The menace of parallel economy taking hold of India

Author: EQSIS
Published Date: November 29, 2016

The menace of Parallel Economy taking hold of India

You have often heard the term Swiss bank accounts widely associated with many politicians. Have you ever thought what all this fuzz is about? And why print and electronic media creates such hype around these infamous accounts? Well, let us today have a look into the matter, because we all have a right to know where our money comes from and goes as well.

The term black money which is associated with parallel money is the money which is unregistered and hence, free of tax. As we all know, there is a huge amount of tax on large properties and account that is where the parallel economy plays the deciding factor in the game. According to a recent report, India is the 5th largest exporter of Black money in the world. Also, the percentage of black money in the market is larger than ever.

The Impact of Parallel economy

The Impact of Parallel economy is far reaching. It has deep roots in the economy of the Nation and is constantly affecting the Nation’s economy. It has the following impacts:

  1. Inequality

    • With a bulk amount of black money circulating in the market, inequality comes natural. The unnatural growth of black economy leads to a sharp contrast between the poor and the rich. As a general rule of thumb, the rich become richer and poor become poorer. When money is concentrated to the elite of the society, it widen the gap between the ruling elite and the normal citizens of the country.
  2. Threat to social security

    • Black economy is a huge threat to social security. As the one who has the more money, gets the power. Hence, exploitation of the poor at the hands of rich becomes a common practice. And it also appears that the law is only there for the poor and the elite are exempted from all laws which create a sense of social insecurity among general masses. An, they are forced to think, what exactly is the worth of the laws of the state?
  3. Encouraging Terrorism

    • Black money when circulated in abundance will ultimately serve as a healthy ground for growth of terrorism. As terrorist will most likely be encouraged by Mafia, Corrupt and White colored criminals to inflict terror attacks on cities in order to gain personal benefits.
  4. Delay in growth and developments

    • With the larger circulation of black money, government will lack actual funds to run various planned development projects. Because the tax collection will be less due to unreported money circulating in the country. Government will have to take loans from banks such as IMF which will cause huge economic backdrops for the country in the long run.
  5. With corruption there will be poor quality of service

    • Corruption and parallel economyCorruption is the ultimate menace for the economy of a country. Corruption causes people’s money to flow into the wrong hands. Which are only concerned with their well-being, when the government will lack sufficient funds to provide quality service to all, what will happen is that there would be alternate services offered with poor quality and common masses will ultimately have to settle for what is available.

One best example is China products which can’t be just dumped into Europe and US markets. But can be done in Indian and African markets.

How to encounter parallel economy

There are various forms of parallel economy. Let us go through the ways to encounter them all.

To encounter underground economy:

In order to control the underground economy which is infecting the country like a virus, following could be the ideal solutions to the prevailing problems.

To Control corruption/ bribe:

The underground economy is a cancer to any nation. So, naturally strict action should be taken against those found guilty. A proper committee should be set up which holds accountability of each influential person, from corrupt politician to government official in various departments. This should be the ideal way to combat the parallel economy.

To Control terrorism /criminal Activities:

According to a recent study, education has a direct impact with the extremist behavior of a terrorist. So in order to overcome the ratio of criminal activities, the literacy rate should be increased. The education system needs to be improved to offer skill sets and employability among younger generation so that they are not forced to opt for paths which will lead not only destroy their own lives but, many along with them.

To encounter informal economy:

Now, this type of economy can be controlled by the following:

Motivating transaction through banking systems:

It is a good option if you look at it from the government perspective. Banking system will provide a transparency in all transactions, and hence, a fair account of the monetary flow could be managed. But, as said it should be motivated instead of forced. This has to be handled in a phased manner; people should be guided towards using banking system as a healthy alternative to the conventional transaction system, contributing indirect economic benefits such as employment.

Make real economy affordable:

In a country like India, estimates say that that informal economy is larger than formal economy. One of the serious consequences of informal economy is that it is difficult to quantify. Taking up effective measures such as Affordable tax rates would encourage business to have transparent account systems. The online transaction charges, excise duties and other indirect tax rates have to be revised.

Let people ask for bills:

The Individual can be offered tax exemptions for their expense made through online mode.

Reduce real estate registration fees:

The real estate registration fees and other duties have to be reduced to motivate buyers to transact through banks. The digitalization of real estate would reduce counter party risk, prevent fraudulent activity and remove benami from the system.

Are We Prepared For these Outcomes?

According to the recent developments, Prime Minister has taken up a Bold Move to combat parallel economy menace. But, there are however, few concerns over its consequences.

  1. This might be considered a great beginning for the executive authorities. But, in any case, post declaration of demonetization of monetary forms, with winning money mash over the bank part expresses the worries over the execution capacity.
  2. At the time when people favor the previous executive which was on the seat, different rating firm and financial specialist have expressed their concerns over the demonetization, which is not something to be trifled with. RBI ought to work more intimately with government however they ought to have autonomous choices as well, which are somewhat constrained by government. This may prompt to budgetary hazards in the long run.
  3. The current decision is undoubtedly positive from long term perspective, if it is executed properly, government will be in a much better position to stop circulation of black money.
  4. By any chance if the short term liquidity plan extended beyond a certain limit, it may trigger fundamental problems such as unemployment, lack of demand and currency weakness. This was the main concern which was held by various economists.
  5. The Long cue in front of ATMS and banks are expected to reduce in next few weeks. This would reduce the public inconveniences, but the large corporate and small informal business may take time to come back into action.


Find this article useful? kindly do share with friends and comment with the solutions to dealing with the menace of black money and parallel economy, your suggestions are valued and may bring end to the chaos we are currently facing in form of parallel economy.

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