New Delhi: Pegging India’s black economy at over ₹ 30 trillion or about 20% of the gross domestic product (GDP), a new report says it has been contracting gradually over the years but still remains bigger than the overall economic size of countries such as Thailand and Argentina.
Besides, a crackdown on black money has made the cost of capital costlier in the black economy with the lending rates having risen to as high as 34% from 24% a year ago, the report by Ambit Capital Research said.
The study said the crackdown has had some “unintended consequences" in the form of an increase in preference for cash in physical form and a notable decline in the usage of formal banking channels with record low deposit growth—which may keep the GDP growth rate flat this year.
It said the size of India’s black economy expanded rapidly over the 1970s and 1980s, but since then had been contracting at a gradual pace and is now estimated at around 20% of the country’s GDP.
The term black economy typically refers to the economic activities outside formal banking channels and include cash transactions in high-value assets such as gold and real estate.
“Given that India’s GDP in calender year 2016 is expected to be $2.3 trillion, the size of India’s black economy is about $460 billion (over ₹ 30 trillion), which is larger than the stated GDP of emerging markets like Thailand and Argentina," Ambit Capital Research said in a note.
A majority of this black money is locked up in physical assets such as real estate and gold, it added.
Physical savings instruments have been historically preferred to financial savings instruments in India because purchase of physical assets can be funded using black money, while the purchase of financial assets cannot be funded in such a manner due to a strong paper trail.
While official figures regarding the quantum of black money flowing into real estate sector are not available, experts suggest that more than 30% of India’s real estate sector is funded by black money.
The report said since the Narendra Modi government assumed power there has been a clear step-up in checks around gold transactions, and it has become increasingly difficult to park unaccounted cash in the form of jewellery or bullion.
Due to various measures taken by the government to tighten the noose around black money, there has been a clear drop in the prices of land and real estate and a decline in the appetite for gold, it said.
The crackdown has, however, also resulted in increase in the preference for cash in physical form and a notable decline in the usage of formal banking channels as evinced by the decline in bank deposits as well as usage of debit cards.
“The combination of heightened interest rates in the black economy as well as the lack of liquidity in the banking system has led to the weighted average cost of debt capital in India rising by 30 bps (basis point) over the last 12 months even as policy rates were cut by 100 bps," the report said. One basis point is one-hundredth of a percentage point.
“As banks are unwilling to lend to sub-investment grade creditors owing to their own NPA (non-performing asset) troubles, this credit demand has shifted entirely to informal channels of lending. This, in turn, has driven increase in lending rates in the black economy to as high as about 34% per annum as per our primary data sources (against about 24% a year ago)," the report said.