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Instead of wasting time chasing the stash, say experts, India should focus on curtailing the outflow of black money and adopting measures to arrest its creation within the country.
In its latest quest to tap black money to fund growth, in the aftermath of the global financial meltdown, the Indian government has begun negotiations with Switzerland to urge the country to loosen its infamous secrecy laws and share data on tax evasion cases.
In May, New Delhi claimed that after “persistent” pursuits, the Department of Revenue had, with the help of Germany, succeeded in obtaining information on Indians with secret accounts in LGT Bank in Liechtenstein Ltd., a bank governed by the secrecy laws of Liechtenstein – a known tax haven.
“But India may be putting the cart before the horse,” said Raymond Baker, director of Global Financial Integrity, a Washington D.C.-based think tank that claims to be the global campaigner for curtailing illicit financial flows and tighter control on tax havens.
“The prerequisite, before India can begin to address the accumulated stock of money abroad that was taken out previously, is to curtail the ongoing outflow of money from India. That is the more pressing issue at the moment than trying to address the stock of stashed money abroad, because one no one knows how big the stock is, and two, it is difficult to get it back,” said Baker.
According to GFI, which is the first international organization to seriously study the flow of black money, or what it calls illicit money, from 2002 to 2006 India witnessed average illicit financial outflows from a low of US$22.7 billion to a high of US$27.3 billion per year.
GFI ranked India fifth in the list of 160 developing countries suffering from the outflow of illicit money. In its report Illicit Financial Flows from Developing Countries, 2002-2006, GFI estimated that over 1 trillion dollars of illicit money moves out in a year across borders, with Asia accounting for 50 percent of that outflow. China with US$233-289 billion topped the list, followed by Saudi Arabia (US$54-55 billion), Mexico (US$41-46 billion) and Russia (US$32-38 billion).
“This is alarming. The report means that during the five years of GFI study, over US$136 billion of black money was moved out of India,” said R. Vaidyanathan, a professor at the Bangalore-based Indian Institute of Management. “However, if one considers that India has been witnessing the outflow of black money for the last six decades, the total amount of black money stashed away may be many times higher.”
The issue of black money has plagued India for decades. Ever since the country embarked on radically liberalizing its economy in 1991, successive governments have claimed to tackle the problem. But the fact is that black money continues to thrive and has become an integral part of the economy.
“Despite the reforms that India has been implementing for the past 18 years, the underground economy has continued to grow and currently accounts for anywhere from 20 to 50 percent of India’s gross domestic product,” said Dev Kar, co-author of the GFI report, who in his earlier job as an economist at the International Monetary Fund tracked the problem for years.
It is hard to fathom its exact size, since black money is untraceable by its nature. According to Vaidyanathan, who is part of a task force formed by India’s leading opposition, the Bharatiya Janata Party, the estimated amount of money that has flown out of India in the past years is as large as US$1.4 trillion. This is about 50 percent larger than the annual size of the Indian economy.
“That’s mind boggling, but what is more serious is that one of the key reasons for the generation of the astronomical amount of black money is India itself,” said M. Guruprasad, professor at the Mumbai-based Asian Institute of Communication and Research. “Black money gets generated at every level of the Indian economy and every rule and law in the system facilitates its creation.”
Experts like Guruprasad say that a combination of liberalization without adequate regulation, crony capitalism, and a high level of corruption allow a parallel economy to thrive in India.
“Undoubtedly black money is a global problem, but while it forms just about 4 to 10 percent of GDP in developed economies, in India it is as high as 50 percent of GDP depending on what you include as black money,” said Kar.
This is why even Kar believes that India needs to examine the forces driving illicit outflows and institute policies to mitigate them, while also calling for multilateral efforts to increase transparency and accountability in offshore financial centers, tax havens, and onshore banks, which are points of absorption for illicit flows.
However, black money may also be a necessary evil for India. “Like it or not, India’s tax structure, corruption, and many other factors contribute to the creation of black money, which is very often ploughed back to the economy,” said Guruprasad. “It is incorrect then to conclude that black money does not aid economic growth at all; in the Indian instance at least, growth of black money is also an indication that the country’s economy is growing.”
Still, as India stands at the tipping point of its rise to being an economic powerhouse, it also needs to claw back every little bit of the stashed money that has found its way out until now.
After all, as Vaidyanathan says, black money generated and retained within the country is productive since it is used in the economy. But the money kept in Swiss banks does not contribute to India’s economy nor benefit its citizens.
It is estimated that over one- third of the money stashed abroad has found its way to Swiss bank accounts while the rest is parked in the 70-odd tax haven countries with whom India has signed Double Taxation Avoidance Agreements.
Consequent to the OECD’s drive against tax havens, many countries have started caving in to sign international standards on transparency and exchange of information. For instance, the Cayman Islands recently signed bilateral agreements with seven Nordic countries, which will allow it to unilaterally exchange information on tax matters.
“Similar arrangements between India and tax havens like the Cayman Islands would also allow Indian tax authorities to track down tax evaders by gaining access to financial information that is otherwise hidden,” said Kar. “And if India can take effective measures within, it could emerge a leader in the fight against illicit financial flows.”
