Culprits at large in India’s billion-dollar black money
View(s):In a June 27 issue of India’s Frontline magazine titled cover story “Black money and Grey areas”, the report deals at length on an issue that has dogged the economies of India and many others including Sri Lanka. The trail is so murky that in the words of Indian Prof. Arun Kumar, an expert on India’s black economy: “The point is there is no dearth of knowledge about how black income is generated, how it is taken abroad, and how it is round-tripped. But we don’t have specific names”.
Prof. Kumar is the Sukhamoy Chakravarty Chair Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University (JNU). He is also associated with the anti-corruption and Right to Housing movements, according to the magazine
Many of the issues raised in the Frontline interview with Prof. Kumar are relevant to Sri Lanka where the black money economy thrives amidst the lethargy of the administration in going after the crooks. Excerpts of the Frontline interview are reproduced below:
Question: Your recent book has a whole chapter on the black economy. The distinction you draw between anecdotal and the larger picture of the black economy is interesting. Would you describe the setting up of the SIT (India’s Special Investigation Team probing black money) to investigate the black money stashed away in foreign bank accounts as dealing with the anecdotal or the larger picture?
My first point would be that urgent steps could have been taken by the new (Modi) government. This government has taken advantage of the Supreme Court’s directive in the Ram Jethmalani vs Union of India case to set up the SIT. All the agencies which are in it—such as the Enforcement Directorate, the Intelligence Bureau and the Research and Analysis Wing already have a lot of information. The question is why they are not acting on it? Politically it is not convenient to act on information that is already available.
To cite one instance, hawala takes place in Delhi, Mumbai, Kolkata, and every other city. These places are tracked by government agencies. So, this is not as if they do not know where hawala originates; who the operators are; or who the people visiting their houses are? If the Prime Minister wants to stop hawala, he can do so in a matter of five minutes because information about hawala operations is already available to the government agencies. Hawala is the main conduit for taking the money out and bringing it back.
I doubt the sincerity of the government in setting up the SIT and doubt whether it is serious about bringing the black money back. Since 1947, more than 40 commissions and committees have been set up to look at different aspects of the black economy. They have analysed the different aspects of the black economy seriously in the past 65 years. These committees and commissions have made thousands of suggestions. The Wanchoo Committee was rich with suggestions. Hundreds of these recommendations have been implemented. Yet, the black economy has continued to grow. The black economy is characterised by waste of capital. I call it digging holes and filling them. You set one man to dig a hole during the day, and at night set another person to fill it. It is activity without productivity. Capital is being utilised but the output is zero. A large part of the black economy is like that. Because of the black economy, there is a large amount of illegality associated with economic activity. The point is, there is output in the black economy, but the potential is not reached due to waste. The Indian economy today has a potential for 12 per cent growth rate. Because of the black economy, it is only growing at a rate of 7 per cent.
When I say the black economy is today 50 per cent of the gross domestic product (GDP), it means almost all activity has some associated illegality. In my (latest) book, I have described many sectors where black incomes are generated, but I could not have discussed all since the list is long. Whether it is education, health, environmental regulation, traffic on the roads, law and order, industrial regulation, mining, whichever sector you take, it has black income generation. So it is widespread. It is systematic and systemic. It is not anecdotal. It is not that one day I do it, next day I don’t do it.
Under the system followed in production, the excise person will be bribed, the sales tax person will be bribed, and the local politician, policemen and so on are taken care of. It does not matter what the tax rate is, because the system is in place. So whether the rate is 7.5 per cent or 10 per cent, the businessman will evade taxes. That is why in India, even when the tax rates have come down, black income generation has gone up. The black economy is increasing because laws are violated systematically. How are the laws violated systematically? By having the policymaker and the implementer of the law as parties to its subversion. So, underlying the black economy is a triad. The triad consists of the corrupt businessman, the corrupt politician and the corrupt executive. The corrupt executive consists of the corrupt bureaucracy, the corrupt police and the corrupt judiciary. Judicial corruption is also enormous as many recent exposes have shown.
Private information exists in the entire system. Bureaucrats know, judges know, policemen know the people to be contacted for hawala and for setting up bank accounts (in the tax havens). All this information exists. But it is not being used to tackle the problem, because it is political in nature and because all parties are involved in it, the will to deal with it is not there.
Question: Ram Jethmalani (top lawyer, former politician and petitioner in the black money case in India’s Supreme Court), in an interview to a television channel, has said that footprints can be easily identified, and the money trail can be followed:
Not so easily. What happens is when you transfer money from one shell company to the other, you close the previous one. Then, how do you go back? India cannot investigate tax havens belonging to other countries. The advantage developed countries have is that the money they get from tax havens is giving them additional capital. Why is it that developed countries were happy with these tax havens and not acting against them earlier? Because capital was flowing from the developing world to them. One of the arguments has been that after colonialism ended, these tax havens were deliberately set up by developed countries so that capital, which was earlier coming from developing countries as (a) drain of wealth, could now come through these tax havens into their economy. And they were benefiting from it. Latin Americans lost hundreds of billions of dollars through these tax havens to European countries.
India and other countries lost to Britain because money was going through these tax havens. After the global economic crisis in 2007-08, there has been pressure from the Organisation for Economic Cooperation and Development (OECD) countries that taxation secrecy should go. That is why the Swiss banks have opened branches in Singapore and Dubai. Even if Switzerland complies with pressure from the OECD, its branches operating in other countries will continue to act. That is why Credit Suisse was caught in the U.S. and fined $2.5 billion. UBS was caught in 2007. Therefore, banking secrecy should end globally. Only then we can catch them.
One important thing I must point out. In 2008, when the financial crisis took place, Fortis Bank collapsed and the Netherlands government took over the bank. It found that Fortis Bank had 700 subsidiaries in tax havens. So the whole purpose of subsidiaries in tax havens is to allow high-networth individuals to move money. This is a standard practice of multinational banks, especially the Swiss, British, and big American banks. So this should be checked.