Chemicals and chemical products, construction, land transport, agriculture, petroleum products, iron and metallic products, are among the 11 sectors seen as "more prone to generation or utilisation of unaccounted incomes", according to a government-commissioned report on black money.
Electricity, communication, mining, machinery manufacturing, and trade and business services are the other sectors, the National Institute of Public Finance and Policy (NIPFP) report on black money said while estimating that about Rs 5.3 lakh crore (at the current exchange rate of Rs 64/US dollar) flowed out of India illegaly in 2007.
The 1,200-page report, which is yet to be made officially public, was commissioned in 2012 by and presented in 2013 to the Central Board of Direct Taxes (CBDT) under the Congress-led United Progressive Alliance (UPA) government. Economic & Political Weekly, in collaboration with Business Standard, recently uploaded the report.
The pharmaceuticals sector alone generated Rs 46,200 crore black money in 2009-10 while, in 2010, under- or over-billing exports from, or imports to, India cumulatively generated about Rs 2.3 lakh crore of black money.
The flow of black money abroad ranged from less than one to seven per cent of gross domestic product (GDP) between 2000 and 2010, according to the NIPFP report.
Exports are used for illicit outflows to countries such as the US, the UK, China and Mexico. For countries such as Hong Kong, Netherlands, Switzerland and Singapore, both exports and imports are associated with illicit inflows or outflows.
The NIPFP report identified 11 sectors as "more prone to generation or utilisation of unaccounted incomes": Chemicals and chemical products, construction, land transport, agriculture, petroleum products, iron and metallic products, electricity, communication, mining, machinery manufacturing, and trade and business services.
Real estate and gold and jewellery were identified as the sectors where major unaccounted incomes might be held as wealth.
"At least for medical professionals, fashion designers, legal professionals," the NIPFP report pointed out, "there is large scope for under/non-reporting income due to high incidence of cash/without-bill transactions."
There is no relation between returns of income and service tax filed by professionals, clearly indicating rampant non/under-reporting of incomes and inflation of expenses, the report argued.
In the mining sector, "inadequate monitoring and regulation has resulted in extensive misuse of licences resulting in over-mining supported by widespread corruption", the report said.
"The average unaccounted incomes as a percentage of reported GDP from the minerals" for the decade 2001-10 has been estimated to be 10.32 per cent, excluding illegal mining.
Lack of coordination between multiple regulatory agencies in the pharmaceutical sector -- a representative for the chemicals industry -- has led to substantial under-reporting of sales and sale of spurious drugs between 2000 and 2010, the NIPFP report argued.
The large presence of small-scale units has also made monitoring difficult in the pharma sector, the NIPFP report noted.
Pharma companies should be issued single-use stamps to be pasted on each unit they produce, the report suggested, citing the use of prepaid tax stamps in American states to control drug trade.
Public distribution system (PDS) kerosene diverted to adulterate diesel (36 per cent of total sales by volume, according to NIPFP estimates) created Rs 11,910.1 crore unaccounted income in 2011-12, the report estimated. Price control of kerosene and tax structure of both products are blamed for this diversion.
Defining "unaccounted incomes as incomes not reported for the estimation of GDP", the report estimated black money to be 41.7 per cent of total estimated GDP or 71.5 per cent of reported GDP in 2009-10.
One of the ways of estimating black economy assumes that the share of unaccounted incomes is reflected in the stock or flow of money in an economy. Since illicit transactions take place mostly in cash, any evasion from the official economy would raise demand for currency. By looking at the changes in currency demand, NIPFP has estimated the size of GDP from the known stock of money. The estimated GDP is then compared with the reported GDP. The difference between the two GDPs is the black economy, according to the NIPFP report.
India's black economy was estimated to be 24 per cent of GDP in 2007, according to a 2010 World Bank working paper. Arun Kumar, professor, Jawaharlal Nehru University, who wrote a book-length work on the black economy in India in 1999, has estimated it to have grown to 62 per cent in 2013.
Economists typically use a physical indicator whose consumption is assumed to be related with unaccounted economic activity to estimate the size of the black economy. The NIPFP report used land freight transport because it is used as an input in all sectors of the economy. For instance, output from illegal mining will need trucks for moving extracted ore. In fact, unaccounted incomes in land transport and construction are derived from unaccounted activities in mining, the report argued.
Based on the use of trucks of average age 6-7 years for land freight transport, the report estimated unaccounted GDP to be 63.4 per cent of the reported GDP in 2011-12. When the average age of trucks is considered to be 15 years, the share balloons to 164 per cent in the year. The share of road transport in the country's output was 3-5 per cent between 1980-81 and 2010-11, the report estimated.
Based on proxy indicators for illicit economic activities (the ratio of money held in currency to that in demand and time deposits and other deposits), the report estimated the share of unaccounted income in total GDP has dropped to about 40 per cent in 2009-10 from 70-75 per cent in 1980-81. As a share of reported GDP, it has dropped to about 70 per cent in 2009-10 from 200-300 per cent in the 1980s.
The decadal average share of unaccounted income in GDP was 70-75 per cent in 1980s, around 60 per cent in 1990s and about 45 per cent in 2000s. The report attributed this partly to tax and other economic reforms since the 1980s.
Among the limitations the report said it faced in analysing policy choices were the lack of organised and consistent data. For instance, there were large discrepancies in information given by various authorities on mining, pointing to the unreliability of public data.
"The only authoritative figures of the sale and purchase of gold in India are from the World Gold Council," the report said. "It appears that most policy analysis would have to be based on hunches and guesses," it added.
(In arrangement with IndiaSpend.org, a data-driven, non-profit, public interest journalism platform, with whom Vipul Vivek is an analyst. The views expressed are those of IndiaSpend. Feedback at firstname.lastname@example.org)