The Swiss Bank Myth
Ridding the domestic economy of black money should be a priority
On his nationwide yatra, BJP leader L K Advani has urged bringing back India's "Rs 25 lakh crore" allegedly lying in dubious foreign accounts. "If the black money is brought back," Advani has said, "India can provide basic facilities like water, power, roads and others to nearly six lakh villages." Others have coined an imaginative one-liner: "Swiss bank to grameen (rural) bank".
Advani has based his figure on calculations made by Global Financial Integrity (GFI), a Washington DC-based think tank. In a November 2010 report titled 'The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008', GFI said in the 61-year period it studied, India had lost $213 billion in absolute terms: "Adjusting this for accumulated interest on gross illicit outflows increases the figure to $462 billion." Advani has translated this final figure into rupees.
In GFI's assessment, "The total value of illicit assets held abroad represents about 72% of the size of India's underground economy". This is "a staggering loss of capital", even if it "falls far short of the $1.4 trillion reported by the Indian news media in the run-up to the general elections in April-May 2009". That second, larger number has also been quoted by Advani on occasion.
Street rhetoric in Indian politics often reduces serious issues to caricature. In 1989, campaigning for the general election, V P Singh pointed to his pocket and said it had a piece of paper with the number of the bank account into which the Bofors bribes were paid. Today, there is the bizarre proposition that hundreds of billions of dollars are lying around in mystery bank accounts, waiting to board a flight to India and build roads and power plants.
Given this, it is necessary to enter three caveats. First, historically why did some Indians maintain secret Swiss (or similar) bank accounts? Corrupt politicians and civil servants did it to park bribe money (they still do) and rich Indians did it to hedge against political uncertainties at home, policy instability,
foreign exchange shortage.
The banking-haven accounts did not pay any great interest. An account-holder made money by betting on the Indian rupee losing value vis-à-vis the US dollar or the Swiss franc.
Now, conditions have changed. India's property and stock markets tend to offer handsome returns. The Indian rupee is not depreciating like it did in the 1980s. Neither is there a problem for a citizen who wants to buy dollars from the Reserve Bank to use elsewhere.
As such, the incentive to stash money abroad has reduced, though admittedly not vanished. More than businessmen who resort to trade mispricing, it is public servants who feel the need to keep slush funds overseas. In both cases – slush funds as well as trade mispricing – a greater quantum of the money comes back to India than ever before, simply because the returns are to be made here.
Second, as the GFI report says, "Disguised corporations situated in secrecy jurisdictions enable billions of dollars shifting out of India to 'round trip', coming back into short- and long-term investments." This could mean FDI inflows using the notoriously opaque Mauritius route. Equally, it could mean buying property in India and claiming to pay for it from a cousin's account abroad.
The upshot is a significant portion of the $213 billion – if the GFI calculation is accepted – would long have come back to India and been put to work here, in buying property or equity or whatever. Today, it may be worth $462 billion or more or less. We have no idea.
Third, while seeking cooperation from banking havens is a legitimate pursuit, "crowding out" black money from the domestic economy should also be a priority. India needs to contract usage space for illicit money. This is a preventive mechanism no politician, not even Advani, is talking about.
Both economists and tax officials agree that the number one absorber of black money within India is the property business. In recent times, the surge in property prices in some of India's bigger markets – the Delhi metropolitan area, Mumbai-Pune, Chennai-Bangalore – was linked to pay-offs from, among others, the 2G, Commonwealth Games and iron ore scandals.
All this has made India's property trade ridiculously overpriced and dirty. State and municipal governments try and tackle it by increasing circle rates – the minimum valuation at which property registration levies are charged – but Union governments have long given up the battle.
The last serious attempt to curb black money deals in property was made in the mid-1980s, when V P Singh was finance minister. Provision 37(i) of the Income Tax Act was introduced, allowing I-T authorities to buy a property at the price at which the seller was claiming to sell it to another. This had an immediate impact. It cleaned up suspicious high-value transactions in Mumbai and disincentivised avoidance of capital gains and other taxes.
It was too good to last. In 2002, provision 37(i) was revoked because it had become a nuisance. Corrupt tax officers were using it to harass and blackmail property sellers. That aside, politicians were too invested in the property market to want a change and to risk a price correction.
Literally and otherwise, India's black money battle must begin closer home. Of course it's always simpler to rail against Swiss banks.
The writer is a political commentator .
L K Advani on his anti-corruption yatra: Eye on overseas havens
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