Estimates, by their very nature, are approximations and cannot claim any substantial level of accuracy. When it comes to the parallel or black economy, it is extremely difficult to provide even an estimate that is reliable — which is not surprising considering that cash transactions do not always leave a trail. There are several estimates of the black economy and the amount of unaccounted money stashed abroad. While many of them are believable, from a policy-making perspective it is important that the process and methodology of estimation are robust and credible. Therefore, when an agency such as the National Institute of Public Finance and Policy comes up with a report that pins the size of the parallel economy at 75 per cent of the GDP, we need to take serious notice. Bringing even a part of this into the system can work wonders for public finances. The NIPFP study has identified four major founts of black money. Three of them — property transactions, mining business and private education — choose themselves straightaway; the first two have traditionally been the base of the parallel economy, while the third is a recent addition after private university education took off. It is the fourth one — diversion from government subsidy schemes — which is the surprise package in the NIPFP report.
Diversion of subsidised kerosene to the open market is estimated to have generated as much as Rs.11,910 crore, which is half the kerosene subsidy provided last year. It is highly probable that there are similar leakages with other subsidies and social welfare schemes. The biggest source, though, remains real estate transactions, the unaccounted money from which is estimated to be as big as the Plan expenditure of the government. Though under-reporting has decreased after steps such as making income tax PAN mandatory for property deals, the fact is that cash transactions still reign supreme. The only way to plug this is by revising guideline values at frequent, regular intervals to reflect market prices. Guideline values are considerably lower than prevailing market prices, which encourages registrations at lower prices. The mining industry generates cash through under-invoicing of sales, under-reporting output, and inflating expenses. Checking this should not be difficult, but what is required is the will to do so. Taking a larger view, the government needs to review its taxation policies and tighten systems and processes. If the infrequent updating of guideline values and leakage of subsidies are failures of processes, the malpractices in the mining sector constitute a failure of governance. At some stage in the future, the government, through reform of its tax regime, will also have to encourage people and businesses to report their incomes truthfully.
