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Economics notes for law students:Has Liberalization Curbed Black Money

Economics notes for law students: Has Liberalization Curbed Black Money

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Has Liberalization Curbed Black Money?



The new economic policies introduced a variety of concessions to capital. The black economy was sought to be curbed by legalizing certain activities but new opportunities seem to have opened up to generate black incomes. Quantitative restrictions on imports have been almost eliminated so that what was smuggling earlier has become importation. Tax concessions are being granted to retain national capital within the national economy and NRIs are being encouraged to bring in capital. A part of this is capital formerly taken out of the country.

These changes have converted part or undeclared profits of industry into declared profits accruing within the national economy. Corresponding black investments abroad would decline. However, the loss of foreign exchange has continued since the quantum of these legalized activities has grown.

Since tax rates have come down sharply and controls are less, some have argued that the size of the black economy would have declined. This is not borne out by a listing of the major scandals exposed in the national press between 1956 and 1996.

The black economy measured as a share of the white economy has not diminished and most likely grown even if some activities have gone out of its ambit. The large-scale expansion of the tertiary sector in spite of a reduction in the scale of operations of the Government is partly linked to increase in speculative activities which lend themselves to black income generation.


In spite of the decline of governmental regulation and reduction in tax rates, the increases in the scale and size of corruption, the newer opportunities to businesses, increase in speculative activities, and growth in the tertiary sector where the black economy is concentrated suggest that the black economy has continued to grow. Even the evidence that the buoyancy of direct tax has gone up is not evidence of better compliance but reflects a more skewed income distribution. The problems originating in the black economy prior to 1991 have, therefore, continued. These are compounded by the decline in the primary fiscal deficit of the public sector and the surge in imports and the decline in the true current account surplus of the external sector.

Internationalization of Indian capital occurred earlier through the black economy but now has gone a step further through the opening up of the Indian markets and the liberalization of terms and conditions for MNCs bringing in capital. However, the earlier internationalization of Indian capital was based on illegality and criminalization, so it did not help to become competitive and technologically self-sufficient. The result is, the Indian capital is not ready to face competition from the MNCs and can only act as their junior partner. Consequently, a big shake-out is taking place in the Indian capital markets. MNCs initially teamed up with Indian big businesses (junior partners) but have been jettisoning them in the last few years. Without bringing in much capital they have controlled Indian capital through their financial clout, technology, marketing, brand names, etc.

In brief, under the new economic policies, indications are that the size of the black economy has continued to grow in spite of the legalization of certain formerly illegal activities. This is due to the easing of the business environment and the availability of newer opportunities for not declaring profits. The pre-1991 trend of an increase in the share of profits through the black economy and internationalization of the economy has continued.

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