The Perils of Black Economy

By Smriti Joinwal

Jawaharlal Nehru had a vision for independent India. He wanted to raise the standards of living  and wanted to overcome all the hurdles that would have come in the way of economic growth of the nation. But today, as we enter 2014, and for a moment look behind, we see that the past few years were characterized by corruption, policy paralysis, economic slowdown and job losses which not only the government but even the common man would like to forget. If I had to choose a problem that required the maximum attention  in 2014 amidst all the other serious problems, it would be cash economy, in black, that lies comfortably outside the banking system. It not only hurts the backbone of the economy but also widens the gap between the rich and the poor. It keeps pushing us back in the dark times as it continues to thrive relentlessly.

Let’s see how it creates problems for a common investor. The economy distorts asset prices extremely, including gold. It attracts a high amount of cash which in turn raises its price. The common investor joins in as the prices increase slowly and steeply. The black economy worsens the situation. It imports gold, increasing the CAD. The cash economy extravagantly spends on expensive fuel guzzling cars and personal vehicles. This also increases the import bill for oil and hurts the country even more as petrol products are subsidised. The hawala operators use foreign exchange to buy gold and pay less than the market price for fuel to escape the burden of price hike.This distortion does not end here. Some amount of black money returns to India through disguised FII flows and makes the investors believe(wrongly though) that the global companies are taking interest in India. It flows without any basis in valuation and distorts liquidity and market prices. Thus the black economy pains the common man even more by denying money for important needs. Since a major part of the stashed wealth has moved into gold, real estate and consumption, the money for national-purposes is less. The money for boosting up supply in agriculture and industry has been lost in fulfilling the demands of the audacious rich. The govt has a deficit more often now. Capital markets are not able to channelize money into projects. Inflation, unemployment and inequality are still high. Thus all of this paints a gloomy scenario for the country in the years ahead until we all rise to protest and revolt against it.

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