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Black Economy, Underestimation of Unemployment and Budget 2005-06

This paper analyses the effects of the black economy on the estimation of employment in order to throw light on the true extent of unemployment in the economy. This is done through an analytical presentation of the issues involved. The paper also analyses the union budget 2005-06 to see whether the steps proposed are adequate to deal with the problem.

Black Economy, Underestimation of Unemployment and Budget 2005-06

This paper analyses the effects of the black economy on the estimation of employment in order to throw light on the true extent of unemployment in the economy. This is done through an analytical presentation of the issues involved. The paper also analyses the union budget 2005-06 to see whether the steps proposed are adequate to deal with the problem.

ARUN KUMAR

T
he Economic Survey 2005-06 has admitted that unemployment has doubled in the last few years. The economy is witnessing a healthy rate of growth of around 7 per cent per annum over the last three years but the unemployment problem is not getting addressed. First, growth is concentrated in the non-poor areas and sectors [Kumar 2006]. Second, even though the investment-GDP ratio in the economy has gone up, given rising capital intensity [Kumar 2003] this is not resulting in adequate employment generation [ILO 2003], which some characterise evocatively as jobless growth. Employment is being generated but far less than required by either those currently entering the job market or to clear the backlog.

However, there is a puzzle here. The black economy in India has grown from 4 per cent of GDP in 1955-56 [Kaldor 1956] to 40 per cent in 1995-96 [Kumar 1999], and by all indications, it is continuing to grow. The rising share of the services sector in the economy and growth of the financial sector result in a rise in the size of the black economy. Further, since the estimate referred to, unlike many others, is based on measuring only factor incomes not reported to the direct tax authorities, it implies that value addition in the economy is substantially higher than officially recorded. If so, would it not imply that there must also be some additional employment generation that may not be getting captured in the data? If so, are we overestimating unemployment?

If unemployment is less then why is there growing disaffection amongst the youth? The black economy suggests another answer, even if unemployment declines, rising disparities due to the growth of the black economy can lead to disaffection. In Kumar (1999) it has been argued that the black economy is concentrated in the hands of at best 3 per cent of the population so that the disparity (between these people and the bottom 40 per cent) is considerably higher (five times) than what the white economy data suggests.

Unemployment estimates are based on surveys, like, the National Sample Survey (NSS), and if they capture employment due to the black economy, then there would be no problem. But, is this the case? If yes, this would result in a lower reported productivity of labour. If no, unemployment and underemployment would be lower than reported. But, surveys in India are notoriously inaccurate and again the problem is due to the black economy. People not only do not reveal accurate information but also fudge their white incomes. NIPFP (1985) found that an independent survey of incomes of households in 1976 gave an estimate that was 45 per cent less than the national income. In other words, not only did the respondents not report their black incomes, they also did not report fully their white incomes. So, surveys in India (official or private) are unlikely to tell us what the real picture is.

However, there is another aspect of the problem relating to the black economy, namely, it lowers the value of the multiplier by raising the rate of savings and lowering the employment potential of the economy [Kumar 1999; Kumar 2005c]. Further, it prevents the economy from reaching its potential level of income and lowers the rate of growth of the economy by raising the incremental capital-output ratio [Kumar 2005c]. This lowers the long-term employment potential of the economy. Finally, the black economy results in policy failure and makes the achievement of targets difficult, whether, in the area of employment generation, education, health, etc. Thus, there are direct and indirect effects of policy failure on employment generation.

In brief, due to the working of the black economy there are many contrary affects on both the estimation and generation of employment and without carefully analysing them, we cannot come to any conclusion about the nature or the extent of unemployment in the economy. This paper analyses the impact of the black economy on employment in India by presenting analytically the issues involved and then analyses the union budget 2005-06 to see whether the steps proposed are adequate to deal with the problem.

I Definitional Aspects of the Black Economy

The most recent estimate of the size of the black economy in India by Kumar (1999) is that it is 40 per cent of GDP for 1995-96. This estimate is based on the fiscal approach and the earlier estimates given by NIPFP (1985), Gupta (1992) and Basu (1995). It is not comparable to the estimates given by other authors using other methods since it differs in definition from them [Kumar 1999].

The definition used is that black incomes are factor incomes property incomes not reported to the direct tax authorities. This definition excludes transfer incomes, like capital gains and bribes. In this sense, it is strictly consistent with the definition of white incomes and GDP. This is also important because the black

Economic and Political Weekly July 29, 2006 economy is reported as a per cent of GDP and if in definition they are different then it would be meaningless to express one as a per cent of the other. The definition also eliminates multiple counting of incomes as is the case in Gupta (1992), where any income evading any tax is counted and if an income evades several taxes, as is usually the case, and then it is counted several times. It was argued in Kumar (1994) that this multiple counting of black incomes results in very high estimates of the size of the black economy. For instance, any output evading excise tax would also evade sales tax, corporation tax and income tax.

Thus, black incomes as factor incomes are, broadly speaking, underestimated value added. So, if the size of the black economy was 40 per cent in 1995-96, that implies an additional GDP due to the black economy of 40 per cent in that year. Of this, 8 per cent was estimated to be from illegal activities (smuggling, narcotic drugs trafficking, mafia, gambling, etc) and 32 per cent from legal activities (activities allowed by law, like, agriculture, construction, industry, etc). Value addition from the legal sectors is reported in the National Accounts Statistics (NAS) but the contribution of the illegal activities is not counted in NAS since they are supposed to be producing social “bads”. The black incomes from legal activities should have been in the national income total but are mostly (not entirely) not in it. Hence, the distinction between black and white incomes is not that between unaccounted and accounted – some black incomes get counted while some white incomes do not get counted [Kumar 1999].

Since the size of the black economy as a per cent of GDP has grown, this means that not only is the actual GDP higher than revealed by the official statistics but its rate of growth has been higher than officially reported. Further, it is shown that due to the existence of the black economy the actual rate of growth of the economy has been lower by 4 per cent than what it could be potentially [Kumar 2005c:261]. Thus, potentially, the economy could have been much larger today and so could employment have been more and unemployment less. In this paper, this potential employment is not being referred to. The employment being referred to is that associated with the current, at least 40 per cent of additional GDP, due to the black economy.

Black income generation involves illegality – both in legal and illegal activities. Examples of illegal activities are drug trafficking, smuggling, prostitution, crime, etc. By definition, since these activities produce social “bads”, they are not counted in GDP. So, employment associated with these activities should also not be counted in employment. Unfortunately, some of this does get counted. For instance, a smuggler may get counted as a “fisherman” or a “transporter” and a drug pusher as a “trader”. This would lead to overestimation of employment. There is employment but its output is not counted in national income, so it should also not be counted.

In illegal activities, the profit margins are usually high so that the wage component tends to be small. In other words, output per worker would be high in illegal sectors. Further, more the illegal activities, more the regulatory apparatus, but in this paper this is not being included as overestimation. It is like digging holes and filling them up. Such activities result in unproductive employment, but legitimate all the same.

II Model of Black Income Generation in Legal Activities

Let us turn our attention to black income generation in legal activities. By definition, in a capitalist economy, incomes are factor incomes – profits and wages. For a business, we can define profit as:

Profit (P) = Revenue (R) – Cost (C) …(1)

Profit may be white (what is declared) or black (what is not declared). The declared profit appears in the income statement of the business and is called the balance sheet profit. The undeclared profit or black profit is called off-balance sheet profit. It accrues directly to the management of the business.

P = White Profit (P) + Black Profit ( Pb) …(2)

wFurther,

P = Actual R – Actual C …(3)

Black Profit (Pb) is generated by declaring lower revenue and/ or overstating costs.

Actual Revenue (R) = Declared R (Rd) + Undeclared R (R)

au…(4)

And, Actual Cost (C)

a= Declared C (Cd) – Overstated Cost (C) …(5)

o

Substituting (4) and (5) in (3), and using (2), we get,

White Profit (P) = Balance Sheet Profit = Rd – Cd. …(6)

wBlack Profit (Pb) = Off-Balance Sheet Profit = R + C. …(7)

uo

Now, if price is p and quantity is q, then R = p × q. R in equation 4 may be written as:

a

R = p × q…(8)

aaa where p is the actual price charged and q the actual quantity

aasold. Fudging of revenue is resorted to by under-invoicing of either q or p or both. The declared revenue is different from the actual revenue.

R = (pd + under invoiced p) × (qd + under invoiced q) …(9)

a

Rd = declared price (pd) × declared quantity (qd) …(10)

Using equations 9 and 10 in equation 4, we get: Undeclared R (R) = R – Rd = (pd).(under invoiced q)

ua+(qd). (underinvoiced p) + (under invoiced p).(under invoiced q).

This may be written as:

R = pd.(q – qd) + qd.(p – pd) + (p – pd).(q – qd) …(11)

uaaaa

Regarding costs: C = Cost of (wages and salaries + purchased goods and services

+ interest paid + depreciation) …(12)

Assume that the interest paid and depreciation are as per the norms of taxation and the financial sector. For the present, let us ignore the fudging that may be carried out in these factors as well. To show lower profits, costs are overstated by inflating costs of purchased inputs and/or wages.

Cost = cost of production of the declared output

+ cost of production of the undeclared output. …(13)

Economic and Political Weekly July 29, 2006

This is overstated by showing higher costs for each item of the cost mentioned in the equation 12 above. The actual raw material and the wage labour is used to produce the entire amount of output by the business. But a part of the output is not declared so its cost of production is also included in the cost of production of the declared output. Thus, the cost of the declared output is further overstated by the cost of production of the undeclared quantity. Hence,

Overstated C (C) =

oOver-invoicing of both purchased goods and services and wages

+ the cost of production of the undeclared output …(14)

It may be asked why the under- and over-invoicing is not detected by the tax authorities by cross-checking the accounts of the buying and selling parties. The reason is that there is double bookkeeping and often the tax authorities are unable to cross tally the invoices of the buying and selling firms. The over-invoicing by a buying business is not captured in the accounts of the seller because of this inability to tally the accounts of both the businesses. In fact, the sellers also do not show the true sales revenue since this is revenue for them and as mentioned above in equation 4 they would under-invoice the sale to show lower revenue for making black profits.

There are two ways of showing a higher wage bill, namely, fudging the number employed (muster roll fudging) and inflating the wage shown as paid. The first involves the showing of a higher number of people employed. The management draws the extra wage shown as paid to the fictitious employees and the higher wage shown on record as paid. As mentioned above, the higher wage bill shown on the balance sheet becomes the management’s off-balance sheet profit. In brief, this results in both employment and wages being overestimated in the official data.

It may be argued that at times, to declare a unit to be a smallscale unit, to take advantage of the tax concessions and other benefits, a firm may show lower rather than higher employment. This is correct in some instances. However, in these cases also the wage bill shown is higher than actually paid. In fact, this argument strengthens the point being made in this paper that fudging of the wage bill is rampant in the economy.

Would the above model apply to all the black income generating activities? Pretty much so, including the case of the self-employed. The case of the work done for a bribe many not be included but since a bribe is a transfer income [Kumar 1999] it is not to be counted. There are several ways of fudging the accounts with different methods adopted for fudging employment and wage bill in different sectors. Examples are discussed in Kumar (1999). In the corporate sector, perquisites like, travel, entertainment, servants and communication are often shown as company expenses and fictitious bills are presented to show higher costs. Capital costs maybe overstated. Raw material costs and revenues are often misstated. Bills may be drawn up to show higher temporary employment and higher payment to them. In the case of many private educational institutions the salary cheque is handed to the teachers only when they pay the management a certain amount in cash. Thus, the salary shown is higher than what is paid. This is also found to be true in other private sector establishments. Thus, employment and wages are overstated in legal activities. Since this is also true for the illegal sectors, overall, wages and employment are overstated.

III Some Other Results

It needs to be noted that while output not declared is (q – qd),

avalue added not declared is given by equation 5, namely, Undeclared R + Overstated C, that is, the sum total of equation 11 and 14, and is much larger than the output not declared. The net result is that for small amounts of undeclared output, the off-balance sheet profit (Pb) and value added not accounted for are large. Further, what is of relevance to employment generation is that the wage bill is inflated. This is made up of both, an inflation in the wage rate and the number employed. While the NAS shows a lower profit than actual due to the existence of the black economy, it shows a higher wage bill than actual. In other words, the real distribution of incomes between profits and wages is more adverse than indicated by the white economy data. This has serious implications for the business sector’s investment function because the white economy only partially explains their actions. Also, the higher wage bill shown in the accounts results in higher profits for the management. An important conclusion is that black incomes are gross profits or factor incomes property incomes and not wage incomes. This definition has serious implications for measuring the size of the black economy. In recent years, a method suggested for measuring the size of the black economy called the MIMIC approach [Giles and Tedd 2002] has been widely used. This belongs to the class of methods of measurement called the monetarist method [Kumar 1999] and it includes all incomes without discriminating between wages, profit and transfer incomes. This is because it does not analytically define black incomes [Chattopadhyay 2005]. Further, as argued in Kumar (1999), most wage earners in India are outside the tax net because of the high exemption limit relative to the per capita income. The monetarist method also captures these incomes that are not in definition black and which may be missed out of the official national income data. There is some redistribution of the gross profits through bribes and under the table payments but this is only transfer and does not change the distribution between profits and wages in production, which is what is captured in this article. Poverty may be higher because the wages and employment are lower than shown in the accounts and the poor get no part of the extra incomes from the black economy. Our employment statistics need a relook and the paradox for the economy is that in the white economy, output, q, is understated while employment, L, is overstated. The consequence of this two-way movement is that labour productivity of the economy (O/L) is much higher than depicted by the white economy. Incremental K/L for white economy is wrongly estimated because both incremental K and L are overestimated in the white economy data. For an actual economy, incremental capital is higher since there is also incremental capital in the black economy so the total capital stock is higher than depicted in the white economy. However, as far as employment is concerned, the total workforce is to be reduced. Hence, the actual incremental K/L is higher than that estimated for the white economy.

IV Some Indicative Numbers

As stated earlier, the size of the black economy is estimated to be 40 per cent of GDP for 1995-96 [Kumar 1999]. Of this 8 per cent comes from illegal activities and 32 per cent from legal activities. The method used to arrive at these estimates is

Economic and Political Weekly July 29, 2006 the fiscal approach and involves calculations sector by sector. Since no one reports their black incomes, the estimates are based on indirect methods and are in the nature of guesstimates. But this is not very different from the manner in which the white economy is estimated. The estimates presented below are also approximate and indicative and based on simple assumptions and some information on a few sectors where black income generation has been studied (like the sugar industry, real estate, ‘hafta’ system, government contracts, education, health and public sector).

In illegal activities, the entire value addition is illegal. Further, the wage share is likely to be small since (a) the degree of monopoly is high, (b) there are higher risks, and (c) bribes have to be paid to the official machinery. In the white accounts, in 1999-2000, the share of compensation of employees in net domestic product at current prices was 37 per cent [GoI 2002:183]. In other words, the ratio of property income to wages was 2.72. If it is taken that a higher profit requires one extra unit of profit for covering risk and half a unit for bribing the political and executive classes, then the ratio of property income to wages in the illegal sector should be 6.75 (that is, 2.5 × 2.72). Thus, wages would constitute 1/7.75 of value added in illegal activities. Of the 8 per cent of value addition in illegal activities, this would give 1.032 per cent or approximately 1 per cent as the share of wages. Employment corresponding to illegal activity gets counted because it is wrongly declared as something else (like, trade or fishing or transport). So, this represents overestimation of employment and wages.

In the case of legal activities, the sectors are rather heterogeneous. Agriculture is left out of the calculations since no black factor incomes are generated in this sector [Kumar 1999]. In non-agricultural GDP, in 1999-2000, the wage component varied from a high of 100 per cent in public administration to 80 per cent in community services to 11 per cent in real estate and to a low of zero per cent in unorganised banking. Depending on the sector, to generate black incomes, it is easier to over-invoice inputs where the wage share is low and it is easier to over-invoice wages and employment where the wage share is high.

As a first approximation, following equation 7, there are two sources of black income generation, under-invoiced revenue and overstated cost. Assume that both these sources contribute equally since there is no a priori reason to assume that one mode may be favoured over the other. Then overstated costs would contribute half of the black profits (Pb) from legal activities or 16 per cent of GDP. This is further split up between four components (equation 14), namely, purchase of goods, purchase of services, cost of production of undeclared output and over-invoiced wages. Assume that across all the sectors, on an average, each one of these components contribute the same amount to black income generation. Then over-invoicing of wages would contribute 25 per cent of the overstated cost component, that is, 4 per cent of GDP. Since the recorded compensation of employees is 37 per cent of value added and, as shown above, it is overstated by 4 per cent so that in reality it is 33 per cent. This is the compensation of the entire labour force of the economy.

Wages may be overstated through overstating employment at a given wage rate and/or overstating the wages for a given workforce. The latter is easier than the former so assume the ratio between the two to be 1:2. Thus, overstated wages due to overstated employment would be 1.33 per cent of GDP. Since 33 per cent

Economic and Political Weekly July 29, 2006

of GDP is the wage of the entire labour force, 1.33 per cent wage share would correspond to 4 per cent (that is, 3x1.33) of the labour force. Roughly, the overstatement of wage share and the employment share turn out to be equal. Assuming the same to hold for the illegal sector, employment in the illegal sectors would be 1 per cent and has to be subtracted from employment figures since it produces social “bads” that are not counted in GDP. This along with the 4 per cent overstated employment from the legal sectors gives a total of 5 per cent. It must be stated that this result is aggregative and would be sensitive to changes in assumptions.

In brief, the black income generation process, with the most plausible available assumptions, results in overestimation of employment and wages by 5 per cent. This would not imply 5 per cent additional unemployment but a combination of underemployment and unemployment. This is not counting child labour that is illegal and may be another 5 per cent of the workforce.

V Union Budget 2005-06, Employment and the Black Economy

Recent budgets may be analysed in the light of the model presented above which shows that there is additional unemployment and underemployment in the economy. The problem maybe more serious than indicated by the official data. The analysis suggests that to step up the rate of growth of the economy and combat growing actual unemployment, in addition to other steps, there is a need to check the growth of the black economy. Policies in India contained in the budgets have been unable to check the growth of the black economy since they are not based on the correct analysis of the causes of the existence of the black economy. In Kumar (1999) it has been argued that the usual steps like tax concessions and voluntary disclosure do not attack the root cause of the problem and have therefore not been successful in reducing the size of the black economy.

In union budget 2005-06, two schemes were introduced, the banking transaction tax (BTT) and fringe benefit tax (FBT), with implications for the black economy. The former was billed as that, while the latter was not. Yet, it is the latter that had real potential for checking the growth of the black economy in the corporate sector by reducing the false declaration of personal expenses as company expenses (see section II). BTT was misconceived as a scheme to create a paper trail of black income flows that could be pursued by the tax department to catch black incomes [Kumar 2005a]. The union finance minister has justified this scheme in this year’s budget and continued it. The point is that banks already have a paper trail for all deposits and withdrawals, so it has always been a question of pursuing them. This is where corruption enters and the tax evaders escape the net. Bankers and tax officials are found to be in league to enable this to happen. The same can easily happen with the BTT, given that the same officials are involved.

Worse, there is a contradiction between continuing BTT and eliminating the existing one-for-six scheme, which was a way of generating a paper trail through capturing the consumption of high-income individuals. That scheme resulted in the tripling of the number of income tax assessees by the addition of perhaps 20 million tax assessees. This generated a huge paper trail that could have been followed up, but a corrupt tax department is not up to the task. What is the guarantee that it would now do so using the BTT. Further, it has been shown times without number that the ingenuity of the tax evaders is so great that they quickly develop mechanisms to circumvent the newly created rules and laws [NIPFP 1985]. The issue is not how many laws we have but how well are they implemented. Corruption cannot be an argument for having fewer laws since they are not responsible for it. In this context, the argument that the government that governs the least does not mean having fewer laws but their better and automatic implementation.

The PAN scheme has been implemented since 1980. It is supposed to enable the identification of all transactions of income tax assessees. With the elimination of the one-for-six scheme if the number of assessees falls, as is likely, the cross-checking of transactions would become more difficult. This would dilute the importance of the PAN scheme, which has itself been suffering from fraud.

FBT checks the misstatement of the expenses of management as costs, and, therefore, it curbs the black income generation in the corporate sector. In the last financial year, it has possibly led to an increase in corporate tax collection of more than Rs 15,000 crore, both directly and indirectly. This is a substantial part of the increase in the collection of this tax (in 2005-06) and has helped the government achieve its revenue generation target. Thus, while industry is opposed to this tax for obvious reasons, it is absolutely essential to tackle one component of the black economy in India. In fact, it needs to be strengthened by the introduction of a gross profit tax [Kumar 1999].

The value added tax (VAT) has also been billed as a scheme to tackle black income generation in indirect taxes. It is supposed to lead to better compliance. The preliminary data reveal that this may indeed be the case. However, this needs to be carefully analysed. The point to note is that VAT is not a new tax [Kumar 2005b]. It is a method of calculation of an indirect taxes. Specific and ad valorem are the other two ways of calculating the tax liability. In India, VAT is replacing these other two methods of calculation. It has been shown in Kumar (1986) that theoretically a shift to VAT from ad valorem taxes would not be revenue neutral unless the VAT rates are higher.

It is likely that more taxes are being collected under VAT because the net has been widened and also there is computerisation of the system. The same could have also been done with the previous ad valorem system and perhaps the buoyancy would have turned out to be even higher. The logic is simple, if the cascading effect is indeed being removed by VAT, then effective tax rates would decrease and collection would decline unless the rates are being increased or coverage is being expanded. However, the real problem with the tax is that it is ill-conceived for a poor economy like India where a large part of the production and trade is still with the smallscale sectors with poorly maintained accounts. This was the logic of going for MODVAT suggested in GoI (1985), instead of MANVAT or VAT in 1986. The same logic still holds; its calculation is complicated and beyond what small businesses can handle.

Services tax collection has shown high buoyancy. Many more services are progressively being brought under the net of this tax. It is suggested that this is also a way of tapping black incomes since the services are not paying taxes. It is also argued that the services sector is now 55 per cent of GDP (in the total economy, including black, it would be about 70 per cent of the economy) and should be also contributing to taxes.

There are several problems with the arguments. First, the services tax is an indirect tax. The levying of this tax does not capture black incomes generated in this sector since that is linked to the payment of direct taxes. Those in the services sector who

Economic and Political Weekly July 29, 2006 do not declare their incomes are going to continue to do so and the size of the black economy would not be affected by this tax. However, since it is an indirect tax and like a prime cost (is passed on to the consumer) it is inflationary [Kalecki 1971]. In this sense, this is a misconceived tax even if it has helped raise the tax-GDP ratio of the central government.

The inflationary consequences of this tax are not visible because many of the services on which these taxes are levied are not counted in the cost of living index. This is the reason that the rate of inflation turns out to be lower than it actually is. This is compounded by the concentration of black income generation in the services sector and that is also not captured in the inflation data. This tax is affecting the middle classes and over a period of time wage indexation for the organised sector would be adversely affected.

In brief, the experimentation with taxes being attempted, the BTT, VAT, service tax, etc (except the FBT) has little relationship with curbing the growing black economy. The changes being introduced may only end up making the situation more complex and may make controlling the growing black economy more difficult. In other words, unemployment would continue to be underestimated and even if the steps proposed in the budget to tackle it are somewhat successful, the overall problem would continue since it would not be visible.

In the union budget for 2005-06, additional funds are allotted to employment generation and to the social sectors (education, health, etc). While the former would directly increase employment, the latter would also help in employment generation since these sectors are employment intensive. Assuming the affect of leakages due to the black economy to be unchanged, it is argued in Kumar (2006) that the increased amounts allotted are totally inadequate to the task at hand. Thus, the steps being proposed are not even going to be successful in making a serious dent on the visible part of the unemployment problem.

VI Conclusions

The paper began by asking whether the official data underestimates the extent of employment, given that there is a substantial black economy. Since the black economy implies additional output, should this not be accompanied by additional employment? We have shown that the method of black income generation in businesses and government is such that in the legal sectors, black incomes are gross profit, or in NAS sense, property incomes [Kumar 1999]. Wages are overestimated and are a mechanism of generating black profits. In brief, the black economy produces the contradictory result of showing a lower level of declared output (40 per cent), but under the most plausible available assumptions, a higher level of wage bill and of declared employment in the economy (by 5 per cent). Thus, unemployment and underemployment are likely to be larger than officially declared. It is clear that without incorporating the black economy in the analysis, there can be no clarity on the issue of unemployment in India.

NSS data used for calculating employment and unemployment is likely to be affected by the factors analysed in this paper since people do not report honestly. The black economy would result in a bias in reporting. In addition, the analysis shows that the distribution of incomes between profits and wages is more adverse than indicated by the white economy data, productivity of labour (O/L) of the total economy is much higher than depicted by the white economy, incremental K/L is higher than for the white economy and all this would imply a lower rate of growth of the economy. For similar reasons, with wage bill being reported to be higher, poverty would also tend to be higher than estimated.

Regarding unemployment, theEconomic Survey 2005-06 admits that unemployment has gone up sharply. The implementation of the national rural employment guarantee scheme (NREGS) is an admission of this growing problem. It was essential to take effective steps in the union budget to tackle the problem. The 7 per cent rate of growth in the last three years raised the possibility of mobilising more resources but the steps taken are grossly inadequate to deal with the problem of declared unemployment in India [Kumar 2006]. The other way of dealing with the problem would have been to deal with the black economy frontally, both to raise additional resources and to increase the employment potential of the economy. Not that the black economy does not generate employment, but by lowering the value of the multiplier and the potential rate of growth of the economy, it lowers the employment potential. The paper argues that changes in taxation proposed in recent years on the plea of tackling the black economy are not only wholly inadequate to deal with the problem at hand but may be counterproductive in dealing with the problem. Thus, the government’s seriousness in dealing with the twin and interrelated problems of black economy and unemployment maybe questioned.

EPW

Email: arunkumar1000@hotmail.com

[An earlier version of this paper was presented at the International Conference‘Development in Open Economies: Labour in Industry’ organised by Academyof Third World Studies, Jamia Milia Islamia University, New Delhi on March6-8, 2006. I am grateful to the participants for the comments since they helpedme to produce this paper.]

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