Estimation of the size of the Black Economy in India, 1996-2012

As we confuse terms like Black money,Black income, Black wealth and so on, time to read some experts.

Prof Arun Kumar of JNU has a paper looking at size of black economy in 1996-2012:

This article attempts to make an advance in the estimation of the size of the black economy in India by bringing in the institutional aspects of black income generation and taking the macroeconomic variables they affect into consideration. It is not a one-point study, as earlier studies based on the fiscal approach have been. Unlike studies based on the monetarist approach, the fiscal approach recognises that black incomes are generated through many different ways in different sectors of the economy. Hence, the size of the black economy in India is projected on the basis of data on the share of the services sector and trade in GDP and the crime rate representing the extent of illegality.

Finally, after 1995–96, estimates based on the fi scal approach are not available, and this article therefore estimates the size beyond that year. The analysis points to two major difficulties in estimating the size of the black economy. First, the lack of official studies that can provide additional data points. Second, the lack of proper econometric techniques to incorporate the missing or mis-specified variables required to carry out the estimation. All the offi cial data series are in error due to the existence of the black economy, and all the studies using such official data suffer from this.

Given the many limitations concerning data mentioned, the relative size of the black economy in 2012 turns out to be 62.02% of the GDP. The average rate of growth of the black economy in the five-year period up to 2012 was about 20%. Clearly, since projections have been made from 1996 onwards, the further out in time one goes, the larger is the likely error in the estimate. New methods of estimation of the size of the black economy are needed, and this article has made one such attempt.

The paper is an extension of earlier interviews of Prof Arun Kumar (one and two) who pointed who this demonetisation exercise will hardly achieve much. It will just be increased trouble for the poor and marginal..

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