ZEROING IN ON BLACK MONEY
$462000000000
IN A season of swindles, kickbacks and scams, here is some more on the mother of them all. Black money — the popular moniker given to the billions seeded by dirty deals and whisked away abroad from the taxman's prying eyes — has received much attention in recent years.
The opposition never tires of screaming foul at the government. The government, for its part, is at pains to say it is doing all it can to track down the illegal stash.
Despite the cacophony, an estimate of the scads of black money in secret bank vaults overseas has long been one big unknown, resulting in a great deal of speculation and glib talk around the subject. Finally, some help is at hand.
A new study by an international watchdog on the illicit flight of money from the country, perhaps the first ever attempt at shedding light on a subject steeped in secrecy, concludes that India has been drained of $462 billion ( 20,556,848,000,000 or over 20 lakh crore) between 1948 and 2008. The amount is nearly 40% of India's gross domestic product, and nearly 12 times the size of the estimated loss to the government because of the 2G spectrum scam. The study has been authored by Dev Kar, a lead economist with the US-based Global Financial Integrity, a non-profit research body that has long crusaded against illegal capital flight.
Mr Kar, a former senior economist with the International Monetary Fund, says illicit financial flows out of India have grown at 11.5% a year, debunking a popular notion that economic reforms that began nearly two decades ago had tempered the creation and stashing away of black money overseas. Outflows accelerated after reforms
IF CAPITAL outflows were a child of the independence era, the problem came of age in the years after the reforms kicked in. Nearly 50% of the total illegal outflows occurred since 1991. Around a third of the money exited the country between 2000 and 2008.
"It shows that reforms seem to have accelerated the transfer of black money abroad," says Mr Kar, whose study titled 'The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008' sifts through piles of data on the issue over a period of 61 years. The study, which Mr Kar says is the most comprehensive one yet on illicit financial flows from India, will be made public on Thursday.
His report comes amid a renewed government push in recent months to pursue black money stashed abroad. In late August, the government signed an agreement with Switzerland — its banks top a list of usual suspects — that will enable exchange of information on tax evaders. New Delhi is also in talks with at least 20 tax havens, particularly Mauritius, to extract similar information.
The government is also attempting to gain a measure of the total unaccounted money circulating in the economy. The finance ministry last week approached the National Institute of Public Finance and Policy to get a fix on such money.
But M Govinda Rao, director of the institute, says his think-tank is yet to decide on going ahead with the exercise because it is not an easy task. "A study on this subject is a huge challenge because one is dealing with a very big problem that covers hordes of money from many sectors," he says.
Black money turned into an election issue during the 2009 general elections, with the BJP harping on the issue throughout its campaign. Its leader LK Advani has been the most vocal critic of the government on this issue, time and again questioning the government's resolve to chase illegal funds. Mr Advani recently urged the government to publish a white paper on the issue.
While Mr Advani was unavailable for comment, the government's detractors on this issue say there is more talk than action to address this issue.
"Everybody knows about the gravity of the problem, but the government has not shown the political will to bring the money back to India," says Prakash Karat, general secretary of the Communist Party of India (Marxist).
The government has, however, received praise from Paris-based Organisation for Economic Cooperation and Development, which has been at the forefront of the fight against tax evasion. OECD, whose relentless offensive is largely credited with lifting the veil of secrecy over umpteen tax havens, hailed India's efforts to crack down on tax evasion and sign information exchange agreements earlier this year.
These are but short-lived answers, say experts, adding that an overhaul in the global financial system is central to a lasting solution. New tax havens will spring forth when pressure mounts on existing ones.
That is not to say there are only a few tax havens out there. Indeed, at least 91 such hotspots flourish across the globe. Asian countries, particularly Thailand, Singapore, Hong Kong and Macau, too are emerging as new destinations for parking illicit funds.
Besides Switzerland and Mauritius, Indian money is also said to end up in Seychelles and Macau. Due to the illicit nature of these deposits, pinpointing the journey's end of the bulk of India's black money is tenuous at best.
The GFI study gives a measure of the amount of money that the government is chasing, but it is only a fraction of the $1.4 trillion that the BJP claims is the illegal stash.
GFI acknowledges as much, saying its figure is conservative and hasn't taken into account smuggling and certain types of trade mischief. It also admits to gaps in available statistics, lamenting the lack of data on the consolidated fiscal balance with the government, which has hampered research. If these indicators were counted, India's total illicit outflows would well be half a trillion dollars.
But Mr Kar says the $1.4 trillion figure was an "estimate", while the numbers in the latest report are based on real data.
Still, GFI says that by no stretch of imagination is its calculation insignificant, more so when viewed against the country's existing external debt at nearly $230 billion.
"It means India could not only have contracted less debt or even paid it off, but another half would also have been left over for poverty alleviation and economic development," says Mr Kar. "There is no question that this huge loss of capital has set India back in its struggle to eradicate poverty and illiteracy."
The study has based its findings on the World Bank Residual Model that tracks illicit outflows by measuring the disparity in a country's recorded source and use of funds. It also delves into IMF's 'trade-mispricing' model that compares a country's recorded imports to what the world says it exported to the country as well as the recorded exports against its global imports. The gaps tell the story.
The perpetrators of illicit outflows, says the study, are wealthy individuals and private companies. Black money is also abetted by the existence of an 'underground' economy that emerged out of illegal activities and assets spawned by such activities.
The unabated growth of slush funds is borne out of a growing affinity of culprits for offshore financial centres, or tax havens, at the expense of banks in developed countries such as the US, France and the United Kingdom. The study finds that the share of deposits in offshore tax havens grew to 54.2% in 2009 from 36.4% in 1995.
The study is as much an indictment of feckless government action as it is about shedding a light on the nature of illicit financial flows. "The sharp rise in illicit flows means that tax evasion (which is part and parcel of such flows) is also increasing sharply," says Mr Kar.
"In the absence of good governance and poor institutional oversight, the desire for the hidden accumulation of wealth drives more of such transfers," he adds.
Though India cannot end its black money problem alone, there are challenges it must address by itself, says the study. Legal institutions and procedures need to be strengthened and streamlined. The guilty should be punished --the architects of the Commonwealth Games scam, for example -- swiftly. And tax policies must be rationalised.
"Sure, black money is there in most countries but if it worsens poverty, robs human rights and drives centrifugal forces such as naxals, it becomes a problem that can no longer be ignored," says Mr Kar.
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