Reviewed by Sep 30, 2020| Updated on
The black economy refers to the country’s economic activity consisting of business dealings, which are outside the formal economy. The business activities carried on in the black economy do not follow the rules and regulations set by the government. The business may or may not be categorised as legal or illegal, depending on the nature of the goods or services.
The black economy can be classified into the informal economy, the unreported economy, the illegal economy, and unrecorded economy. A black economy or black market can arise due to many factors. The factors typically include restriction placed by the government on the trading or manufacturing of certain goods or provision of certain services.
For example, there is a restriction on production, cultivation, trading, and distribution of any narcotic drug or psychotropic substance under the Narcotic Drugs and Psychotropic Substances Act, 1985. This would be part of the illegal economy.
Similarly, the government may restrict the number of imports. For example, there is a restrictive import policy for gold followed by India. Another case is the imposition of high import duties on certain products, making them quite expensive to import by following the rules and regulations.
For example, the import of cars attracts high import duties in India, which increases the cost of the car by almost two times. This is part of the informal economy.
The black economy also consists of fake goods industry where replicas of the goods belonging to another well-established brand are sold under the same name. The fake goods industry is outside the formal economy, causing piracy and loss of revenue to both the brand and the government. This is part of unreported or the unrecorded economy.
The regular business dealings in a legally allowable good or service can also give rise to the black economy. The payments and receipts in connection with the business dealings which are outside the formal economy circumvent taxes on both the payments and receipts.
It can also create a chain of non-taxable activities when the person to whom wages are paid does not report the income. This is part of unreported or the unrecorded economy.
Black market activities also include harmful activities, such as robbery, sale of stolen goods, kidnapping or murder for ransom and so on.
People or organisations carrying on the activities in the black economy conceal their activities from reporting to the government under various laws and regulations. The carrying out of such activities generally comes with a penalty and also imprisonment in certain cases under the applicable laws of India.
Black marketers or smugglers who supply consumer goods banned in a certain region benefit the people in that region with better quality goods. The banning of the goods may be on account of the socialist policies of the government or due to fiscal reasons.
However, the black market has a large negative impact on the well being of society and the nation. The single black market activity can create a chain of other black market activities and cause harm to society—for example, the consumption of banned narcotic drugs and substances.