Forecasting correctly, the Indian GDP growth is next to impossibility. It is not that the method used to compute is not robust but most of the data on economic activities that should come under the purview of GDP calculation is not available. In India, the size of the unorganized sector is massive and is mostly based on cash transaction. Why is this so? For a population of 1.25 billion people there are only 100000 public and private bank branches across India. Approximately around 50 to 60% of the 680000 villages in India probably may not have a bank available in its neighborhood for transacting. Both the velocity and size of turnover of business and also the amount of money being transacted cannot be easily guesstimated.
From my own limited knowledge gathered through talking to a tender coconut vendor in Chennai, I realized that it is not possible to track the transactions that take place every day. As far as records are concerned his sales is not part of economic activities of the country. The one vendor that I am familiar with borrows Rs. 1800 every day to buy the tender coconuts and returns Rs. 2000 by 6 PM the same day. If this data could be cumulated over the entire country, we could add another 50% to our economic activities. It matters because if creates job for at least one person. Once the income tax is abolished (This is what Dr. Subramaniam Swamy promises if he becomes a Finance Minister) the number of people employed in the unorganized sector will increase multifold. Practically every apartment and house will become either a trading or a service center. Doctors, Lawyers never report their income correctly and so spending time worrying about GDP growth rate will be futile and will be a wasted energy. Countries even cook up their books like what Greece did and accepted it openly.
Can the so called illegal activity be part of the GDP? Yes, says the Italian government. It has just announced it will include revenues from prostitution and illegal drug sales to its Gross Domestic Product figures.
If India decides to change the way our GDP is computed, you may be in for a bonanza. Except salaried employees where the tax deduction takes place, most of the transactions that take place are without any records. Take the case of a fruit vendor, vegetable vendor, road side tea stalls, mobile food services on the streets, the street tailor, cloth ironing, flower vendor to name a few, have never heard of income tax and don’t bother to report their income.
India is a huge country with 800-900 million people who do odd jobs and survive. Black money is used in a plenty of major sectors such as Construction, Housing, Entertainment business, Betting etc. the revenues are never properly accounted for, which by itself will amount to billions of Rupees. Added to this is the money spent during the national and provincial elections that could add up several billions more.
Mr. Prime Minister, please recognize the presence of this black money in the economy and let it be. Encourage the money to flow through all activities that can create jobs. Also allow interest income to become tax free and this will generate huge savings and encourage the habit of saving. The old and retired people will thank you immensely.
Finally, we need a vibrant economy. People afraid of tax laws use their funds in wrong activities. Shift the taxation to consumption and not an income. This way everybody will pay tax whether the income is derived through agriculture, rent, or gambling. Like a magic, the budget deficit will come down and the real economic activity will take off bringing back the confidence that was lost during the UPA government.