THE public policy shift in July 1991 promised that deregulation would eliminate the black economy. A decade ago, demonetisation raised similar hopes. However, the black economy is quietly thriving, particularly in Punjab, where it is creating a multidimensional crisis and severely impacting development.
Punjab’s woes are often discussed through the prism of familiar issues like the drug menace, debt burden, unemployment, tax evasion, illegal sand mining, illicit liquor and agrarian distress. These are not separate crises, but elements of a shadow/black economy that drains revenue, undermines governance, harms public health and hits economic activity. Punjab does not yet have a reliable official estimate of its underground economy. That absence is itself significant.
Estimates of India’s shadow economy vary widely, from around 14 per cent to more than 50 per cent of the GDP. More recent estimates tend to place it closer to 20-30 per cent. But the problem in Punjab cannot be understood only through the national average. The state’s shadow economy is shaped by its geographical location, agrarian economy, real-estate practices, fiscal stress, GST leakages, illicit liquor networks and illegal sand mining.
The most visible and socially devastating face of Punjab’s shadow economy is the narcotic trade. The state shares a 553-km international border with Pakistan, making it vulnerable to cross-border trafficking. Official seizure data shows that narcotic trafficking has remained high. Total seizures stood at 49,422 kg in 2022 and 47,609 kg in 2023. The crisis is also reflected in cases under the Narcotic Drugs and Psychotropic Substances (NDPS) Act, with Punjab accounting for more than one-tenth of all such cases registered in India in recent years. These figures capture only intercepted narcotics, not the full volume of the trade.
A drug economy of this magnitude generates cash flows, informal credit, patronage and laundering channels that can spill into real estate, consumption, small businesses and local politics. The scale of substance use shows how the narcotic trade feeds Punjab’s wider shadow economy. The 2019 national report of the Union Ministry of Social Justice and Empowerment estimated that Punjab accounted for 7.2 lakh opioid-dependent people, 2.1 lakh sedative-dependent people, 27,000 cocaine users and nearly 88,000 who injected drugs. A 2022 survey by the PGI, Chandigarh, reported substance use among 15.4 per cent of the population.
Addiction turns the narcotic trade into a deeper economic crisis by weakening the labour force, raising household costs, increasing informal borrowing and embedding shadow networks in everyday life.
The fiscal cost of this hidden activity becomes visible in revenue leakages, especially through GST evasion, real-estate undervaluation, illicit liquor and under-regulated extraction from natural resources. GST evasion illustrates this revenue-side pressure. GST was expected to reduce evasion, formalise transactions and widen the tax base. However, between July 2017 and December 2024, Central tax agencies registered 1,386 GST evasion cases in Punjab involving around Rs 6,454 crore, with 72 arrests linked to these cases. This indicates that tax evasion is not confined to non-compliance; it is an organised channel through which public revenue is hit hard. The persistence of such leakages shows how informal and fraudulent practices continue to erode Punjab’s fiscal capacity even within a formal tax framework.
Real estate is a major channel through which the shadow economy enters the formal economy. The gap between collector rates and actual market prices allows property transactions to be recorded at lower official values, while part of the payment is settled in cash. This enables unreported income to be converted into property assets, while reducing stamp duty, registration revenue, capital gains visibility and income tax trails. Punjab’s 2024 revision of collector rates was not merely a revenue measure, but an attempt to reduce the space for undervaluation, cash settlement and informal wealth accumulation in property markets.
The scale of the gap is visible in sharp local revisions. For instance, in Kheri Gujran (Patiala), residential collector rates have reportedly risen from Rs 3,445 to Rs 22,750 per square yard (560 per cent increase). Thus, real estate absorbs hidden income, weakens revenue collection and gives informal wealth the form of a durable asset.
Agriculture adds a more complex layer to this pattern due to the uneven visibility of the agrarian economy. Procurement is formally recorded, but labour arrangements and income reporting often remain outside regular scrutiny. The exemption of agricultural income under Section 10(1) of the Income Tax Act, 1961, is necessary to protect small and marginal farmers. Yet it can also create space for large agricultural income, and sometimes non-agricultural income, to avoid a closer examination. The same informality is visible in farm labour. A large share of agricultural workers reportedly works without written contracts. This keeps wages, working conditions and social security obligations inadequately recorded. Agriculture thus remains a grey zone, formally visible in procurement but ineffectively monitored in income reporting and labour relations.
Illicit liquor and illegal sand mining show how unlawful activities can acquire an organised economic form. Private networks make gains outside formal regulation, while the state loses revenue and society bears the cost. The 2020 hooch tragedy in the Majha region flagged the human cost of illegal liquor — deaths, medical expenses, household distress and loss of productive labour. Illegal sand mining creates a parallel concern by weakening public revenue, distorting construction material markets and damaging riverbeds as well as groundwater systems.
With Punjab reportedly earning only around Rs 250 crore annually from mining, continued illegal extraction points to weak revenue capture, environmental harm and erosion of local regulatory authority.
Across sectors, the outcome is evident in terms of revenue loss, governance problems and rising social cost. The policy response must therefore move beyond raids, seizures and arrests. Existing measures have improved detection, but have not addressed the conditions that allow these illegal activities to persist. Punjab needs more than leakage mapping. It requires a data-driven governance strategy that combines a state-level shadow economy estimate, AI-based GST risk profiling, real-time property valuation linked to market transactions, digital tracking of mining permits and transport, targeted scrutiny of high-value agricultural income claims, financial tracing of narcotics-linked assets, and community-based monitoring of illicit liquor and illegal extraction networks.
Policy must shift from ex post facto enforcement to early detection, prevention and institutional accountability. A precondition for this policy suggestion to work is the dismantling of the nexus among the police, the bureaucracy and the political class.