Introduction
While measuring black money completely eludes economists to this day, there have been a few methods that have been developed to approximate the extent of black income in an economy. In this article, three prominent methods of black income determination are discussed.
The Input-Output Method
This approach is based on the widely acknowledged aphorism that “nothing comes from nothing”. To create an output, there must be an input. The technology that is available determines the output that is produced from a given input. Each input has a unique input-to-output ratio that is technologically specified. The output can be predicted if the input-output ratio for one of the inputs is known. An estimate of the output can be derived from the inputs that were used in the process. This method compares this estimate of the output to the actual declared output in the national accounts. Any difference between the two is considered to be output creation that is generated through black economic activities.
The Monetarist Method
This significant technique is similar to the input-output approach. The premise is that all transactions in a contemporary economy need payment in some form. Each year, money is exchanged from transaction to transaction numerous times. People may hang onto their money and not spend it when they are unsure, which can cause the velocity of money to fluctuate. Money minted only by the Reserve Bank of India (RBI) flows through banking channels and contributes to the money supply in the economy (although some counterfeit money also exists). The RBI has detailed documentation on this. As a result, the input is known, and the output-input ratio is the velocity of circulation.
Together, the two should produce an estimate of the real total income produced by the economy. Both black and white transactions depend on money to distribute earnings. It is assumed that since white earnings are known, it should be feasible to determine the amount of money required to circulate these incomes. The extra money in the economy—the difference between these two amounts in circulation—can be assumed to represent the black earnings. The amount of the black economy would then be determined by multiplying this number by the velocity of circulation.
The Fiscal Approach Method
Kaldor, in 1956, first measured black money using the fiscal approach. This approach assumes that given that wages and salaries are essentially part of the white economy, these cannot be used to engage in black market transactions. Therefore, he obtained the total non-salary income by subtracting wages and salaries from the net domestic product. To determine the total non-salary earnings assessed to tax, an approximation of the actual non-salary income taxed was developed for each sector. The difference between the projected non-salary income and the actual non-salary income that is subject to tax is calculated as the amount of black income in the country.
Historical Estimates of Black Income in India
With a few adjustments, the Direct Taxes Enquiry Committee (Wanchoo Committee) used Kaldor's fiscal approach. The Wanchoo Committee determined that, after making preliminary adjustments for exclusions and deductions, the projected income on which tax has been avoided (black income) would likely be Rs 700 crore and Rs 1000 crore for the years 1961–1962 and 1965–1966, respectively. The amount on which tax was avoided for 1968–1969 was projected to be Rs. 1800 crore based on the percentage rise in national income from 1961–1962 to 1968–1969.
Under the direction of Dr. S. Acharya, NIPFP carried out an elaborate study to estimate black money in 1985. The research defined "black" money as the total of taxable incomes that were not disclosed to the appropriate tax authorities. For clarity's sake, the report provided a broader definition of "black" income and referred to it as "unaccounted income." Because there was insufficient data available, the NIPFP research used "the least estimate technique." It utilised a degree of under-declaration that could be reliably considered as the least in the relevant sector since it was unable to determine the most likely level of under-declaration or leakage. The study used a range of underestimations rather than just one in a few instances.
S.B. Gupta updated the NIPFP estimate, however, he left the errors in the NIPFP estimates alone. By eliminating the items that constituted double counting in S.B. Gupta's estimate and addressing the bias in the NIPFP estimate, Sonali Basu recalculated these numbers in 1996. The estimated amount of the black economy for 1980–81 comes out to be roughly 25% of GDP if capital gains are also left out. The actual number for 1987–88, the final year for which Gupta provided an estimate (51%), is closer to 30%. A reasonable estimate of the extent of the black economy, which includes illegal operations, may be estimated to represent roughly 40% of the white economy in 1995.
The Problem of Estimating Black Money in the economy
The studies mentioned above for determining the amount of black money in the economy used various methodologies and have faced criticism for their varied approximations and inconsistent assumptions. Moreover, even for the same year, they arrived at various black money estimates.
It is incredibly challenging to measure black money because of its very definition. How can the government gauge something that is purposefully being hidden? Furthermore, there are no precise, widely-accepted methodologies for making such an estimation, nor are there any trustworthy estimations of the production or accumulation of black money. There also exists a lack of uniformity in any of the postulates assumed by the numerous methods concerned with assessing the black economy.
The Standing Committee on Finance released a report in 2019, in which it concluded that there was no veritable method to quantify black money, whether in India or abroad, after consulting three leading think tanks and conducting numerous analyses using various methods. The Committee's calculations of the economy's black money range from 7% to 120% of India's GDP, demonstrating the huge variation in the approaches for estimation.
It is important to acknowledge the need for more accurate estimates of the amount of black money present both within and outside of the nation, figures that have been reached after thorough investigation. This is required to avoid irrational speculation and to assist in formulating better and more effective policies.
Twinkle Adhikari
