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Mainstream, Vol XLVIII, No 36, August 28, 2010

Black Economy and the Nation’s Ills: Would Churchill Feel Justified?

Thursday 2 September 2010, by Arun Kumar

Another Independence day has come and gone with the usual reflections on the nation’s achievements and its ills. With the shadow of another round of ferocious protest/violence in Kashmir, the continuing Maoist movement (‘the biggest internal security threat’, according to the PM) and inflation troubling the common man and leading to a united Opposition onslaught in Parliament, the mood of the nation and the rulers was sombre. These are the biggest worries but the smaller ones are no less troublesome—Manipur, Telangana, Bellary, Aligarh and so on. The difficulties in the nation’s path of development seem to be growing and it appears to be tottering from crisis to crisis. The euphoria of the UPA-II coming to power last summer and the promise of stability with the Congress-I gaining seats in Parliament has dissipated quickly. The PM seems to be in a limbo, perhaps—as he has hinted—he is waiting for the prince to ascend the throne. Would future generations say that the ‘man twiddled while Delhi burnt’?

Major scams routinely grab the nation’s attention. Minor scams hardly draw public attention even though they affect the citizens daily, like exam paper leak, foodgrain rotting, police recruitment and so on. The major recent scams are: Commonwealth Games, illegal mining at Bellary, Satyam, Madhu Koda, charges against a former Chief Justice of India, ongoing impeach-ment proceedings against two High Court judges, the PF scam investigations against HC judges in UP, a Governor resigning due to charges of inappropriate sexual behaviour in Raj Bhavan, Medical Council of India fraud, Deemed Universities imbroglio, IPL manipulations, Sukna Land scam involving some of the seniormost Army officers and the allotment of 2G spectrum. The list is endless. Bofors and the Quattrochi affair are on the verge of being closed for obvious reasons and will make big headlines sometime soon. The Amit Shah case in Gujarat and the Madani case in Karnataka and Kerala are festering and can blow up any time. The cases against Laloo, Mulayam, Mayawati and other former Chief Ministers and Ministers are on the back-burner leading to charges of political misuse of the CBI. There is hardly an agency of the government that retains its credibility in the public eye.

Reports that papers pertaining to the Emergency are not traceable, the Home Minister’s admission that the Bhopal papers in the Anderson fiasco are missing, the severe indictment of Vedanta in the report of the N.C. Saxena Committee investigating the illegal mining in the Niyamagiri hills—all point to a system that has been so manipulated by the politicians and conniving crooked businessmen that it is collapsing under its own weight. Bhopal is a classic case of malicious (not benign) neglect of the suffering of the lakhs affected by the poisonous gas more than 25 years back and now the parliamentarians admit that they have been (criminally) remiss and must do something. The PM set up a GoM that is acting in haste to show the government is finally serious—but for how long? Till the next big issue blows up.

The sustainability of the path that the nation is on is increasingly in doubt. The corporate sector has increased its share in the national income so rapidly that less than 0.1 per cent of the population now earns more than the 50 per cent who depend on agriculture. India boasts of the largest number of the poor and also some of the richest people in the world. Such growing disparities between the rich and poor are promoted by the system which has put in place ‘growth at any cost’. This is also leading to large scale displacement of the poor due to the mega projects being set up indiscriminately—roads, airports, mines, steel factories, SEZs and so on. The people’s experience is that when they are displaced the vast majority of them only get menial jobs in these projects or migrate to the slums of the nearby cities to live in miserable conditions.

Some lucky ones near big cities who get large compensation for their land mostly blow it up and lose the only security they had known. The result is increasing social tensions, like in Aligarh and POSCO area. Rapid environmental degradation is another cost of the ‘growth at any cost’. This is resulting in rising health costs neutralising any increase in incomes of the poor people. Take the example of the train daily running from Bhatinda to the cancer hospitals 200 km away and called by the locals the ‘cancer special’. Promises to the people remain unkept because of growing policy failure and poor governance. Bihar seems to be suddenly in the news because of its rapid growth but the Opposition doubts the statistics which clever governments are able to manipulate. The growing black economy has a lot to do with all this.

Problems in J&K, the North-East, tribal areas and rural India are linked to growing corruption. In the case of J&K and the North-East, the common impression amongst the citizens is that the local leadership has been coopted through corruption and promise of power. The massive resources that poured into some of these States are siphoned out leading to huge inequity while development remains weak and there is disenchantment with the government. In the case of the Maoist affected rural and tribal areas, development has been seen to fail while the local businessmen, politicians and the executive have been found to fatten themselves (Madhu Koda is the latest example of this). The Centre is perceived to be insincere over long periods of time and has failed the local people repeatedly so that the issue has transcended from the economic to the political and the social. In J&K, the various lulls in protest are not utilised to improve matters because the leadership is incapable of a different vision. By the time the administration has caught its breath, the next round of strife starts, triggered by the next perceived attack on the dignity of the people and this is not difficult because so many things go wrong all the time. The idea of India is dented, the eight per cent rate of growth notwithstanding.

In India, everything that can go wrong does so and the leadership only fire-fights. Eighty children die in a school building fire in Nungambakkam in Tamil Nadu and there is little to reform; so children die in Delhi and then elsewhere. Women parade naked in Manipur in front of the Raj Bhavan to protest atrocities against them and we forget it. In a court in Maharashtra women get together and kill their tormentor not believing that they would get justice. Correctives are not put into place because we refuse to learn from our mistakes—there is resignation, so everything is ‘chalta hai’ and a ‘jugaad’. Innovation is defined in terms of how many rules can be bent, short-cuts taken and the system manipulated. With many fires burning simultaneously, the state is in a state of siege. It does not know whether to take care of J&K or corruption in CWG or inflation or Manipur or the Amit Shah case or oil spill off Mumbai and now the N.C. Saxena report which would put a spoke in the ‘growth-at-any-cost’ strategy. Without a long term view it reacts only when the issue threatens to go out of hand.

THE black economy is now about 50 per cent of the GDP or roughly Rs 30 lakh crores annually. Three per cent of Indians, the elites, get most of it and the rest are its victims either paying directly or indirectly for the greed of the rulers. While having to pay bribe for work or not receiving (or rotten) grains in PDS may be counted as direct costs, the indirect costs are due to policy failure. Schools and dispensaries not functioning as they should, projects poorly executed and delayed lead to indirect costs through slower development. The black economy results in both shortage of resources for develop-ment and ineffectiveness of the expenditures.

The black economy leads to waste. Many activities are like ‘digging holes and filling them’, that is, ‘activity without productivity’. Roads are repeatedly repaired because funds are siphoned out and the quality of construction is poor so that money for new roads is inadequate. As a result of unproductive investments and the impact on the nation’s meagre savings that are wasted, the country has been losing five per cent rate of growth since the seventies. It could have grown at eight per cent in the seventies, 10 per cent in the eighties and 13 per cent now if the black economy had not been so big. Thus, India could have been at more than $ 6000 per capita instead of the current $ 1000 and would have been a middle income country and not one of the poorest. We would not have had 77 per cent of the Indians (according to the 2003-04 NSS round) spending less than Rs 20 per person per day—an abysmal figure.

People in India face some of the most uncivilised conditions of living anywhere in the world. Lack of drainage, filth all around their houses and colonies, polluted drinking water even in taps, lack of toilets and routine power breakdowns are common. This is not due to shortage of resources. Resources are siphoned out on a huge scale by the elite rulers and businessmen through flight of capital to tax havens (77 of them) of which Switzerland is the best known. No firm estimates exist about how much capital has been lost in the last sixty years but it could be several trillion dollars including the interest it would have earned—more than ten times the nation’s foreign debt. A nation that is supposedly short of capital, exports it on a large scale. Not unlike what has happened in Latin America and Africa.

The massive scale of the black economy is feasible only if laws are systematically violated. We have got used to violating every single law —traffic lights, industrial regulation, environmental protection or Forest Acts. The black economy is the joint product of the public and private sectors, involving a ‘triad’ consisting of the businessmen, politicians and the executive (the bureaucrats, police and judiciary). Criminals have entered the triad as either businessmen or politicians, resulting in growing criminalisation in society. Legislatures are increasingly being filled by people with criminal cases against them. Our legislators now flaunt their ill-gotten wealth with designer clothes, fancy cars, expensive watches and so on. They seem to compete to outdo each other. There are exceptions but these are getting difficult to find because party tickets are not going to the honest but to those who can manipulate—the fixers are all over the corridors of power and no party is an exception.

The policy-makers, who should control the black economy, are not interested since they and their parties are its beneficiaries. Those in power, who are personally financially honest, have to look the other way to survive. Their honesty is only relative and in a systemic sense they too are dishonest. For a time, they lend credibility to a dishonest system. However, this does not last and the public becomes disenchanted and cynical over time. Their appeal to cleanse the system falls on deaf ears and people who are suffering stop responding to their calls believing them to be insincere.

The German Government bought a disc containing the names of people holding illegal bank accounts in Liechtenstein in 2007. They offered to share the disc for free with all the governments whose nationals’ names were in the disc. The governments of the US, UK, France immediately took the data and started prosecution but the Indian Government refused to accept it for two years—perhaps to enable the corrupt to escape. The US Government managed to force UBS, the biggest Swiss bank, to pay a fine of $ 750 million and reveal the names of about 5000 individuals having accounts with it. The French Government bought a disc containing the names of its nationals in another foreign bank and has initiated prosecution.

In India, more than forty committees and commissions have gone into the different aspects of the black economy and made thousands of recommendations. Hundreds of them have been implemented over time but the black economy continues its march. Controls like FERA, MRTP, small scale reservations and licensing have been diluted or eliminated. Direct Tax rates have been reduced drastically. Voluntary disclosure schemes have been tried repeatedly. But there is little dent on the black economy. The reason is that the black economy involves illegality and incomes from such activities cannot be declared however low the tax rates. It takes several years to set up the systems to make black incomes and once they are in place with the connivance of the triad, there is little threat; so making the extra buck becomes easy and there is no reason to dismantle it. The black economy becomes systematic and systemic and drives the nation towards ungovernability and dents the idea of India. Colonialists like Churchill said India cannot govern itself; our elites are bent on proving them correct.

Dr Arun Kumar is a Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. He can be contacted at e-mail:

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