The recent trip to India was an eye-opener of sorts. I had always been cognizant of there existing a significant parallel economy in India. But this current trip, I interacted with people familiar with the tricks of the trade. Presenting a few thoughts that I feel are pertinent:
Black money is undeclared money, money that has never seen a bank account, money that the government does not know exists; money that has not been taxed. Almost all Indians who deal in real estate have a secret stash of black money hidden under a mattress somewhere. And this is perhaps a reason why you don't see Indians use cards and checks while doing their groceries; they use cash.
Incidentally, some speculative articles in the popular press (not peer reviewed, mind you) contend that black money is saving the Indian economy from a US economy type fate in this credit crunch. Anecdotal evidence talking about Sony Bravias (worth a few lakhs) still selling despite hell having broken loose in other markets seems to corroborate this notion.
The size of the Indian black economy defies quantification. It is unanimously agreed that India's black economy is at least 20% of the size of its GDP. Some estimates hold that a conservative estimate of India's unofficial economy is around 50% of the GDP. And I have it from a few personal sources that the black economy is roughly equal in size to the actual GDP.
When we consider the annual per-capita income of India (or annual per-capita GDP, for that matter), do we also factor in the black component? We quote that the per-capita income of India is $2600 per year (based on PPP) - and we lament fact that we are living in a poor country. But, if 50% of the economy is black, then the per capita income would turn out to be $3900 per year. A significant change. Maybe Indians are as rich as Sri Lankans, it looks like. And If the economy were equal in size to the black economy, then India's per capita income would be $5200, almost on par with that of Egypt. (Of course, Egypt and Sri Lanka probably have under-reported their economies too, but not as badly as India).