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Estimating the Size of Black Economy in India

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  • Sharma, Chandan

Abstract

The issue of black economy is a hotly debated issue in India and it has been the key target of policy action from last four decades. The debate is further fueled by demonetization of higher currency notes in the country. In this context, we estimate the size of black economy in India for the period 1970-2013. A currency demand approach is adopted for this purpose. The test of structure break indicates for a break in the system therefore we employ Johansen et al. (2000) cointegration test. For estimating the empirical model we utilize fully modified ordinary least squares (FMOLS) for taking care the endogeneity problem. The estimates indicate that the Indian economy has a sizable black economy. Specifically, in the last estimated year, 2013, it is computed to be US$957 billion or 52% of the Indian GDP. Nevertheless, since early 1990s, perhaps because of a range of fiscal reforms, it has been decreasing. In the light of these findings, policy implications are brought out.

Suggested Citation

  • Sharma, Chandan, 2016. "Estimating the Size of Black Economy in India," MPRA Paper 75211, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:75211
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    File URL: https://mpra.ub.uni-muenchen.de/75211/1/MPRA_paper_75198.pdf
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    References listed on IDEAS

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    Cited by:

    1. Dasgupta, Manjira, 2017. "Moving towards "Cashlessness" in an emerging economy: A case study of latest policy steps in India," International Cash Conference 2017 – War on Cash: Is there a Future for Cash? 162907, Deutsche Bundesbank.

    More about this item

    Keywords

    Black economy; taxation; structural break; India;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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