Black Money Ghost of India
That are large chunk of India’s money has been stashed away in Swiss Banks account is known fact, but the recent Global Financial Transparency Report’s shocking revelation indicates the magnitude of the income outside the country kept aside by politicians and some large business houses. GoaChronicle.com brings to you insight into this hard truth…
From 1948 through 2008 India lost a total of $213 billion in illicit financial flows (or illegal capital flight). These illicit financial flows were generally the product of: corruption, bribery and kickbacks, criminal activities, and efforts to shelter wealth from a country’s tax authorities.
Adjusted Estimates: The present value of India’s total illicit financial flows (IFFs) is at least $462 billion. This is based on the short-term U.S. Treasury bill rate as a proxy for the rate of return on assets. In all likelihood, this estimate is significantly understated because economic models can neither capture all the channels through which illicit capital can be generated nor the myriad ways in which the capital can be transferred. While this estimated stockpile of illicit assets held abroad by resident Indian nationals’ falls far short of the US$1.4 trillion reported by the Indian news media in the run-up to the General Elections in April-May 2009, the figure still represents a staggering loss of capital. If India would have avoided the fight of capital over such a long period, it would have enabled the country to either contract less debt or pay off the existing debt at the time. A country that is still struggling to eradicate poverty with a shortage of capital relative to its development needs can ill-afford to lose funds of such magnitude.
The total value of illicit assets held abroad represents about 72 percent of the size of India’s underground economy which has been estimated at 50 percent of India’s GDP (or about US$640 billion at end 2008) by several researchers. This implies that only about 28 percent of illicit assets of India’s underground economy are held domestically, buttressing arguments that the desire to amass wealth without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital. While the relative proportion of foreign to domestic illicit assets that make up the underground economy can be expected to vary across countries depending upon a number of economic, legal, and political factors, efforts to hide illicit wealth leads to what we call the “iceberg effect,” wherein the visible domestic portion of illicit assets represents only a sliver of the vast portion, mostly foreign, that is hidden from view.
•Total capital flight represents approximately 16.6 percent of India’s GDP as of year-end 2008;
•Illicit financial flows out of India grew at a rate of 11.5 percent per year while in real terms they grew by 6.4 percent per year;
•India lost $16 billion per year from 2002-2006.
IFF Drivers: High Net-Worth Individuals (HNWIs) and private companies were found to be the primary drivers of illicit flows out of India’s private sector. (ix). India’s underground economy is also a significant driver of illicit financial flows.
IFF Trends: From 1948 through 2008 the Indian private sector shifted away from deposits into developed country banks and towards increased deposits in offshore financial centers (OFCs). The share of OFC deposits increased from 36.4 percent in 1995 to 54.2 percent in 2009.
India’s underground economy is closely tied to illicit financial outflows. The total present value of India’s illicit assets held abroad ($462 billion) accounts for approximately 72 percent of India’s underground economy. This means that almost three-quarters of the illicit assets comprising India’s underground economy—which has been estimated to account for 50 percent of India’s GDP (approximately $640 billion at the end of 2008)—ends up outside of the country.
The finding that only 27.8 percent of India’s illicit assets are held domestically support arguments that the desire to amass wealth illegally without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital.
In the post-reform period of 1991-2008, deregulation and trade liberalization accelerated the outflow of illicit money from the Indian economy. Opportunities for trade mispricing grew and expansion of the global shadow financial system—particularly island tax havens—accommodated the increased outflow of India’s illicit capital flight. (Introduction)
There is a statistical correlation between larger volumes of illicit flows and deteriorating income distribution
As we have seen, economic growth can well finance more outflows of illicit capital if growth is not accompanied by the strengthening of institutions, rule of law, and overall improvements in governance. For instance, we found that while trade liberalization has led to more trade openness in the post-reform period, a larger trade sector has also provided increasing opportunities to traders to misinvoice trade. In fact, transfers of illicit capital through trade mispricing account for 77.6 percent of total outflows from India over the period 1948-2008. There is evidence that growth in the post-reform period 1991-2008 has not been inclusive in that the faster pace has actually worsened income distribution to some extent. As income distribution worsens, there are a larger number of high net worth individuals who are the main drivers of illicit financial flows.
Illicit flows not only present a challenge for economic development, but also pose grave national security issues. A June 2010 report by the Paris-based Financial Action Task Force (FATF), of which India is a full member, has recently noted that anti-money laundering (AML)/combating the financing of terrorism (CFT) regime in India is “relatively young” and the country faces many risks emanating from such activities. According to the FATF, the main sources of money laundering in India result from illegal activities carried on both within and outside the country such as drug trafficking, fraud, counterfeiting of Indian currency, transnational organized crime, human trafficking, and corruption. As we noted earlier, economic models can neither capture all means of generating illicit funds nor the myriad ways those funds could be transferred abroad. For instance, a few recent studies have found that hawala transactions in India are used to launder the proceeds of trade mispricing, or that the two work in conjunction in a self-sustaining cycle.
The FATF report notes that money-laundering techniques in India are diverse, ranging all the way from opening multiple bank accounts to mixing criminal proceeds with assets of a legal origin. For transnational organized crimes, the FATF recognizes that such syndicates typically disguise their criminal proceeds through the use of offshore corporations and trade-based money laundering. There are some continuing issues which have hampered the implementation of a stronger AML/CFT regime including the need to resolve the threshold condition for domestic predicate offences. As India continues to be “a significant target for terrorist groups”, the authorities would need to strengthen the AML/CFT provisions as a matter of the highest priority.