduced.ThehighdemonetizationratesasonthatdayamountedtoRs.146
crores.NotestenderedtoReserveBankofIndiaamountedtoRs.125croresas
perdataavailabletillAugust1981(Lekhi,2003,195).

ii.

VoluntaryDisclosureSchemes:TheGovernmenthasfloatedvariousvoluntary
disclosureschemestodeterminetheblackmoney.In1951,avoluntary

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disclosure scheme with relaxation in panel provision was introduced. It

resultedintotaldisclosuresamountingtoRs.71croresandtaxcollectionof
Rs.11croresonly.Upto1968atotalconcealedincomeoftheorderofRs.519
crores was declared on which Rs. 131 crores were paid as tax; this further
highlightsthefailureoftheGovernmenttounearthblackincomes.Thewealth
disclosedundertheschemewillattractincometax,butnotwealthtax.Under
thescheme,previouslyundisclosedincomereportedbythedeclarant,willbe
subjecttotaxattherateof30%forindividualsand35%inothercases.Further,
theFinanceMinisterhasannouncedthatthedeclarantwillnotbeliabletopay
interestorpenaltiesandwillbegrantedimmunityfromprosecutionunderthe
IncometaxAct1961,WealthtaxAct,1957,ForeignExchangeRegulationAct,
1973andCompaniesAct,1956.ThisschemewillremaininforcetillDecember
31,1997(HighlightsofUnionBudgets,1997).

iii.

SpecialBearerBondScheme:Bearerbondsweremostlikelyfirstusedinthe
United States during the postCivil War era to fund Reconstruction (1865
1885). are bonds that are owned by whoever is holding them, rather than
havingregisteredownerslikemostothersecurities.Likemostotherbonds,
theyhaveastatedmaturitydateandinterestrate,butcouponsrepresenting
interestpaymentsaregenerallyphysicallyattachedtothesecurityandmust
be submitted to the company for payment (Bernfeld, 2010). Special Bearer
Bonds Scheme (1981) was intended for canalizing unaccounted money for
productivepurposes.TheSpecialBearerBonds,1981ofthefacevalueofRs.
10,000eachwereissuedatparwithamaturityperiodof10years.

iv.

Measures toCheck Tax Evasion: Dealing with tax evasion hasalways been
oneofthemostdifficultchallengesforgovernmentsallroundtheworld.Tax
evasionisdonebyindividualsbelongingtodifferentstrataofthesocietyin
differentways.As per the surveys and reports, there are many people who
provide false income details to the tax authorities to reduce the amount of
liability. The income tax evasion penalties can help the government recover
maximumamountsintheformoftaxandutilizethemoneyforthebenefitof
thecommonpublic.Taxevasionisoneofthebasiccausestogeneratetheblack
income.Therefore,variousmeasureswereundertakentoplugtheloopholes
intaxevasion.Mostofthesemeasureswerebasedontherecommendations
of various committees and commissions viz Taxation Enquiry Commission
(1953), Administrative Reforms Commission (1969), Direct Tax Enquiry
Committee(1971)etc.Mostoftheserecommendationswereanupgradingin
taxlaws(Charlie,2010).

v.

Economic Liberalization: Introduction of economic liberalization has

detached the regime of controls and regulations and thereby the extent of
blackeconomywouldbereducedregularly(Lekhi,2003,196).

vi.

Voluntary Disclosure Scheme:Finance Minister Mr. P. Chidambaram while

presenting199798budgetsannouncedaVoluntaryDisclosureScheme(VDS).

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Voluntary Disclosure Scheme which was extensively advertised yielded tax

revenueofRs.10,500croresanunprecedentedrevenuegainfromanyVDS
schemelaunchedsincetheindependence.

vii.

Other Measures: The Government has also introduced some measures to

containthegrowthofblackincomeinthecountrywhichincludesDepositin
theNationalHousingBankin1991,NRIforeignexchangeremittance,issuing
NationalDevelopmentBondsinUSdollars,controllingtheelectionexpenses
incurred by the candidates, conducting searches, seizures, raids and other
stepstoplugloopholesinthetaxadministrationetc.

ThePreventionofMoneyLaunderingAct,2004cameintoeffecton1July2005.Section
3 of theActmakes the offenseof moneylaunderingcover those persons or entities
who directlyor indirectlyattemptto indulge orknowinglyassist or knowinglyare
partyorareactuallyinvolvedinanyprocessoractivityconnectedwiththeproceeds
ofcrimeandprojectingitasuntaintedproperty,suchpersonorentityshallbeguiltyof
offenseofmoneylaundering.Section4oftheActprescribespunishmentformoney
launderingwithrigorousimprisonmentforatermwhichshallnotbelessthanthree
yearsbutwhichmayextendtosevenyearsandshallalsobeliabletofinewhichmay
extendtofivelakhrupeesandfortheoffencesmentioned[elsewhere]thepunishment
shallbeuptotenyears(MoneyLaundering,2010).Moneylaunderingnetworkshave
andcontinuetoprovideavenuestosiphonmoneybetweenindividuals,groups,and
nationsacross national borders andacross the world forlegitimateand illegitimate
purposes(Lambert,1996).

InJuly1991,theUnionFinanceMinisterprojectedanewschemeNationalHousing
Bank Scheme to persuade black money back into the legitimate operations of the
nationaleconomy.Theschemeoffered possessorsofunaccountedformoneyan
opportunity to depositany quantity of money (with a maximumlimit ofRs. 10000)
withNHBwithoutdisclosingthebasisoffunds.

Somescholarshavemaintainedthatallthesemeasureshavetouchedonlythetipof
theiceberg.AllofschemeshavehardlyfetchedRs.5000croreoveraperiodoffifty
years. The maindrawback in theseschemesis that they touch the problem of black
moneyalreadycreatedbuttheydonotgointotherootcauseofgenerationofblack
money. Unless this problem is tackled, the menace of black money will continue to
increase.

Indiahastriedtocombattaxevasionbyrequiringanidentificationnumberforallmajor
financialdeals.Thepermanentaccountnumber(PAN)isacompulsory10character
numberissuedtotaxpayersbythetaxdepartment.Butmanytransactions,especially
those related to property, are conducted in cash and are unlikely to be reported. In
the fiscal year 20072008, the countrys highvalue transactions amounted to more
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than 55.7 trillion rupees, according to IndiasAnnual Information Return filed with
thegovernment.Butnearlyonethirdofthe3.3milliontransactionswereconducted
withoutaPAN.Inmanyothertransactions,PANnumberswerefake(Chopra,2010).

CONCLUDINGOBSERVATION
ParalleleconomyisanewthreatfortheIndianeconomy.InIndiaparalleleconomyis
expandingveryrapidly.GovernmentofIndiaintroducedcommissionsunderKaldor,
Wanchoo, Rangnekar, Chopra, and Gupta for estimating black economy. There are
many factors like Controls and Licensing System, HigherRates of Taxes, Ineffective
EnforcementofTaxLaws,Inflation,Fundingofpoliticalpartiesetc.thatinfluenceits
growth.

InIndiaamountofblackmoneyareincreasingcontinuouslywhichbadlyimpactsthe
economicgrowthofthenation.SuchmoneyisanewchallengeforIndianeconomy.
Indian economy is badly affected by black money as it is underestimating GDP,
increasinginequalityofincome,increasingillegalactivitiesetc.Overthepast50years,
thegovernmenthasatvarioustimesannouncedseveralschemesofferingopportunities
to bring black money overboard but the result are not so effective. Some of these
schemes are: introducing the scheme of Special Bearer Bonds, demonetizing high
denomination currency notes, stringent raids and scheme of voluntary disclosures.
Theseinstrumentsareexpectedtoreducethevolumeoftheblackeconomy.

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