System D and its effect on economy

Central bank reports often use complicated jargon to describe relatively simpler and commonly known issues.

System D is one such term used in the latest Financial Stability Report released recently by the Reserve Bank of India. ET decodes the term and helps you understand it

1. What is System D?
Shadow economy is also referred to as System D. The term shadow economy may refer to black economy or black money, says RBI in its latest financial stability report. There is no uniform definition of black money in economic theory and various other terms such as 'unaccounted income', 'black income', 'dirty money', 'black wealth', 'underground wealth', 'black econo my' and 'parallel economy' are also used in this regard.

2. How is it defined in the Indian context?
In the Indian context, a white paper on black money , released by the Department of Revenue, Ministry of Finance, in 2002 adopted a definition of black money as “as sets or resources that have neither been re ported to the public au thorities at the time of their generation nor dis closed at any point of time during their pos session“.

3. Are there any estimates of the size of such a system at the global level?
Though estimating the size of the shadow economy is chal lenging, according to the Organisation for Economic Cooperation and Development ( OECD) half of the world's workers were employed in the shadow economy in 2009 (this number is likely to grow to twothirds by 2020). According to an article published in Foreign Policy , the global black market, approximately valued at USD 10 trillion, is the world's second largest “economy“ and is also the fastest growing one (Neuwirth, 2011)

4. What are the problems associated with such a system?
One of the many problems with the shadow economy is that it renders official statistics unreliable and severely impacts policy formulations by governments. Besides, the loss of tax revenues may force governments to hike tax rates, which may further encourage greater activity in the shadow economy.