Black money has always being a contentious issue in India, with no reliable estimates regarding its exact size. Global Financial Integrity, a research and advocacy organization working to curtail illicit financial flows out of developing countries, has pegged the losses on account of illicit financial flows due to tax evasion, crime and corruption at $462 billion since 1947.
The opposition parties have often cited these figures during parliamentary debates on the issue, and the government has taken various steps to fight the menace. One of these measures is incorporating the controversial General Anti Avoidance Rule (GAAR) in the Direct Taxes Code Bill to deal with aggressive tax planning devices that circumvent tax laws.
Against this backdrop, it is worthwhile to take a look at how India compares to its peers in terms of the size of its black economy relative to the official economy.
Researchers Ceyhun Elgin and Oguz Oztunali from Bogazici University have recently constructed a novel unbalanced 161-country panel dataset over the period between 1950 and 2009, which contain estimates of shadow economies for each of these countries over this period.
They use a two-sector dynamic general equilibrium model, a new methodology, to estimate the size of the shadow economy in various countries. This is superior to existing methodologies as it is free from the statistical errors that riddle existing estimation models.
A look at chart prepared from the data reveals that India has fared better than most its BRICS peers in bringing down the relative size of its shadow economy. For instance, the estimate of shadow economy for India has fallen from 40.39% of official gross domestic product (GDP) in 1950 to 23.71% in 2008, whereas it has fallen from 63.86% to 37.5% for Brazil over the same time period. In the case of Russia, the shadow economy was 41.82% of GDP in 2008.
This clearly shows that India has done reasonably good job of reducing the size of its shadow economy as compared to its peers, but a look at China’s data suggests lot more needs to be achieved. The Chinese shadow economy fell from 34.06% in 1952 to 13.36% in 2008.