Black money has been in the spotlight ever since Narendra Modi, during the 2014 general election campaign, promised to bring back all the black money parked abroad in foreign banks, estimated at over Rs 2 lakh crore, within 100 days of coming to power and transfer Rs 15 lakh into every citizen’s bank account. Three years have lapsed since the BJP came to power but there is no sight of this money. When quizzed about this in the last Bihar assembly election, BJP president Amit Shah admitted that this promise was a mere ‘jumla’, or election rhetoric!
Perhaps to ward off embarrassing questions from the public and the media, the prime minister made the sudden dramatic announcement on November 8, 2016 on the eve of Assembly elections in Uttar Pradesh and Uttaranchal to demonetise currency notes of Rs 500 and Rs 1,000 denominations, accounting for 86% by value of the currency in circulation, as proof of the government’s determination to wage war on black money.
More than 10 months have lapsed since demonetisation, and now we are told that 99% of all Rs 500 and Rs 1,000 banned notes have returned to the banking system and only some Rs 16,000 crore in these two currencies did not come back — ostensibly black money recovered from this whole exercise. As late as August 15, the prime minister, in his Independence Day speech, stated that about Rs 2 lakh crore black money had been forced out of the system post-demonetisation and another Rs 1.75 lakh crore of money deposited into the banks was under scrutiny.
Estimates of the magnitude of black money vary widely and are constrained by conceptual problems, data inadequacies and methodological limitations. Professor Nicholar Kaldor, who was the first person to estimate the size of black money in the Indian economy, estimated it at about 4.5% of GDP in 1955-56, whereas the Wanchoo Committee (1970) estimated it at 7% of GDP. The National Institute of Public Finance and Policy (NIPFP), New Delhi, in a study in 1985 estimated this proportion at 18-21% of GDP for the early 80s.
Professor Arun Kumar of JNU, a leading authority on the subject, estimated it to be 35-40% of GDP in the early 90s and 62% in 2012. The UPA government commissioned a study by NIPFP in 2012, but it has not been released to Parliament or the public although some reports said it had pegged black money at 75% of recorded GDP.
A World Bank study (2010) of the share of the ‘shadow economy’ in official GDP in 2007 covering 162 countries estimated it to range between 20-24% for India, as compared to the world average of 31-34%. ‘Shadow economy’ was defined to include all market-based legal production of goods and services that are deliberately concealed from public authorities.
Black money is generated through both legitimate and illegitimate means and held in cash, gold and jewellery, benami assets, investments in shares and stocks. It is held both in India and abroad in benami assets and accounts. According to Prof Arun, black money is concentrated in the services sector, such as trade, finance and transportation through manipulation of accounts.
Liberalisation’s effect
The relaxation of trade restrictions post-1991 has accelerated the generation of black money and capital flight to safe havens abroad. It is widely acknowledged that a lot of black money is stashed abroad in tax havens such as Switzerland, British Virgin Islands and Singapore, either in bank deposits or benami assets. According to the Global Financial Integrity (GFI) report 2017 by a Washington-based think tank, illicit financial flows (IFF) to and from developing countries was estimated at about $1 trillion in 2014.
The report pegged this IFF at 4.2-6.6% of developing country trade in 2014. The GFI report for 2015 notes that between 2004 and 2013, IFF for developing countries rose from $465.3 billion (in nominal terms) in 2004 to $1090.1 billion in 2013. Most alarming is that India’s share of IFF rose from just 4.2% in 2004 to almost half, that is 46.8% in 2013!
GFI research suggests that 45% of illicit flows end up in offshore financial centres and 55% in developed countries. An OECD report notes that money laundering, tax evasion and international bribery make up the bulk of IFF. The report notes that yearly, an estimated $1 trillion is paid as bribes. Reducing bribes reduces the opportunities for illegal gains and hence IFF.
Accelerating and sustaining economic growth rates to 8% or more has been accepted as a major objective by the government. Trade liberalisation and FDI are critical to that mission. But ironically, these factors are also major sources of black money in the absence of effective regulations.
Take the case of Mauritius, a small island nation accounting for a minuscule 0.02% of world GDP in purchasing power parity terms in 2017 with foreign reserves of $ 4.5 billion (as against 7.6% and $335.2 billion respectively for India) accounted for a major share of FDI into India. Last year alone, Mauritius ($15.73 billion), together with Singapore ($8.71 billion) accounted for over 40% of total FDI flows into India, estimated at about $60.1 billion in 2016-17.
Most intriguing is that these two countries also claimed a major share of Indian overseas investments (due to tax incentives offered by these countries) which raises serious doubts about ‘round-tripping,’ that is, capital flows out of India and comes back as FDI into India through such tax havens. Other tax havens such as British Virgin Islands, Jersey and Switzerland, too, figured among the top 10 destinations for Indian overseas investments.
Given the above, the question arises as to whether we can ever realise a black money-mukt Bharat? While we certainly can tighten laws and put in place appropriate institutional mechanisms to tackle the black money menace and reduce it, so long as we are stuck with corrupt politicians, bureaucrats, business people, traders and citizenry, the malady of black money will continue and manifest in various forms to circumvent law and scrutiny. Black money is here to stay. At best, we can hope to make it harder for people to generate and hold black money and assets, with exemplary costs for violators.
(The writer is Chairperson, Centre for Economics, Environment and Society, Bengaluru)