Black Economy Public Policy Interface:

The above mode of functioning and expansion of the black economy became an important basis for policy disruption in India. The underground economy works under the wings of the informal and formal sectors. It enters the consumption sphere and values and along with the economy also involves the executive, legislative and judicial wings of the state. It concentrates social power and influence in the hands of the black economy operators and, thus, becomes a powerful player in the policy arena. It becomes a sort of state within the state. The operation of the black economy during the statist (that is when the state plays the leading role in the economy on a large-scale regularly) controls and regulations era  of India frustrated most of the state policies and gave outcomes contrary to the declared economic, social-populist objectives which tried to combine industrialisation of the catching-up variety with reduction of extreme poverty and  attainment of a modicum of social welfare. What we achieved was limited and lop-sided exclusionary growth. It was highly costly (with rising capital-output ratio). It was concentrated in the hands of a few monopolistic industrial conglomerates with location largely in a few states and metropolitan centers. As a result of the influence of the black economy, the production pattern became heavily loaded in favour of high-income goods and services. There was regular erosion of the purchasing power of the rupee with long-term rate of growth of inflation averaging 8 per cent per annum. It became a basis for increased dependence on external financial sector, investors and suppliers of technology. In brief, it led to the collapse of developmental state and  self-reliant development in India by around the end of the 1980s. The consumerist urge to adopt the consumption level and pattern of the rich countries and concentration of income, wealth and power gave impetus to smuggling. The urge to hoard black wealth in the form of gold gave a double boost to stashing away of black wealth worth thousands of crores of rupees (illegal capital flight) and for smuggling by means of hawala to finance smuggling. It is clear that the direct and indirect impact of the black economy, covering the election process and party politics, corporate functioning through stock markets, under and over invoicing of exports and imports, tax evasion, etc., creates a close, informal nexus between the top rungs of bureaucracy, politicians and corporate promoters and executives, and, later on there comes about a liberal mixing of criminal mafias with the above trinity. These criminal and others with tainted black money try to launder their ill-gotten wealth by placing it in the hands of businessmen for financing films, real estate, hoarding of scarce commodities, production of fake and spurious goods, human trafficking, etc. As a part of these processes there takes place more or less on a regular basis leakages from public spending, virtually amounting to loot of public funds (as manifested in innumerable scams of increasing volume of money). These kind of goings on have vitiated every stage of the policy process in a big way, as what actually happens becomes vastly different from what is announced and legislated (though it is not altogether absent even from what is legislated). The way these public policies tend to serve the interests of the black market operators who come to command a dominating position in the country and in Government makes one wonder what is public about the public policies in India now. After all, they reflect and further the interests of a  tiny section of society who come to dominate the social and state processes. In the preceding section, we have illustrated the relationship between policy failures and the black economy by the case of tax policy. All kinds of licensing are other major areas in which policy implementation was vitiated by the black economy.  

A huge, widespread black economy, with active, indulgent, supporting and/or collaborative role of state processes and personnel, expands itself by reinvesting the black incomes and savings into the black circuit to finance politics, crime syndicates and some businesses on a growing scale. Even the use of black incomes and wealth in the consumption sphere leaks in a good measure into the black economy. These traits make the phenomenon of black economy a really tough nut to crack. We are referring to the large-scale forays of the unsanctioned, illegitimate economy into politics, policy and administrative processes and crime. The protection and clandestine support provided by the political-administrative structures to the black deals, extends over time to public expenditure by forging a nexus between public works contractors, suppliers of goods and services to public agencies, including the public enterprises, appointment authorities of public personnel, approver of foreign collaboration deals, including for defence supplies, proposing schemes of incentives and taxation to various industries, granting of industrial, imports, capital issue licences, etc., (the list can go on).