A review on the macro economic linkages and implications of the black economy in India

The black economy is once again a headline in the news and discussions following the announcement of demonetization of the large-denomination currency notes in India in November 2016. The notion that demonetization can tackle the black economy is a result of the incorrect understanding that the black economy is all cash. The black economy is the single biggest problem confronting India since 1970s. In India, it was estimated to be 62 percent of GDP for 2012-13. If it is assumed to be the same in 2017-18, the black economy amounts to Rs.103.99 lakh crore. Hence it cannot be ignored. In 1955-56, it was estimated by Prof. Kaldor to be 4-5 percent of GDP. Its growth has been rapid and it is intertwined with the white economy and results in growing inefficiencies. The black economy is one of the biggest reasons for the failure of state policies-the result of which is that society is unable to achieve its goals. It impacts all the micro-and-macro variables-inflation is higher and the trade deficit larger, the savings rate rises while the investment rate falls; employment is lower than potentially possible, and the rate of growth below the potential and ultimately sets back development. There is a paucity of white economy data, because of the existence of a substantial black economy in India. Its non-inclusion in analysis results in a partial understanding of the economy and often incorrect policy pronouncements. The need to incorporate the black economy is not simply an empirical matter, but a theoretical necessity. This paper in general tries to give some conceptual and theoretical understanding of the concept of the black economy in India. The empirical section of the paper explains the significance of the black economy as a variable to be included in the analysis to get a better understanding of the economy.