The Shadow Economy and 'petty corruption' end up doing a lot of good. Why stop it?

“Kaushik Basu, the chief economist of the World Bank and former chief economic adviser to the Indian government, says the nation’s tradition of petty corruption helped India avoid the worst of the banking crisis that has crippled most other large economies in the last few years.”(1)

Several eminent economists have over the years argued that the robustness of the Indian economy exists substantially due to a lot of money not being a part of the system. This also is attributable to the fact that a substantial portion of savings in Indian households exists in saving accounts and cash, and not as investments in securities or bonds.

The government has over the last two years brought in several measures to reduce the flow of physical money in our economy, trying instead to make it cashless with increasing reliance on credit and debit cards, and other forms of electronic transfers.  The limit on cash transactions without PAN, the 50,000/- cash deposit limit in accounts, and the like. The 2016 budget also brought in a 1% excise tax on jewellery, aimed at bringing in more transparency to a sector widely considered to be a hotbed of large scale cash transactions, second only to real estate.

The effect of the measures listed above is sluggishness in consumer spending in b2c markets, a slump in real estate, a drastic reduction in consumer spending on jewellery (even before the 1% excise tax), and a slowdown in the economy in real terms (the FM and the government have been talking about the 7% growth rate-the figure is potentially misleading due to a change in the base year of calculation).

The question is–if this shadow economy, so to speak, actually buoys consumer spending, provides a safety net in times of global crises, and even is the reason behind rise in real estate and demand in commodities, why all the effort to stop it?

The two fold argument to answer that question is one, corruption is the sum and substance of this ‘black money’, and second it is either the cause or consequence of substantial tax evasion.

To begin with, corruption makes this country function. In the labyrinth of an infamously inefficient bureaucracy, archaic laws, and inefficient legislature, the personal interest of officers is what makes progress. The officers of the Indian government only have an incentive to take additional risk to move files when they are duly compensated for it. It may be their job in the first place, but why would a regular John want to stick his neck out for anything other than self gratification?

Secondly, most small scale tax evaders argue that they don’t like to pay tax since they feel that the money paid will in any case be misappropriated by the government to a very large extent. Moreover, the government charges for electricity but every house needs an inverter/generator; the government charges for water but every house needs a boring/storage tank; the government charges for gas and utilities but a substantial portion of the cylinders bought are in the black market; the government charges for law and order but most businesses and community accommodation have their own security provisions; the government charges for public transportation but its hard to commute without your own vehicle. Even the social schemes launched only have a trickle down effect on the target base. In light of this sordid state of affairs, with what authority can the government force us to pay taxes, and moreover what argument can it present to those unwilling to do so? In fact, doesn’t levying taxes also reduce the level of happiness among the populace?

Perhaps the solution lies in allowing this shadow economy to exist and run concurrently with the white economy. What if an abolition or reduction in direct taxation and a progressive taxation on goods and services is the way forward to meet a balance?


(1) How ‘black money’ saved the Indian economy (BBC India)

Siddhant Kohli is currently a third year student of law looking to further a career in International litigation. He is interested in travelling, reading, and golf. 

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The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.