What is in popular parlance known as black money, and is, misleadingly called the 'parallel' economy, (as it operates very much with and within the legal, formal economy and rarely fully outside the latter), is no longer a marginal phenomenon, representing merely deviant behaviour. For a proper understanding of this important component of the Indian economy/society, it is critical to recognise that the illegal/alegal or extralegal, dirty economy (among several names it had acquired like the black sector or black economy), is a regularly on-going, steadily expanding, large and significant part of the Indian economy, with strong, symbiotic (i.e., mutually beneficial and reinforcing) linkages with the polity and governance (including justice administration). It has covered in its fold most, if not all, the spheres of our social existence, ranging from culture and religion to many other societal institutions. As such, it is highly unlikely that the state processes, particularly, policy processes would remain outside its baneful influence. We have already discussed above the market theory or neo-liberal theory based approach to black economy. What we are discussing here should be contrasted with the above.
In addition to the domestic economy, its multifaceted relationship with the country's external economic sector lends its colour to India's integration with the global economy. In brief, the Indian economy cannot be understood and analysed without explicitly taking into account, along with the formal (legal or open) sector, the informal (generally alegal and incorporating the excluded and marginalised sections) and the illegal (or criminal, underground, dominated by several open or camouflaged mafias) or black economy so much so that the three sectors crisscross each other at innumerable points and in several ways, making the term 'parallel' inappropriate and unrealistic. That is to say, the phenomenon of the 'black' or illegal is closely interwoven in the fabric of the legal, formal economy, the informal sector and the openly criminal sectors. In short, the rampant black economy, its enormous size, fast growth and widening arena of generation, operation, utilisation, expansion and the creation of own logic and framework have come to represent a situation of near-total breakdown of the legal order. However, owing to the distinction between white-collar and blue-collar crimes, the black economy often escapes inclusion in the criminal economy where it really ought to belong. As a result of the near ubiquity of the black phenomena, the sanctity and adherence to legal norms have reached a rather low level. It represents a wide chasm between the formal legal positions and actual, generally prevalent situation. This basic trait is also reflected in the policy processes, creating a gulf between the stated policy objectives and the actually obtained outcomes on account of the intervention of the black economy operators and processes both in Government and business. As we shall try to show, the black economy is among the major factors for the ineffectiveness of many of our economic policies.
The process of recognition and conceptualisation of the black economy came to the fore mainly with the practice of tax evasion, i.e., not paying taxes fully or partly by means of manipulation or falsification of accounts, activities, (termed creative accounting) and forging links with the tax administrators by providing illegal gratification or on the basis of 'expertise' provided by accounting and legal experts. In India, price and distribution controls and regulations are often violated by the business-persons in order to make a fast buck. This phenomenon too came to be recognised as a source of black economy more or less on par with tax evasion. In any case, the two are close cousins. Thus, a view came to prevail that the black incomes and transactions are those that evade and/or avoid payment of taxes fully and honestly (i.e., by tendentious misinterpretation of tax laws, which may itself be full of loopholes and escape routes). It is true that many other laws, like price and distribution, or import and export, or investment and production control, to name a few, too can be and are infringed with a view to earn higher than permitted returns, on which the question of paying taxes does not arise ab initio owing to their tainted origins. Such controls considered socially desirable or necessary tend to impose some costs and sacrifices on the economic actors, some of whom may look for means of bypassing them. But if some are able to do so successfully fairly regularly, then over time such practices tend to become general owing to the competitive logic of the markets and inter-firm learning. Thus, in course of time, a rather disturbingly large part of the economic transactions tend to form part of the black circuit and evolve methods of moving back and forth from the sanctioned to the unsanctioned circuit and vice-versa.