India’s black economy pegged at ` 30 lakh cr
Despite contraction, it is still larger than Thailand’s GDP
New Delhi, June 5: Pegging India’s ‘ black economy’ at over ` 30 lakh crore or about 20 per cent of total GDP, a new study says that it has been contracting gradually over the years but still remains bigger than the overall economic size of countries like Thailand and Argentina.
Besides, a crackdown on black money has made the cost of capital costlier in the black economy with the lending rates having risen to as high as 34 per cent, from about 24 per cent a year ago, as per the study by Ambit Capital Research.
The study said that the crackdown has had some “unintended consequences” in form of an increase in preference for cash in its physical form and a notable decline in the usage of formal banking channels with record low deposit growth as well as the usage of debit cards — which may keep the GDP growth rate flat this year.
It said the size of the India’s black economy expanded rapidly over the 1970s and 1980s, but since then had been contracting at a gradual pace and is now estimated at around 20 per cent of the country’s GDP.
The term ‘ black economy’ typically refers to the economic activities outside formal banking channels and include cash transactions in highvalue assets like gold and real estate.
“Given that India’s GDP in calender year 2016 is expected to be $ 2.3 trillion, the size of India’s black economy is about $ 460 billion ( over ` 30 lakh crore), which is larger than the stated GDP of emerging markets like Thailand and Argentina,” Ambit Capital Research said in a research note.
A majority of this black money is locked up in physical assets such as real estate and gold, it added. Physical savings instruments have been historically preferred to financial savings instruments in India because purchase of physical assets can be funded using black money, while the purchase of financial assets can not be funded in such a manner due to a strong paper trail.
While official figures regarding the quantum of black money flowing into the real estate sector are not available, experts suggest that more than 30 per cent of India’s real estate sector is likely to be funded by black money.
The report said that since the Modi government assumed power there has been a clear step- up in checks around gold transactions and it has become increasingly difficult to park unaccounted cash in the form of jewellery or bullion.
Due to measures taken to tighten the noose around black money, there has been a clear drop in the prices of land and real estate and a decline in the appetite in gold, it said.
“The combination of heightened interest rates in the black economy as well as the lack of liquidity in the banking system has led to the weighted average cost of debt capital in India rising by 0.30 per cent over the last 12 months even as policy rates were cut by one per cent,” it said. “As banks are unwilling to lend to subinvestment grade creditors, this credit demand has shifted entirely to informal channels of lending,” the report added.
The crackdown on black money has had some unintended consequences in form of an increase in preference for cash and record low deposit growth as well as the usage of debit cards
— AMBIT CAPITAL