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Seeing red on black money

Getting a handle on the size of India’s black economy is deucedly difficult. And it doesn’t get easier if the government takes on the job. What we need a robust regulatory mechanism to police the markets with greater rigour.

india Updated: Nov 20, 2011 11:36 IST

Getting a handle on the size of India’s black economy is deucedly difficult. And it doesn’t get easier if the government takes on the job. A joint study commissioned to come up with an estimate of how much of Indians’ income goes unreported and where it ends up must devise a hypothesis and test it on data that is just not there.

The human desire to evade taxes or legal scrutiny doesn’t lend itself to mathematical modelling, which is why no serious academic effort has gone into what is anecdotally a pervasive phenomenon in India. This is also the reason for estimates of unaccounted wealth stashed at home or abroad varying bizarrely.

If the government wanted to be seen to be doing something about black money, it could have chosen the more practical approach of addressing its causes rather than announcing a census.

Two obvious questions arise from the announcement though. One, if estimation of black money is smoke-and-mirror economics, isn’t there a bias in any government-sponsored study to underestimate the problem? Two, if the “independent” think tanks do manage to put out an estimation method 18 months from now that stands up to scrutiny, why haven’t we thought of doing it before now?

For their part, the think tanks will most probably come up with something that pits two sets of claims against each other and work on the discrepancies.

For example, what India says it trades with the world and what the world says India trades with it, or what sellers say they have sold and what buyers say they have bought. Even if economists get hold of two sets of conflicting data, they’re still clueless about the frankly illegal activities that do not show up in official databases anywhere.

However, if we do get a fix on the black money generated from legitimate economic activity a large chunk of the underground economy will be exposed. Then again, if Indian economists fail to come up with a reasonable estimate — one that stands up to scrutiny by peers — they can draw comfort from the fact that nobody else has succeeded.

A government facing questions on what it is doing about black money — including from the Supreme Court — is understandably touchy about the issue.

First, why should a black market exist? Second, what makes money go underground? And third, what are the chances that a person plying his trade in the parallel economy will be caught?

The answer to all three is governance, or the lack of it. Joining a global crusade against funny money is not enough for a country that has too much of it. India must lead the crusade.

As a beginning, it needs to introspect on the shortages that create black markets in the first place, the regulatory mechanism that nudges resources underground, and the lack of policing that allows the parallel economy unfettered growth.Seeing red on black money

Our Take

We need a robust regulatory mechanism to police the markets with greater rigour.

Getting a handle on the size of India’s black economy is deucedly difficult. And it doesn’t get easier if the government takes on the job. A joint study commissioned to come up with an estimate of how much of Indians’ income goes unreported and where it ends up must devise a hypothesis and test it on data that is just not there.

The human desire to evade taxes or legal scrutiny doesn’t lend itself to mathematical modelling, which is why no serious academic effort has gone into what is anecdotally a pervasive phenomenon in India. This is also the reason for estimates of unaccounted wealth stashed at home or abroad varying bizarrely.

If the government wanted to be seen to be doing something about black money, it could have chosen the more practical approach of addressing its causes rather than announcing a census.

Two obvious questions arise from the announcement though. One, if estimation of black money is smoke-and-mirror economics, isn’t there a bias in any government-sponsored study to underestimate the problem? Two, if the “independent” think tanks do manage to put out an estimation method 18 months from now that stands up to scrutiny, why haven’t we thought of doing it before now?

For their part, the think tanks will most probably come up with something that pits two sets of claims against each other and work on the discrepancies.

For example, what India says it trades with the world and what the world says India trades with it, or what sellers say they have sold and what buyers say they have bought. Even if economists get hold of two sets of conflicting data, they’re still clueless about the frankly illegal activities that do not show up in official databases anywhere.

However, if we do get a fix on the black money generated from legitimate economic activity a large chunk of the underground economy will be exposed. Then again, if Indian economists fail to come up with a reasonable estimate — one that stands up to scrutiny by peers — they can draw comfort from the fact that nobody else has succeeded.

A government facing questions on what it is doing about black money — including from the Supreme Court — is understandably touchy about the issue.

First, why should a black market exist? Second, what makes money go underground? And third, what are the chances that a person plying his trade in the parallel economy will be caught?

The answer to all three is governance, or the lack of it. Joining a global crusade against funny money is not enough for a country that has too much of it. India must lead the crusade.

As a beginning, it needs to introspect on the shortages that create black markets in the first place, the regulatory mechanism that nudges resources underground, and the lack of policing that allows the parallel economy unfettered growth.