Black Economy [UPSC Important Topics]

By : Neha Dhyani

Updated : May 22, 2023, 10:31

Black Economy refers to all economic activities outside the purview of the government laws and regulations related to commerce. A major part of this economy involves illegal activities that generate black income. Interestingly, the black economy also includes legal activities. The web of this economy exists everywhere, right from third-world countries to first-world nations.

Transactions made in this economy often evade taxes and government regulations. In this article, we have shared the meaning of the Black Economy as well as its causes and impact on Indian society.

Black Economy Meaning

Black Economy means an informal economy. Businesses operating in this economy do not follow the rules and regulations stipulated by the government. Even the income generated in this economy doesn't get reported to government tax authorities. The black economy is also known as the parallel economy.

  • This economy comprises the concept of black money which is earned by trading contraband or other illegal items.
  • Since the money involved in the black economy isn't recorded under official economic statistics, it is quite tough to estimate it.

Example of Black Economy

  • Suppose a cook at a small eatery is paid under the table for his services.
  • This means he won't be accountable for paying taxes to the government.
  • Further, his employer will also not bear the liability of paying tax on his income.
  • Here, running the eatery is a legal business, but the evading of taxes brings this incident under the umbrella of the black economy.

Types of Black Economy

The black economy is prevalent in many different parts of the world. Since they are illegal, these economies often come in different forms. There are many different types of black economies, some of which are shared below.

Illegal Economy

  • This category includes income earned through those economic activities that violate government rules.
  • The illegal black economy also includes all illegal trades such as selling contraband, etc.
  • Kidnapping for extortion and selling drugs are two examples of the illegal economy.

Informal Economy

  • This category of the black economy includes economic activities that evade taxes and don't receive the rights and benefits provided by government administrative rules.
  • The main aim of this type of black economy is to gain financial benefits by engaging in an unregulated sector.
  • Engaging someone as a household helper falls under the bracket of the informal economy.

Unrecorded Economy

  • This type of black economy includes economic activities that dodge the government rules defining the reporting needs.
  • An example of an unrecorded economy is the wilful concealing of information regardless of whether the reason is legitimate or illegitimate.

Unreported Economy

  • In the case of an unreported economy, those activities are covered that don't heed the government's fiscal rules or tax code.
  • Private transactions that are not taxed come under this category of black economy.

Causes of Black Economy

Black economy continues to be a growing concern in all parts of the world. All the trade conducted under this economy remains hidden from government authorities. There can be many causes behind the development of the black economy, some of which are shared here.

  • Corruption: People who are corrupt earn money in black. People in positions of power often receive financial favors under the table, contributing to the illegal growth of the black economy.
  • Financial Benefits: Earning money in black means tax avoidance. While this can save the individual a lot of money, it is bad for the nation’s economy. Moreover, in the black economy, an individual escape their responsibility towards contributing to society through taxes.
  • Regulations: Sometimes, people engage in black transactions to simply avoid following rules and regulations.

Black Economy in India

Establishing a black economy and generating black income can have far-reaching effects on the socioeconomic condition of a country. In India, the parallel economy is huge with millions of people engaging in black transactions regularly. The black economy continues to impact the economy of the nation negatively and is a serious cause of concern.

Impact of Black Economy in India

Some of the major impacts of the black economy in India are as follows.

  • Black income has been impacting the GDP of India on a substantial scale. This is because a huge amount is routed to this unaccounted sector that feeds the growth of a parallel economy in India.
  • Due to tax evasion in the black economy, the state exchequer faces huge revenue loss.
  • Black money has led to investing resources in real estate, including luxury houses.
  • Since one part of the black economy operates in cash, it ensures abundant liquidity.
  • Capitalists and business people with access to black income have a huge amount of money at their disposal.
  • Generating black money has caused the establishment of covert channels and transferring funds to other countries.
  • In the black economy, money earned by evading tax is often spent in an undesirable way. Principles of honesty and hard work are underestimated.

Thus, the existence of the black economy can disrupt the economic progress of the country.

The black economy can disrupt the smooth functioning of the financial system in the country. It can have a huge negative impact on the well-being of society. Thus, it becomes important to stay away from the black economy and abide by government regulations while conducting any economic activity.

Important Current Affairs Topics

List of MLA in MeghalayaList of MLA in Goa
National Statistics DayUnited Nations Public Service Day
World Blood Donor DayInternational Olympic Day
Father’s DayWorld Day Against Child Labor
Global Wind DayWorld Elder Abuse Awareness Day

FAQs on Black Economy

Q1. What is the black economy?

Black economy refers to an informal economy established by making illegal transactions that do not follow government regulations. Black economy exists in various parts of the world, including India. The main aim of this economy is to trade contraband and evade taxes.

Q2. Which country has the highest black economy?

The country with the highest black economy is Bolivia, with 62.3 percent of the total GDP being black transactions. After Bolivia, Zimbabwe has the second-highest black economy, with 60.6 percent of all GDP being black.

Q3. What is the size of the black economy in India?

According to a 2017 report, the estimated size of the black economy in India was about 14% of the country's official GDP. The black economy in India is huge, with many people across posts involved in black trade or corruption.

Q4. What are the types of black economy?

Black economy comes in various forms and sizes. There are four main types of black economy, which are listed below.

  • Illegal economy
  • Informal economy
  • Unreported economy
  • Unrecorded economy

Q5. What are the causes of black economy?

There can be many different causes of the black economy. Mostly, people resort to making transactions in black to avoid tax payments or follow rules and regulations. Another reason of the black economy is trading contraband and other illegal items.

Q6. What factors contribute to the reduction of black economy in India?

The reduction of India's black economy has resulted from various economic reforms. Some factors contributing to the reduction of the black economy in India are strict taxation policies, regulations, industrial licensing, etc.

Q7. What is the preferred transaction route in black economy?

Traditionally, cash has been the chosen method of transaction in black economy as it leaves behind no footprint. At present, cryptocurrencies are gaining popularity as a method of black transactions.