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Parallel Economy

Parallel Economy

A parallel economy is an economy that runs side by side with the actual economy. It functions as an unsanctioned and illegal sector in the economy whose objectives run in opposition to the aims of the official, sanctioned, or legal sector. The parallel economy has political, commercial, legal, industrial, social, and ethical aspects in its functioning.

The flow of black money gives rise to a parallel economy in the country. The term parallel economy is also referred to as black economy, unaccounted economy, illegal economy, or unsanctioned economy. A major point about the parallel economy is that it is promoting those types of economic activities where illegal income remains hidden to the tax authorities. Illegal consumption, real estate, investment in foreign securities, criminal activities, and corruption are the typical spending patterns of the people in the parallel economy. Transactions are executed in a non-transparent manner.

Why People are generating black money?

   CONTROLS AND LICENSING SYSTEM- Black money is rising in India due to controls, permits, quotas, and licenses. Giving quotas to the weaker sections of the society is the reason for satisfaction in the other sections of the society. Giving advantage to one group is the reason that people are using illegal ways to gain an advantage.

      HIGH RATES OF TAXES- Higher rates of taxes have resulted in a growing tendency of tax evasion among the taxpayers. Tax invasions are common in income tax, corporate tax, custom duties, sales tax, etc. The taxpayers are generating black money to compensate for the burden of the high rate of taxes.

      INEFFECTIVE ENFORCEMENT OF TAX LAWS- India is still having people like Harshad Mehta in the country who are clever enough to pick loopholes in its applicability of laws. In India, the enforcement of tax laws in respect of income tax is quite weak. This has led to enormous illegal evasion of taxes and the collection of black money.

    FUNDING OF POLITICAL PARTIES- Money is the power in today’s world. Money is used to gain power and also to dominate the higher power. There is a rising tendency of supporting political parties with the help of black money or illegal money. Big Trade houses are giving large amounts of black money to the political parties, especially ruling parties for their political and economic survival.

Harmful Effects of Parallel Economy: -

    Firstly, it is the unorganized flow of precious national resources of the country. There is only a small part of black money that is kept in a form that contributes nothing/little to the productive activities of the country. Again, around half to two-thirds is spent on illegal consumption of goods and services.

  Secondly, it has majorly worsened the income distribution and has thereby undermined the development and upliftment of society. India has been facing the problem of inequitable distribution of income for a long time. It’s a harsh fact that the 1% population of India is contributing more than 50% of the total national income and the rest of the population is not contributing that much efficiently which shows a major economic gap between the people of the country.

    Thirdly, the existence of a large illegal segment of the economy is a big handicap in making a correct analysis and formulation of the right policies for the economy. It is also possible to monitor the development of the economy with accuracy.

Implications of the parallel economy on the internal security of India: -

   ECONOMIC TERRORISM- It is terrorism that takes place based on illegal money. The country has to deal with Economic terrorism along with physical terrorism. Pakistan has been flooding the country with counterfeit currency to uplift its economy and funding terrorist activities in different parts of the country.

   ORGANIZED CRIME: Organized crimes in India are increasing especially in metro cities such as Mumbai, Delhi Bangalore, etc. It is increasing due to a flourishing parallel economy. Such organized criminals also fund for hypnosis of youth and terrorist attacks.

      RELIGIOUS OR IDEOLOGICAL EXTREMISM- Parallel economy is a major source of financial help to extremists. Financial benefits distract unemployed youth from illegal activities in the name of a particular religion, caste, or ideology.

●  ARMED VIOLENCE- Armed violence is now taking a new form throughout India especially in the form of right-wing extremism. It’s common to see reports of seizure of illegal weapons and public firing by individuals. Black money is an easy source of the illegal arms trade in India and to fund the terrorist for their weapons.

   CYBERCRIME: Crypto-currency is not Illegal in India but is also not recognized in India. Unrecorded cash transactions in e-commerce are also emerging means to supply resources to violent elements in the country.

Government initiatives: -

  DEMONETIZATION- Demonetization has been the best shot by the government to curb black money. It is the act of stripping a currency unit of its status as legal tender and then issuing an alternative for that. It occurs whenever there is a change of national currency: The current form or forms of money is restricted from circulation and often to be replaced with new currency. The benefit is increased savings, as a result of demonetization, people will tend to deposit their cash in the bank rather than at home which will lead to less spending. This will help them save more.

      ECONOMIC LIBERALIZATION- It means a reduction in the regulations and restrictions by the government in an economy with the aim of better participation of private individuals.

    TAX REFORMS: GST- The goods and services tax (GST) is an indirect tax on goods and services which are sold domestically for consumption. This tax is included in the final price and is paid by the consumers at the point of purchasing and it is passed to the government by the seller.

  PREVENTION OF MONEY LAUNDERING ACT (2002)- It is an ACT of the Parliament of India to prevent money-laundering and to provide for confiscation of property derived from money laundering. The Act is imposing an obligation on banking companies, financial institutions, and intermediaries to show proof of their client’s identity, maintain records of information in a prescribed form to Financial Intelligence Unit - India. The act was amended in 2005, 2009, and 2012.

      DIGITISATION OF ECONOMY- Digital economy refers to an economy that is based on digital technology, although we increasingly perceive this as conducting business through markets based on the internet and the World Wide Web. The digital economy is also known as the Internet Economy, New Economy, or Web Economy. It is the best source of proof of any economic transaction in comparison to any cash transaction.


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