There are lies, damned lies and statistics - Mark Twain

Do numbers really tell the truth ?

Vol. III, No. 29 ,24th July 2015

Indias current growth rate of GDP is reported to be 7.5 percent in the first quarter of 2015. The finance Minister in his presentation of budget
2015 said that Indias gross domestic product (GDP) in the fiscal year 2015-16 is expected to grow 8 and 8.5 percent. According to a
Harvard study, India is projected to achieve highest annual GDP growth rate of 7.9 per cent over next 8 years. Are we actually growing at 8
percent? These figures constitute the reported value of goods and services
produced in a country in a particular year. What about the flow of money
which is unnoticed and unreported which constitute what economists call
shadow economy or underground economy?
Underground Economy: It constitutes markets where legal or illegal
goods and services are purchased and sold in illegal way. Adam Smith
defines underground economy as market based production of goods and
services whether legal or illegal, that escapes the detection in official

estimates of GDP. According to the World Bank researchers paper
Shadow economy included all market-based legal production of goods
and services that are deliberately concealed from public authorities to avoid payment of income, value-added or other taxes or to avoid
payment of social security contributions or having to meet certain legal labour market standards, such as minimum wages, maximum working
hours, safety standards and to avoid complying with certain administrative procedures, such as completing statistical questionnaires or other
administrative forms.
Causes: - The major driving forces behind growth of shadow economies have been high tax rates, strict regulations and restrictive labour
laws. It has been observed that the countries having strict rules and regulations have larger shadow economies. Wage rates also play an
important role. People opt for second job for under the table payment when the present job is not paying them enough. More and more
people opting for cash based payment jobs show the dismal picture of job markets in economies where large underground economies have
been emerged. Weak governance is another major factor behind emergence and growth of underground economies. Weak governance leads
to problems like corruption bribery and emergence of black markets. According to report by Global Financial Integrity (GFI) India is among the
top 10 developing countries in the world with black money outflow of $1.6 billion (Rs 8720 crore ) in 2010. The cumulative value of illicit
assets held by Indians during same period is estimated to be $ 487 billion. A selected group of economists opined that at some instances this
shadow economy and under the table flow of money is boosting the growth of economies particularly in poor and underdeveloped countries
where large portion of capital flow in through informal activities. Due to weak governance and institutional framework there is larger scope for
growth of underground economy which in a way helping the economy to grow at faster pace and contributing to the global growth. On the
other hand adverse impact of underground economy is less reported income in the books and less tax paid to the government, which puts
burden on people to pay those taxes thus leaving fewer people richer. The vicious circle of imposing higher taxes, which leads growth of
shadow economy and low tax rates resulting in lower revenues, continues.
There has been a lot of debate on eradicating shadow economy. One alternative is to do nothing another is to improve detection and penalty
cost of illegal activities and third one is to legitimatize the shadow economy activities. On one-hand shadow economy activities put tax burden
on tax payers failure and public policies on the other hand it gives boost to the economic growth as well. The challenge is to striking the
optimum balance, which leads to comprehensive growth. It is under the table current that makes the table float, but the real question is where
to draw the line.

Written by: - Dr. Taminder Kaur, Finance Faculty,CBS

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