Black Money or Illicit Money is currently in the news not just as a social evil where the country’s resources are clandestinely taken abroad, defrauding the exchequer of valuable resources, but also as a political point with the opposition using the issue to browbeat the government. So what is ‘Black Money’, how much of it is out there, how we get it back and if we ever get it back what effect would such funds have on our economy?
Manik K. Malakar reports…
A wisecrack goes that the “safe way to double your money is to fold it over once and put it in your pocket.” Well, double or not a rather large number of people in India feel that the safest avenue to park their money is in foreign countries. But now this ‘black’ or illicit money is giving the government of India some sleepless nights… as the demand for getting it back in to the Indian shores cascades…
“The recent fracas over unaccounted money parked overseas has resulted in a renewed focus on ‘black’ or unaccounted money flows from India,” notes Rohini Malkani, an Economist with Citi India. To recap since the past several weeks the Government of India headed by PM Dr. Manmohan Singh has been under fire from the judiciary, the opposition as well as the media for not taking action against people who have been alleged to have stashed money abroad.
“This is an issue of huge losses to the nation caused by siphoning off money from India to safe havens abroad,” says Dr. V K Vijayakumar, Investment Strategist, Geojit BNP Paribas. In fact the quantum of money that is involved is massive and may even rival the Indian economy! “It is very shocking and the amount of black money held by very few people is alarming. A parallel economy is run with such money by a few people,” says K. Jayraman, Research Associate, Bonanza Portfolio Ltd.
Parikshit Joshi – a senior media professional also feels that the wheeling and dealing that is going on in India is responsible for the current upheaval. “One must understand as to why the issue of black money is rearing its head again: the debate has been triggered by a recent spate of scams—involving multi-crore deals.” “It’s the funds of politicians, bureaucrats and industrialist,” says S. P. Tulsian an investment consultant. Such money has usually originated from bribes and Tulsian is firmly of the opinion that the country must get such funds back.
It must be mentioned that this sort of fund diversion is not new to the country and has been happening from the time of independence.
Unfortunately, the government says that in the absence of a bilateral treaty with Liechtenstein, India cannot seek any administrative assistance on Indian clients of the LGT Bank, notes Citi India. Efforts are currently underway to sign a Tax Information Exchange Agreement (TIEA) with Liechtenstein which would aid disclosure, but Liechtenstein is negotiating a Double Taxation agreement (DTAA).
Observers are sceptical that the country will ever see such illicit outflows coming back to these shores. “Given the involvement of the powerful and mighty politicians, it appears to be a mirage that black money stashed abroad could be brought back to India,” said Joshi.
Several governments had in the past announced VDIS (Voluntary Disclosure of Income Schemes) which succeeded in unearthing of some black money and putting it in the economy, but the problem still persists.
Ominously, black money may have already found its way to our shores…in the form of investment. “Such funds have come into the country in the form of overseas investment and project investment,” said Tulsian. Some FII (Foreign Institutional Investment) may also fall into this category. Tulsian informed that such money usually finds its way to the stock market and also real estate.
Solving the black money problem according to observers would involve an international component, with international persuasion needed to get the money back. “A permanent solution to this problem lies in uprooting the roots of this black money which would involve strict punishment to the perpetrators of this crime and international cooperation to bring the criminals to book,” said Vijayakumar.
But then again maybe the problem lies with those who are supposed to bell the cat. “The problem is that the ‘powers-that-be’ who are supposed to formulate laws are themselves the perpetrators of this crime. This is largely a ‘thief is within the ship syndrome’ said Vijayakumar.
So just how much money has the country lost? Well, of course it will be hard to audit such funds to an exact amount but Citi India has a few numbers.
The Global Financial Integrity (GFI) in a recent study estimated that the present value of total illicit flows at 462bn dollars. A BJP Taskforce report of 2009 estimated the quantum at anywhere between 0.5-1.4 trillion dollars.
GFI has estimated that on an annual basis, India looses assets at the rate of 19 billion dollars every year. “These flows are typically the result of tax evasion, corruption, bribery, kickbacks, and terrorist activities,” noted Malkani.
Perhaps the very symbol of India economic prowess – the economic liberalisation of the 1990s onwards is responsible for some of the woes. While the cause of illicit flows is attributed to structural and governance issues, an interesting finding by GFI was that liberalization of trade and deregulation actually led to an increase in illicit out flows. ‘While this is counter intuitive, GFI attributes this to slow progress in strengthening of institutions governance, consequently resulting in mis-invoicing and the presence of a large underground economy,’ was Citi India’s take on a top-to-bottom failure in the system.
Mind-boggling was the adjective used by Jayraman, and he felt that even a small amount of this money if repatriated to India would help us tremendously.
Now just suppose that the money were to flow back to the country is the hope of some observers what would this mean? Is it just that a tidal wave of inflows from abroad would be a boon to our economy? Well the answer may not be so cut and dried…
First of all the amounts that come into the country would be huge. “These are in the realm of guesstimates. Guesstimates ranging from 400 billion dollars to 1.2 trillion dollars are doing the rounds,” replied Vijayakumar when asked about the possible sums of Black Money that could return to the country. Jayraman has a more conservative 20 to 25 thousand crores that could return to India.
Also the inflationary aspect needs to be considered, as according to Geojit BNP Paribas analysis inflation will certainly be aggravated. Remember that inflation at this point of time is high and is almost as big a bugbear to the government as Black Money. Government policies and RBI measures would be needed to keep inflation in check, but Jayraman is confident that this can be achieved.
But equally there would be positive effects as the curbing tax evasion and efforts to bring back illicit flows overseas would positively impact both Public Finances as well as the Balance of Payments, via the remittance route, noted Citi India.
Just what would be the contours of a possible amnesty? “The government has to offer low tax rates so that the benefits of such money is available for the economic growth of the country,” said Jayraman. Whilst this would be unfair to existing honest taxpayers, there is no alternative. Also there would have to be no penalties and the upfront acceptance of such disclosures.
Also any lock-in period is a no-no. “This would be a dampener,” he said.
Just where is the ‘Black Money’ and what is is the mindset of the people who park them there? It is safe to say that these are in the secretive banks that are the realm of opposition attacks, and thrillers. “Depositors are more concerned about ‘return of capital’ rather than ‘return on capital’ since this is ill gotten money,” was Vijayakumar’s witty analysis. “Largely it is safety than any other thing,” confirmed Jayraman.
And yes, these gentlemen though having parked their funds abroad would be smart enough to avoid the defunct economies like that of Portugal, Italy, Greece and Spain – the so-called ‘PIGS’ economies.
We are taking some efforts to get the ‘loot’ back. “Earlier this month, the Indian government adopted a 5-fold strategy which comprises playing a proactive role in the global crusade against illicit funds and creating an appropriate legislative framework including setting up overseas tax units,” said Malkani. India is working towards modifying the articles concerning exchange of banking information. India has also taken steps to prevent money laundering as well as terrorist financing.
Tax and its reforms will have to be given a closer look. “Further low Income Tax rates must be done gradually year-on-year. A 15 per cent tax is ideal, creating new job opportunities and increased revenue collection through various other sources,” says Jayraman. Improving tax collection by the adequate use of technology is also important.
The amnesty for ‘Black Money’ avenue that is being touted as a way of getting the funds back to the country too is not enthusiastically received. “Amnesty schemes cannot solve the problem,” said Vijayakumar. “Basically, if the government takes concrete and decisive steps, with a will to bring back the black money, there is no need for any amnesty scheme, unless it is a voluntary declaration,” said Joshi.
Tulsian noted that the government has given an undertaking to the Supreme Court that there would be no amnesty scheme, but he opines that an amnesty scheme in inevitable in order to get the money back. Is an amnesty justified? “I have no answer to that question, but I also see no other solution,” was his candid reply.
Historically to whilst in the past sources of black money like gold smuggling, exorbitant income tax rates did exist the liberalisation of the economy has changed the face of the economy. “Other sources like corruption have increased exponentially,” said Vijayakumar.
However, the depressing conclusion is that this is a problem that will take some time to go away, with analysts unanimous that the problem will persist. “As long as corruption is there, the bane of black money will continue to haunt the country,” said Joshi.
A similar view is held by well known journalist and Senior Editor of the TV Today Network, Sandeep Bamzai. According to him “Black money is the hot button subject in urban Indian middle class conversations these days. Does the govt have the wherewithal to deal with the scourge of black money or is it going to take refuge behind double taxation avoidance treaties? The Hasan Ali Khan case is symptomatic of the larger malaise where the govt's investigative agencies have put together the tent poles for an overarching probe, but for some strange reason political will has not allowed them to bite the bullet despite overwhelming evidence. Is the way forward an amnesty scheme on the lines of the one architected in 1997-98 or a belated attempt to bolster the enforcement directorate to ensure that forex violators don't get away? The ability to make an example out of genuine offenders remains the single biggest weakness.”
Black money is the hot button subject in urban Indian middle class conversations these days. Does the govt have the wherewithal to deal with the scourge of black money or is it going to take refuge behind double taxation avoidance treaties? The Hasan Ali Khan case is symptomatic of the larger malaise where the government's investigative agencies have put together the tent poles for an overarching probe, but for some strange reason political will has not allowed them to bite the bullet despite overwhelming evidence.