Black Economy

By : Neha Dhyani

Updated : Mar 29, 2022, 4:52

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

Does this pique your interest? We will help you unravel the meaning of the Black Economy through this article. Read on to understand the Black Economy and its impact on Indian society.

Black Economy Meaning

Black Economy means an informal economy. It is also known as a parallel economy. Businesses operating in this economy don't follow the rules and regulations stipulated by the government. Even the income generated in this economy doesn't get reported to government tax authorities. In other words, the Black Economy comprises the concept of black money. Since the money involved in the Black Economy isn't recorded under official economic statistics, it is quite tough to estimate it.

Let's consider an example. 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 bring this incident under the umbrella of the Black Economy.

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Types of Black Economy

The Black Economy can be divided into four main categories, such as:

Illegal Economy: This category includes income earned through those economic activities that violate government rules. Kidnapping for extortion and selling drugs are two examples of the illegal economy.

Informal Economy: In this category, those economic activities are included that evade the costs and don't receive the rights and benefits provided by government administrative rules. Engaging someone as a household helper falls under the bracket of the informal economy.

Unrecorded Economy: When it comes to an unrecorded economy, it 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 the economy.

Impact of Black Economy on Indian Society

Establishing a parallel economy and generating black income can have far-reaching effects on the socio-economic condition of a country. Some of the major impacts of the Black Economy on Indian society 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.
  • 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.

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FAQs on Black Economy

Q.1. Which country has the highest Black Economy?

The highest Black Money ones are Zimbabwe with 60.6 percent, and Bolivia with 62.3 percent of GDP.

Q.2. What is the estimated size of the Black Economy in India?

As of 2017, the estimated size of the Black Economy in India was considered to be about 14% of the country's official GDP.

Q.3. What factors contribute to the reduction of the Black Economy in India?

The reduction of India's Black Economy has resulted from various economic reforms, such as taxation policies, regulations, and industrial licensing.

Q.4. What is the preferred transaction route in the Black Economy?

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