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Estimating the Size of Black Economy in India

Listed author(s):
  • Sharma, Chandan

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.

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File URL: https://mpra.ub.uni-muenchen.de/75211/1/MPRA_paper_75198.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 75211.

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Date of creation: 20 Nov 2016
Handle: RePEc:pra:mprapa:75211
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  1. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 99-125.
  2. Phillips, Peter C B, 1995. "Fully Modified Least Squares and Vector Autoregression," Econometrica, Econometric Society, vol. 63(5), pages 1023-1078, September.
  3. Lee, Junsoo & List, John A. & Strazicich, Mark C., 2006. "Non-renewable resource prices: Deterministic or stochastic trends?," Journal of Environmental Economics and Management, Elsevier, vol. 51(3), pages 354-370, May.
  4. Mitra,Arup, 2016. "Corruption and Development in Indian Economy," Cambridge Books, Cambridge University Press, number 9781107152670, December.
  5. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters,in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc.
  6. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  7. Frey, Bruno S & Pommerehne, Werner W, 1984. "The Hidden Economy: State and Prospects for Measurement," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 30(1), pages 1-23, March.
  8. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
  9. Guerino Ardizzi & Carmelo Petraglia & Massimiliano Piacenza & Gilberto Turati, 2014. "Measuring the Underground Economy with the Currency Demand Approach: A Reinterpretation of the Methodology, With an Application to Italy," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(4), pages 747-772, December.
  10. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303-303.
  11. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  12. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  13. Chaudhuri, Kausik & Schneider, Friedrich & Chattopadhyay, Sumana, 2006. "The size and development of the shadow economy: An empirical investigation from states of India," Journal of Development Economics, Elsevier, vol. 80(2), pages 428-443, August.
  14. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
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