At Sony Centre, the Japanese consumer electronics giant’s exclusive products store in one of Delhi’s upmarkets, it’s business as usual or even better. The so-called slowdown seems to have had no impact.“You want it. You will get it, slowdown or not,” says a store manager.There is no dearth of customers of high-value consumer electronics products such as the 54-inch Sony Bravaria LCD TV that costs Rs 3 lakh. It’s remarkable how buyers mostly pay in cash — in wads of currency notes.
Cash transactions sustain the black money economy. The parallel economy, last estimated in 1999 at one-fifth of the Indian economy, could, in fact, now be doing a rescue act for the country’s troubled $1-trillion economy. As the economy is slowing down, after three years of 9 per cent plus growth, there are indications that black money is sustaining economic activities. Sectors ranging from real estate to road transport have a huge black money element, and this is what is keeping them going in these “bad” times.The cash economy is thriving. Evidence: currency holding by people, according to latest Reserve Bank of India (RBI) data, was up Rs 93,610 crore in a year to a whopping Rs 6,18,713 crore as on November 21, 2008. This is the highest ever year-on-year increase in cash holding by the public — over Rs 20,000 crore more than the rise seen in the preceding year.“This could be an indication that the cash economy is on the rise,” says the chief economic advisor in the finance ministry, Arvind Virmani.He says the government keeps no track of the stock and flow of black money. Black money, by definition, is unaccounted for. However, it is possible that in times of economic downturns like these, the parallel black economy gets a boost and, in fact, helps absorb some of the shocks.Despite the reluctance of official India to dwell on the subject, a top RBI official said, “It is a fact that in a difficult situation like this, the cash economy (read black money) thrives in a big way when legal business earns a lower return or loses money.” He said, “RBI is aware that, since credit market is frozen, cash transactions could take a pre-eminent place in these times of global financial crisis which has also hit the Indian economy.” RBI has no firm estimates but, according to this official, cash transactions are growing by over 30 per cent and these are keeping both domestic and foreign trade channels brimming with activity. High-value consumer goods, cars, commercial real estate deals and commodity trading have a large cash component. These are sustained by the black economy. There is no official count of the size and the growth of the parallel economy. The last such study was by the National Institute of Public Finance and Policy (NIPFP) in 1985. It estimated the size of the parallel economy at between Rs 31,500 crore and Rs 36,786 crore in 1983-84. This amounted to about 20 per cent of India’s GDP that year.The latest estimates of the black economy were made by the Indira Gandhi Institute of Development Research (IGIDR) in its India Development Report 1999-2000. The report put the quantum of black money at Rs 3,54,000 crore in 1999 when India's GDP was Rs 17,70,000 crore. That again was 20 per cent of the GDP .
Economists say policy liberalisation, lower tax rates, easier availability of bank credit and higher transparency in business transactions in recent years have discouraged the growth of the black economy, but there is an impetus for the parallel economy to grow in times of difficulties. “In sectors such as real estate, the buyer is compelled to transact in black even if the source of his funds is legitimate. This could be on the rise as funding from banks has dried up,” planning commission member Kirit S Parikh, who authored the IGIDR report, said. The black economy is also expected to get a shot in the arm with general elections due in a few months.Each parliamentary poll generates between $10.19 billion and $11.33 billion of black money, a CMIE (Centre for Monitoring Indian Economy) study in 2006 said. Parikh agrees that there have been little electoral reforms that may suggest that the flow of black money may be ebbing.More evidence of the black economy doing well for itself and for the normal economy can be seen in the country’s largely unorganised and unaccounted for business of goods transport by road. The convenor of the Indian Foundation of Transport Research and Training, S P Singh, who keeps a close tab on road transport, says cargo offerings by small and medium enterprises are on the decline, but cargo booking companies still have a roaring high-margin business in carriage of goods on which excise is evaded.“Small and medium enterprises, in order to stay afloat in the current downturn, are tempted to evade excise on goods they manufacture. The tendency was rampant before the government slashed the cenvat rate on goods by 4 percentage points across the board recently. The excise evasion by manufacturers at the factory gate sets into motion a chain of tax evasions, including that of state levies and income-tax, on the part of other players, including transporters", he says.Revenue officials say the 36 per cent fall in incometax collections and the 15 per cent drop in the excise mop-up in November are only partly on account of the economic slowdown. Tax evasion has come to the fore as a major factor.The black economy has already been hailed for keeping the white economy safe from home mortgage crises of the kind experienced in the US. Since the “black component” in a home buying transaction is often 50 per cent or more, the deal is grossly undervalued and shown as such. The lender banks always have the assurance of a much higher market value of the mortgaged property.But as the IGIDR study pointed out the black economy could have other benefits for the normal economy.Even if returns from black investment go unaccounted for in the national accounts, they may trickle down to improve the overall standard of living in the country. If such is the case, the black economy may be a good thing, it said.