“I am very clear on this…black money should not be generated. Economic experts say the magnitude of the global economic crisis at times is not felt in India because of strong (parallel) economy of black money," said Akhilesh Yadav, chief minister of Uttar Pradesh on 15 November. Given the lack of transparency in funding of political parties and myriad corruption and disproportionate asset cases which are going on against several politicians in India, it could be tempting to dismiss Yadav’s statement as an apology or even defence for those who have unaccounted income or black money, as it is popularly called in the country.

Polemics aside, the economics behind such assertions is worth examining. The country’s old GDP series numbers show that post-reform India achieved its highest growth phase during the UPA regime, and barring 2008-09, the momentum was not disrupted even during the global economic crisis.

However, the growth did start coming down from 2011-12 onwards. Along with global factors, policy paralysis during the UPA-II is often cited as a major reason for the headwinds that engulfed the Indian economy. While the then opposition held the Congress leadership as being responsible for the policy paralysis, economists have tried to look for deeper political economy reasons.

In a 2015 article published in the Ideas for India website, University of Manchester economist Kunal Sen attributed the policy paralysis as an outcome of a culture of “closed-order deals" between politicians and business groups, especially in sectors such as natural resource extraction and infrastructure at a substantial loss to the exchequer. Another paper by Maitreesh Ghatak, Parikshit Ghosh and Ashok Kotwal, economists at London School of Economics, Delhi School of Economics and University of British Columbia, highlighted the spurt in infrastructure boom during the UPA years. With public sector investment by and large constant, private spending in infrastructure went up significantly, showed Planning Commission data cited by the authors.

Two of biggest UPA scams are coalgate (natural resources) and 2G spectrum (infrastructure). Once these wrongdoings were exposed, there was considerable chaos and even genuine decisions got stalled for fear of persecution by investigative agencies. Once the paralysis set in, it was not just companies and politicians who suffered, but also the larger economy.

Just before the 2014 general elections, the Economist wrote, “India needs its private sector to build roads, factories and cities. But the relationship between companies and the state is broken. Corruption produces bad decisions; concern over corruption produces indecision. Graft does not function, as some claim that it does elsewhere, as an unseemly but expedient market solution to inert bureaucracy, greasing the seized-up wheels of industry. It has put grit in those wheels. Loans to industries with graft problems have infected the largely state-run banking system; at least a tenth of its loans are sour. Inept cronies have messed up vital road and power projects. Mines and other assets lie idle as courts dither over how crooked their owners are."

The argument is supported by the performance of an index of stock prices of 75 politically-connected companies maintained by Ambit Research.

These stocks were booming in the first couple of years after the economic crisis and plummeted at a much faster rate in comparison to the BSE 500 Sensex subsequently, which underlines their business’s vulnerability to corruption exposes.

In addition to the growth rate figures, questions can also be raised on the role of corruption and subsequent generation of black incomes that led to the massive pile up of bad loans in India’s banking system. In a 2013 article in the Economic and Political Weekly (EPW) R. Nagraj, professor of economics at the Indira Gandhi Institute of Development Research, had described this phenomenon in the following words, “Corporate sector delinquencies, in turn, are raising the banking sector’s non-performing assets, adversely affecting its profitability, and reducing its lending potential".

Another July 2016 EPW paper by Sumit K. Majumdar at the University of Texas, Dallas, pointed towards the role of collusion in pile up of bad debts in India’s banking industry. “A further collusion hypothesis suggests that there could have been franchise bidding by top bankers to land the top jobs in India’s banks. There might have been a quid pro quo between bankers, their appointing authorities in government, and banks’ large corporate customers such that businesses would support the process of appointment of certain bankers to senior positions.These senior bankers would provide the unworthy customers large amounts as loans. These loans would have been provided in the full knowledge that they would go bad and add to the banks’ bad debts. Hence, interest rates would hardly matter as, irrespective of such rates, certain firms would be lent vast sums of money that would not be eventually recovered," the paper says.

One more argument could be made in defence of the black money helps economic growth argument. Black money is known to play a major role in sectors such as real estate. It could be argued that a clampdown on black incomes would lead to reduced activity in the sector and hence adversely affect employment generation in the construction sector, which has been a major employment generation sector in recent times. There could be some element of truth in the claim. One statistic could be cited to counter such claims. Despite high economic growth, India’s tax:GDP ratio has not shown a commensurate increase and, in fact, has become more regressive due to a rise in share of indirect taxes. This acts as a double whammy on growth.

One, black money means a substantial loss in revenue for the government, which could be used for augmenting economic growth. Two, attempts to meet this shortfall by resorting to raise more indirect taxes leads to a higher incidence of tax on the poor and consequently erodes mass demand.

The short point is, black money at best can act as a steroid which gives temporary boost to economic growth. Prolonged dependence on it can leave damaging effects on a nation and its people.