Grey Market and its Impact on Indian Economy

Discussion in 'Economy & Infrastructure' started by Yusuf, Mar 26, 2010.

  1. Yusuf

    Yusuf GUARDIAN Administrator

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    and yes, in india there is something called black market which is as big as the reported or official market. Those figures will never come up. There are so many small time assemblers of PCs here and they don't give any invoice or file sales returns to the government.
     
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  3. johnee

    johnee Elite Member Elite Member

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    Exactly, and arguably the black market is twice the official market if not more.
     
  4. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    Well it really depends on who is feeding the grey market, a lot of times the undercutting is done by the companies themselves to achieve the targeted sales figures and the norm does remain somewhere between 15-20% of the total sales being done, where in some cases it can go as high as 50% but that is a case of rare of the rarest and if done continuously is a recipe of disaster but all this part gets accounted for. These are the things which go unspoken but remain known facts within the companies but yes a lot of sourcing also gets done from outside which gets no where accounted for, but that market will never be bigger than the branded/unbranded market or even half of it.
     
  5. Yusuf

    Yusuf GUARDIAN Administrator

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    Ritesh, I am a trader and I know the kind of black sales that go on. companies filing in sales of less than 10 lacs a month whereas their actual sale was close to a crore.
    Forget that, take our friendly kirana store. They never issue invoices. All sale becomes black. Yes it surely will not be double the actual sale or something overall, but I think parallel GDP will surely be at least 50% of the official one if not more.
     
  6. johnee

    johnee Elite Member Elite Member

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    Perhaps not double(well, I thought bit of exaggeration would be needed to drill the message into our dear chinese brethen), but the parallel market, IMHO, is comparably equal to the real market.
     
  7. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    mate, when a product moves from a company to the distributor point it is all accounted for and these are the figures that a company reports as its annual sales figures, no matter where these products are destined for, ie be it the grey market or the dealer/retail point and it hardly makes a difference if that products further gets to the consumer through the black economy (ie when no billing happens, something that you pointing to) or if it goes through the billing route. so what a company like dell or xyz any other company will report will be the figure which they billed to the distributor.

    what is not accounted for is a container moving into the country and same shown as loss in some freak accident in which people right from the top management to insurance guys all make the money, and this gets all followed in the best known companies, and generally no such accident has taken place and the proceeds from such sale are further gobbled up, not only that there remains a route of smuggling (both from outside and to other countries), in fact sales get shown in india but are happening in b'desh, p'stan, nepal etc, these markets are full of Made in India, Exported to India, Made in China and Exported to China with nothing official about them.
     
    Last edited: Mar 27, 2010
  8. Yusuf

    Yusuf GUARDIAN Administrator

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    Manufacturers send without accounting mate. Or they under invoice.

    Also when considering GDP all goods and services are added. now the friendly coolie is not accounted, nor is the gol gappa wala or the auto rickshaw etc... I understand your point about the big manufacturers accounting their wares. But a lot goes on in the economy that is not accounted. Real estate is another such thing.
     
  9. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    mate not denying that, what you say is certainly true.

    my main focus was a company like dell where the room of creating market that goes unaccounted for remains far less, of course people find ways of beating that system as well but then counter measures do restrict that from happening amass. when i used the figures like 15-20% which in some rare cases could shoot up to 50% of the accounted products entering grey market, then it was specifically keeping in mind a company like that, where these companies directly feed the grey market since if the company is not doing that someone else will, infact the same company will do it but with operations from some other country will do to shoot up their sales figures (in the local market the same company becomes the competitor) as happens in our neighbourhood who are fed with stuff meant for india. so when a company like that is directly feeing the grey market, rest assured that product in its past dealings has been accounted for.

    not to say unaccounted sales do not happen at all, so i took one such example of a complete container going missing.
     
  10. Rage

    Rage DFI TEAM Stars and Ambassadors

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    I think there is also the consideration of unlicensed assemblers assembling PC's from scratch, from components sought from different sources. That I think comprises the crucial part of the grey market in PC sales. I know I bought my first PC from a guy called Rajan, who sourced components from Malaysia and assembled the PC in his now bustlin' shop in Goregaon. He also served as my technician for a good many years. If he was to be believed, most household consumers in India in the '90's were buying desktops from hardware assemblers, who also installed pirated software on their systems and doubled up as technicians, because they were so good.

    If components were being sourced cheaply from local manufacturers, they were liable to underwrite sales or not report them at all. If they were being imported in mass quantities, records malfeasance would be more difficult, but still possible. With the exception of imports, it would be impossible to factor all these into GDP because they were not final produce, rather sub-components for a larger, finished good. Having some, previous exposure to the extent to which Indian companies will underreport sales for tax-evasion, I'd hazard a guess that the gray market for computer goods in India comprises a significant, if not preponderant, percentage of the total market.
     
  11. no smoking

    no smoking Senior Member Senior Member

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    It is meaningless to discuss how Indian economic scale should be bigger when take underground market into consideration. Actually, every country has its own underground market share. Especially for developing countries like india and china where the law is not enforced very well.

    So, if you think that india could be in a better position in the comparison with other developing countries, you are probably wrong because other developing countries may have a even bigger underground market. The reason I say this is because india was supposed to have the best legal system among developing countries, which means the extent of law enforcement in india is higher than other developing countries. So the proportion in its economy beyond the regulation would be smaller correspondingly.

    For example, all the computers or part I bought in China until today are from underground market. I only get a receipt for any of my payments. Just 8 years ago when I left China, there were almost 75% of the my friends bought their computer from Beijing, the top law rulling city. Even last Dec, when I bought a USB hard driver, that was same kind of transaction. Otherwise, I have to pay 14% tax to gov.
     
  12. Rage

    Rage DFI TEAM Stars and Ambassadors

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    Two things I will address:

    • Our analyses of the "impact of the grey market on the Indian economy" is not necessarily for a comparison with other states, or by extension you.
    • India 's 'legal system' may be the "best", but it is certainly not the most expeditious, nor the most pervasive.
    • The Indian grey/black market as a proportion of its total market is probably the highest among all, relatively stable, developing countries. Small businesses regularly report as little as 10% of their total sales on invoices, the number of private entrepreneurs and businesses outside the 'regular' system is colossal, receipts on final sales at retail levels are rarely produced and restrictions on imports to nurture domestic competitors even while the burgeoning Indian middle class has an appetite for foreign goods, ensures that the underground markets for goods and services thrives.
    • As a case study, I remember reading in 2008 that the size of the regular Indian cement market as a proportion of the total cement market, estimated via the method of comparative statics, was 30%. There is a huge private infrastructure boom in India, and construction companies often source materials and wares fractionally from licit and illicit sources.
     
    Last edited: Mar 28, 2010
  13. Yusuf

    Yusuf GUARDIAN Administrator

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    I read an article by I think by Swamy iyer. It was during he housing bust in the US and how india was insulated from it because of the black money.

    Since all american homes were from bank and all white, the borrowers defaulted and just vacated the premise. Banks accumulated a lot of such assets whose market value crashed.
    Now in india, most people buy homes taking only a part of the cost from banks. They register at an amount equal to the white money they pay and it can be as low as half the value they actually pay. The reasons are that the buyer wants to avoid registration charges, he also has a good amount of black money from his business. The developer too needs black money as he too wants to avoid taxes. So what happened when the markets bust? The people had only part financed their homes from banks. Rest was their hard earned black money which was invested, they had no option but to stay put. This saved india from a crash.

    Black market is not necessarily a bad thing. It does have some advantages.
     
  14. threadbrowser

    threadbrowser Regular Member

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    Well on one side i like grey market because it helped me afford a pc when i was very cash poor. On the other side as a long suffering tax paying salarywalla i have huge hatred towards traders and dealers because they make crores and dont pay a cent of tax.

    In the long term though, in order to let the nation grow this imbalance has to be fixed. Tax the consuming middle classes less and reform commercial tax system to be cheaper and simpler to encourage tradesmen to pay tax.
    After some amnesty period, enforce ruthlessly the same laws, imposing huge fines, seizing both violator's property as well as property he puts in name of others.
     
  15. Yusuf

    Yusuf GUARDIAN Administrator

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    The prime reason for tax avoidance is high and multiple taxes. No one has bothered about that. By paying income tax doesn't mean you are a tax payer. We pay sales tax and other taxes too. So there is a whole gamut of taxes at every stage. Tax reforms are the key to tax compliance. GST will go a long way in addressing that. But still income tax will always be an issue. One may well argue that india has lesser income tax than others, but then we can't be compared to the west. we are still a poor country and don't like to part with our hard earned money. A person who falls in the first slab, earning 180,000 a year will have to pay 18k as tax. Yes he will have to plan it out but still it means lesser money at his disposal. You buy a litre of gas which has after all state and central levies nearly 100% tax. We could well pay half the amount as we are doing right now for gas if not for all the taxes.

    Yes the government needs money which can come only from taxes, but irrational tax is what is leading to evasion. If that is addressed then we can have more compliance, VAT changed a lot in this regard. There is better sales tax compliance as tax is added on on the value added.
     
  16. threadbrowser

    threadbrowser Regular Member

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    Yusuf you don't get it. An average middle class company employee has no choice but to see his hard earned pittance of a salary reduced by TDS.
    This is why he has hatred towards traders and businessmen because they can easily avoid all this. On top of this they start talking of how terrible paying excise and VAT is and how that nasty Withholding tax is so burdensome to collect and remit challans for.
    Then when he has to pay indirect taxes on every commodity he has to consume such as fuel, food and white goods he is again angered because it is the govt's inability to properly tax businessmen and traders that makes them impose the double tax burden on the middle classes.
    I agree that our tax codes are extremely red tape filled and a bit on the high side, but justice will only be seen to be done when serial evaders are punished heavily and publicly.

    I myself when i started in work never used to care about taxes, but as time went by and responsibilities increased and i came into contact with many business types through my work only then did i realise who caused those heavy indirect taxes that i was always complaining about.
     
    Last edited: Mar 28, 2010
  17. Yusuf

    Yusuf GUARDIAN Administrator

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    Do you know how much a business man, trader/dealer has to shell out to the corrupt officials?
     
  18. threadbrowser

    threadbrowser Regular Member

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    Less than taxes DuH. Otherwise there would be no utility in it for him. Besides citizens in all walks of life have to shell out to corrupt govt wallahs.
    Maybe the only solution is to chuck away the tax codes like slovakia and go for a flat 20% rate.
     
  19. Yusuf

    Yusuf GUARDIAN Administrator

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    Weights and measures guys come and harass sighting all kinds of laws. Sales tax people come and site all kinds of laws and take money.

    All said, its the duty of every trader to raise an invoice. But sometimes the end users usually small fabricators don't want to pay tax and don't take an invoice. VAT has changed things a lot.

    A dealer rather not sell without bill as you won't get input credit. So no incentive to sell without bill.

    Main problem still remains income tax. 33% for businesses. And then personal income tax. All adds up to quite a lot for someone like me who runs a small business
     
  20. threadbrowser

    threadbrowser Regular Member

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    Yes you have a valid point that for small traders the tax burden is a bit high. But and end of the day businessmen should not take it as excuse to completely avoid taxes either. I guess things will only improve when we get some good FM who will remove much of these taxes and put a standard flat 20% rate or something similar.
     
  21. Yusuf

    Yusuf GUARDIAN Administrator

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    20% sale or income tax?

    20% sales tax is pretty high. Rest assured end users will not prefer to buy with invoice.

    The benefits of GST I suspect will not filter down in terms of reduced costs. The manufacturer and distributor will enhance their margin. So the price will remain the same. And then adding 20% on that will make it pretty expensive to small end user.

    The big industries and factories always will buy with an invoice as they get input credit when they sell. Its the small trader / buyer who invades the tax. And there are a lot of them.

    Income tax will always remain an issue. No matter how many ambassadors come up asking to pay tax honestly, but our system is loop holes filled which gives plenty of scope for evasion. And yes no one wants to part with their money. I think the situation will change if we have an honest polity too. Right now there is a lot of cynicism in the public about how their tax money will end up being used. Once we have better governance and transparency, you will see more people pay their taxes honestly and participate in building the nation.
     

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