A parallel economy, also known as a shadow economy or informal economy, refers to economic activities that occur outside the official channels of government regulation, taxation, and oversight.
These activities are often unreported or underreported, and they can include both legal and illegal transactions. The parallel economy exists alongside the formal, regulated economy and may involve a variety of informal practices.
Also known as the black economy, it has several implications, including:
Loss of Revenue to the Government: The parallel economy operates outside the legal framework, evading taxes. This results in a revenue loss for the government, affecting public services and infrastructure.
Quality of Public Goods and Services: Black money generated in the parallel economy does not contribute to public goods. As a result, the quality of services such as healthcare, education, and infrastructure may suffer.
Higher Taxation and Inflation: The burden of taxation falls disproportionately on honest taxpayers. To compensate for revenue losses, the government may impose higher taxes, affecting the common man. Additionally, unaccounted money can lead to inflation.
Difficulty in Policy Formation: Policymakers struggle to create just policies when a substantial part of the economy remains unaccounted for. Economic data becomes unreliable, hindering effective decision-making.
Impact on Internal Security: Black money funds major internal security issues. It can be used for illegal activities, terrorism, and destabilizing the nation.
Stifling Economic Development: The parallel economy discourages foreign investment due to doubts about the rule of law and governance. Lack of access to credit and financial services limits the expansion and productivity potential of the informal sector.
The parallel economy has some perceived positive implications, although these are often outweighed by the negative consequences. Some of the positive implications include:
Employment Opportunities and Economic Growth: The parallel economy provides employment opportunities, goods, and services that are not available in the formal economy. It also generates income and wealth that can contribute to economic growth and development.
Innovation and Flexibility: Informal economic activities in the parallel economy can sometimes lead to innovation and flexibility in responding to market demands, as they are not bound by the regulations and formalities of the official economy.
This economy poses significant challenges to India’s economic and social fabric, impacting both internal security and policymaking. Here are some measures that can be taken to overcome the parallel economy:
Strengthening Tax Administration: The government can undertake various administrative and legal measures to check evasion of both direct and indirect taxes.
These measures can include improving tax administration systems, promoting financial inclusion, reducing regulatory burdens, encouraging voluntary compliance, promoting international cooperation, implementing legal reforms, supporting small businesses, increasing public awareness, addressing corruption, and increasing the efficiency of the public sector.
Demonetization: Demonetization of high-denomination currency can help curb black money. However, demonetization alone is not a foolproof solution and can be unpopular.
Voluntary Disclosure Scheme: The government can introduce voluntary disclosure schemes to unearth black money. These schemes encourage people to declare hidden income and assets.
Special Bearer Bond Scheme: The government can introduce special bearer bond schemes to canalize unreported money. These bonds offer a low rate of interest and can be subscribed for a fixed period.
Reduction of Tax Rates: Reducing the peak rate of personal income tax can make taxes more productive. This can encourage people to pay taxes and reduce the burden on honest taxpayers.
Economic Liberalization: Economic liberalization can promote transparency and reduce the scope for black money. It can encourage foreign investment and promote growth.
Other Measures: Other measures that can be taken include promoting digital payments, increasing the use of technology, and strengthening law enforcement agencies.
In summary, overcoming the parallel economy requires a multi-pronged approach, including administrative, legal, and policy measures.
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