April 20, 2003

In his book The Black Economy in India, economist Arun Kumar makes a disclosure that has a familiar ring. He notes that the black economy in India is believed to have grown from just about three per cent of the GDP in the in mid-fifties to a striking 40 per cent in the mid-nineties.

Although the book is about India, it holds equally true of the subcontinent. Corruption has come to stay as a way of life. ‘The triad’ of businessmen, politicians and bureaucrats has collaborated to make it systemic instead of sporadic. That has led to the erosion of democratic institutions and the peoples’ faith in the system. The softening of public pressure has emboldened the corrupt, and as a result the black economy has spiralled.

In India a major reason cited by Arun Kumar for the failure of the New Economic Policy (NEP) — being pursued by successive governments since 1991 — stem from the fact that it totally ignores the implications of economic activities which have no legal sanction.

The author has made a convincing case to show why a major shift in base policies is necessary to contain the growth of the black economy in India. But while doing so, he concedes that the solution to the problem is neither purely economic nor technical in character. Kumar seems to settle for nothing less than structural remedial measures which he thinks are needed to deal effectively with the menace.

The situation has come to such a pass that the ordinary citizen not only ends up paying a higher price for goods and services due to corruption, poor quality or a black premium, he also has to endure harassment, humiliations, and delays.

In this highly readable book, the author looks at various dimensions of an issue, which we, on this side of the border, can very well relate to. According to him a tiny minority of about three per cent of India’s population continues to accumulate wealth in a way that is almost impossible to do through legal means. The remaining 97 per cent suffers and pays the price of corruption of that tiny minority.

Kumar has attempted “to build a judgment to work out solutions to a problem that has acquired frightening dimensions”. Defining a black economy, he says it is not an abstract entity but pervades all key institutions and activities in business, the police, the income tax department, real estate, hawala, gold market, the financial market and the public sector. Even a thorough analysis of these sectors barely exposes the tip of the iceberg. Besides, corruption in one sector does operate in isolation. It is like a common thread running through all areas of public and private life which are now a part of the system. They generate income that is not accounted for in the books of accounts.

Relying on data from a variety of official and independent sources, Kumar calculates the size of the underground economy in India to have grown rapidly from just about three per cent of the GDP in the mid-fifties to seven per cent by the end-sixties. By the year 1980-81, it had taken a quantum jump to 20 per cent, rising further to 35 per cent by 90-91 and reaching 40 per cent by 1995-96. Moreover, Arun Kumar has shown with some convincing evidence that the phenomenon has added to the disparity of income between the top three per cent and bottom 40 per cent of the population. In 1995-96 the ratio between them may have been as much as 1:57.

In the white economy alone it worked out to be 1:11.5. Given its formidable size, Kumar concludes: “It is little wonder that the citizen’s life is affected by the black economy at every step. Whether it is the education of a child for which a capitation fee has to be paid, or a visit to a doctor who follows unethical practices to make an extra buck, or the courts where various kinds of malpractices prevail, or the police which extorts money for cases, or the electricity, water and telephone departments which harass the citizen to make a fast buck, the list is endless”.

Kumar does not leave the readers to draw their own conclusions on how such wholesale corruption influences society. The negative impact of the black economy on macro variables is critical because it changes the pattern of the circular flow of incomes and masks what is happening.

In this phenomenon, there is a close link between the businessmen, politicians and the bureaucrats. The businessmen interested in making additional profits shares a part of them with the politician and the bureaucrat for allowing the malpractice.

The black economy leads to policy failure both because of inadequate allocations and due to ineffectiveness of expenditures”. Besides, as Kumar rightly observes, “the institution of democracy, legislatures, learning centres, judiciary, bureaucracy, police and media, are all compromised due to the functioning of the black economy. They are not doing what they should be doing and people’s faith in democracy has been eroded. Issues in elections have ceased to matter, devaluing the electoral process. As people’s pressure has declined, illegality has grown. The involvement of the country’s elite in illegality has eroded their commitment to work and this pervades society. Criminalization, waste and sub-optimality have penetrated deep into Indian society”.

The striking feature of Arun Kumar’s thesis is his abundant hope in the future. Despite gigantic dimensions of the problem, the author argues that remedy is possible. He places immense trust in the people. He believes that there is a popular yearning for a movement to resist temptations and to force top three per cent of the unjustly wealthy to mend their ways. But he concedes that this calls for a struggle to establish the rule of law.

Arun Kumar’s analysis is intelligent and his style is simple and devoid of cliched terminology. One, however, feels that the solution he offers is too simplistic. To place the responsibility of ending economic corruption on the people is to underestimate the power of the vested interests. The people’s attitude can help in the long run. But initially it is the government which will have to take the lead. The writer could have served a better purpose by identifying specific measures that need to be taken to make a beginning in the right direction.

The Black Economy in India
By Arun Kumar
Penguin Books
For more information log on to www.penguinbooksindia.com
ISBN 0-14-302867-7
354pp. Indian Rs295

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