Parallel economy

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Parallel economy
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Parallel economy means the functioning of an unsanctioned sector in the economy whose objectives run parallel, rather in contradiction with the avowed social objectives. It is variously referred to as black economy, unaccounted economy, illegal economy, subterranean economy, or unsanctioned economy. The term parallel economy emphasises a confrontation between the objectives of the legitimate and illegitimate sectors[1].

The existence of a parallel economy or black money makes the monetary policies less effective. Parallel economy, based on the black money or unaccounted money, causes high circulation of money in the market and thus causes inflation[2].

Activities of the parallel economy

The popularity of the parallel economy is no surprise, considering the low initial role of legitimate private enterprise, coupled with a high degree of liberalisation, and hindered by the lack of macro-stability in the absence of a sufficiently developed legal framework. The parallel economy may be informal; internal; covert; or fictitious[3]:

Category Examples
Informal Economic Activity (with business transaction) Barter, street vending, unrecorded cash sales
Internal Economic Activity (with no business transactions) Subsistence agriculture, hunting, fishing
Covert Economic Activity (with illegal business transaction) Smuggling, trade in illegal drugs
Fictitious Economic Activity Foreign devil company

Impact of black income on the economic and social System

The creation of a parallel economy, as a consequence of the growing proliferation of black money in every sector of the economy, has a very serious and, in a number of ways, pernicious influences on the working of the Indian economy[4].:

  • First of all, the direct effect of black income is the loss of revenue to the state exchequer as a consequence of tax evasion, both from direct and indirect taxes. Moreover, tax evasion does not include loss of revenue resulting from unreported production or illegal economic activity.
  • Secondly, the availability of black income with businessmen and capitalists and the consequent inequalities of income place a large amount of funds at their disposal. As a result, the consumption pattern is tilted in favour of the rich and the elite classes, at the cost of encouraging the production of articles of mass consumption.
  • Thirdly, black money encourages investment n precious stones, jewellery, bullion, and so on. This has an adverse effect on growth via its demonstration effect.
  • Fourthly, black money has encouraged diversion of resources in the purchase of real estate and investment in luxury housing. There is large-scale under-valuation of property and, in this way, lots of black money is made white.

Footnotes

  1. S. Shaikh 2006, p.184
  2. D. Experts 2018, p.49
  3. L.P. Dana 2002, p.16
  4. S. Shaikh 2010, p.377-378

References

Author: Natalia Hajduk