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Saturday, August 20, 2011

INDIA'S GANGRENE: The cost of the black economy!

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Arun Kumar, The Hindu / August 20, 2011.

A candlelight march in protest against corruption and black money, at Jantar Mantar, in New Delhi. Photo: Shiv Kumar Pushpakar
A candlelight march in protest against corruption and black money, at Jantar Mantar, in New Delhi. Photo: Shiv Kumar Pushpakar - The Hindu.

Much of the black economy in India is like “digging holes and filling them.” One digs a hole during the day and another fills it up at night. The next day, there is zero output but two salaries are paid.
Anna Hazare's fast seeking the acceptance of the Jan Lokpal Bill, and the widespread mass protests in urban India that followed his arrest from home, have shaken the government. Political parties have woken up to the depth of feeling against corruption. Two factors have come together — the fight for the Jan Lokpal Bill and the violation of the citizen's civil right to protest. The snowballing protests are seen to be against corruption. Obviously, the public are fed up with the day-to-day harassment they face. To put this in perspective, it is important to understand the benefits to society of tackling the huge black economy in India.
Some people argue that the black economy also generates jobs and production. For instance, they argue that a lot of goods are bought in the market using black incomes, and that leads to increase in production and employment. They argue that the black economy generates informal sector employment and helps the poor. Some go to the extent of arguing that India escaped the worst effects of the global recession in 2008, and the economy only slowed down, because a large amount of black money was floating around — which generated additional demand. Some justify bribes as “speed money” that enables work to be done faster. There is some truth in all this. Yet, it can be shown that the ill-effects of the black economy far outweigh its beneficial effects.
Think of bribe as “speed money.” In order to extract a bribe, the bureaucracy first slows down work and harasses the public. If work was automatically done, why would anyone pay bribes? Thus, the system has to be made inefficient so that those who can afford to pay can get their work done quickly but the rest continue to suffer. The administration becomes rundown since rather than devising ways to work efficiently, it is busy thinking of ways to make money by setting up roadblocks to efficient functioning. This has spawned a culture of ‘middlemen' and personal approach to officers. Things hardly happen in the routine manner. The corrupt need the middleman to insulate themselves from direct public contact lest someone reports them. The bribe-giver also, not knowing how much to bribe and how to contact the administrator in charge, finds it a convenient arrangement.
Much of the black economy in India is like “digging holes and filling them.” That is, one digs a hole during the day and then another fills it up at night; the next day there is zero output but two salaries are paid. This is “activity without productivity.” An example is of poorly made roads that get washed away or become pot-holed with every rain and need repeated repairs. Thus, instead of new roads coming up, much of the budget allocation is spent on maintenance. Teachers may not teach properly in class so that students have to go for tuitions. Not only families have to pay extra but the students find learning to be insipid and lose interest. This affects their creativity and future.
Consider how millions of litigants, their families/friends, and lawyers arrive daily in the courts. In most instances, the hearing in a particular case lasts just a few minutes. The next date, weeks or months away, is announced, and they go back home. Not only is justice delayed inordinately, but time is lost and expenses are incurred on lawyers' fees, travel, and so on. Cases that could be resolved in a few months go on for years, multiplying costs. The expense of delayed justice is both direct and indirect. Delay is often a result of the impact of the black economy. Honest people who lose hope start resorting to other means, which dents the notion of social justice and weakens society. This cost cannot be calculated in monetary terms but it is significant.
Because of the growing black economy, policies fail both at the macro-level and the micro-level. Planning or monetary policy or fiscal policies do not achieve the desired results because of the existence of a substantial black economy. Targets for education, health, drinking water and so on are not achieved because “expenditures do not mean outcomes.” The economy does not lack resources but faces resource shortage. Much investment goes into wasteful and unproductive channels, like holding gold or real estate abroad. The flight of capital lowers the employment potential and the level of output in the economy. Capital sent abroad does not generate output in India but does so where it goes. A country that is considered capital-short has been exporting capital. A nation that gives concessions to multinational corporations to bring in capital loses more capital than it gets, and that too at a high cost, from foreign institutional investments or foreign direct investment. India's policies are open to the dictates of international capital because the country's businessmen and politicians have taken capital out in large doses since Independence. The costs are huge.

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