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A Case Against Black Money

From my piece at Yahoo:

The famous SMS doing the rounds:

Anna Hazare says bring back the black money. Do u know what will happen if Rs. 1,456 lakh crore comes back?

No need to pay taxes or electricity bills for the next 20 years. Petrol will cost Rs. 25. India’s borders will become more stronger than the China Wall. We can build 28,000 km of “rubber road (like in Paris). Houses for 100 million people, 1,500 Oxford-like universities, 2,000 free hospitals. Each village will get Rs. 100 crore!

Let’s start at the beginning.

How much black money exists abroad?

The answer is: NOT 1456 lakh crores. That would be equivalent to — let’s see, USD 30 trillion. Our GDP is about $1.5 trillion. 20 times our GDP sitting abroad as illicit wealth? The total wealth in the US is about $60 trillion, and their GDP is more than 10 times ours. (GDP is a measure of value added in a year, not the total wealth)

Remember, much of this so called black money was created when India’s GDP was much lower —we were less than a $1 trillion in GDP just four years ago.

Official Swiss bank figures show that only 0.07% of all the assets in Swiss banks is with Indians — a meager $2.5 billion out of USD 3.5 Trillion. Even you think that Indians if have used foreigners’ names, 3.5 trillion dollars is the outer limit — of which we are fairly sure other countries have their share.

A Global Financial Integrity report in 2010 talks about total Indian illicit assets abroad being $462 billion. This is about Rs. 20 lakh crore and perhaps a more reasonable estimate.

Not an amount to sneeze away, of course — 20 lakh crore is the total Indian government expenditure (budget estimates) in 2010-11, of the states and the central government put together.

Is the money abroad at all?

Swaminomics says, and I concur, that much of the black money has been brought back in. Investing in India after taking money abroad is very easy; you set up a company in Mauritius, send it the money from the Swiss bank account, and the Mauritius entity then invests into India. Mauritius has no (or low?) capital gains taxes, and with our double taxation avoidance treaty, gains made in India can be taken back into that Swiss account tax free, through the Mauritius entity. But it never is; it stays invested in India. Why not, when these people are politicians and can easily find company shares to purchase just before an interesting deal is announced.

Much of the money has been ploughed into real estate as well, which explains why there are so many apartments quoting above Rs. 1 crore after being half that price a few years back, and those houses remain unoccupied or are rented away for tiny fractions of the market value. The house is the bank — it’s a way to store value, because everyone knows that real estate prices don’t fall in the long run*.

(* Tongue in cheek; tell that to the Japanese, or the Americans)

Okay, let’s take 20 lakh crore. Isn’t that good enough?

Well, for one, much of that money is not likely to be black money in the first place. TCS has a fully owned subsidiary in Switzerland. It has a Swiss bank account; does that mean the money in it is illegal?

A good portion of Indian-owned money is likely to be “white” — or legally earned money. We can’t assume it’s all illicit, but even if we did, the courts would be of the view that the person involved must be given a chance to prove that the money was legit. Attempts to sequester that money by force will also be frowned upon by the likes of Switzerland which has a lot more democracy in the sense that for every real decision they hold referendums and county level voting, and they will demand proof that such money is illegitimate before India “brings it back”.

So we’re likely to have to prove it — beyond reasonable doubt — that the money is illegal and that could take years. Much of the proof will require witnesses or even circumstantial evidence, or disproving the source that the owner mentions. In most cases, proof is unlikely to be found.

Imagine a politician whose son owns a software company based in the Cayman islands. A large company asks the politician of favours, and in return, gives the son’s company a contract worth many crores; the money eventually lands up in a Swiss bank. India thinks it’s tainted, but there is no proof beyond reasonable doubt that the money received was not for a legitimate piece of work done. We’ll never get any of that money, unless we are able to find a kind whistleblower somewhere. In other cases, the cost of a deep investigation might end up being more than the money recoverable. At best, we might at best get 30% of the money abroad; so that’s about 6 lakh crore.

Again, that’s not a bad deal; 6 lakh crore is one year’s worth of income tax! (for all of India) We will still have to pay our VAT and for our electricity, though.

The money thus brought back is a less exciting Rs. 1 crore per village, leaving no room for universities or Chinese walls. The government shouldn’t be building houses anyhow, and luckily they don’t have the money for it.

(And among the rest, this much money will definitely help us build 28,000 km of rubber road, though. Rubber roads don’t cost that much – just 20% higher than a regular road which is about 5 crore per kilometer. At Rs. 6 cr. per kilometer, we need to have just 168,000 crores. )

But what’s the point?

So I whittled down the money abroad. So what? Shouldn’t we bring it back anyhow?

Yes, we should. We should somehow signal to people sending illegal gains abroad that there will be retribution. But the money is not a panacea. The money, if we ever recover it will be significantly less than even the 6 lakh crore I’ve brought it down to. It will not give our 700,000 villages a hundred crores each. It will not allow us a tax free existence. If there is money ever brought back much of it will be lost in

a)      The costs of recovering the money in the first place

b)       The deep black hole that is the Indian bureaucratic machine

We really don’t need to wait that long to get that kind of money either. One simple alternative is to have the government reduce it’s borrowing costs; we will end up paying more than 360,000 cr. as interest on government borrowings this year. Why do we pay so much (more than 8% on even 1 year borrowings today) when other governments in the west are paying less than half that? Because we don’t allow foreigners to buy much of our Indian rupee debt. If we let them buy a lot more without any red tape, we might be able to shave off 2% off our borrowing cost — or 1/4th our interest payments. In two years, we will have saved enough money to pay for those 28,000 km of rubber roads.

There are hundreds of ways we can pay for roads, defence, education and infrastructure which is truly what the government needs to be doing. And if we implement land reforms, 100 million houses can be easily built by the India that is not the government. Yet, we want to rely on bringing back black money instead; a truly noble exercise, but if the goal is to make India better, there is much more to do, and much better ways to do it. The message sparks outrage, but disappoints on merit.

  • @Deepak
    You have a very valid point that black money sent abroad is coming back into India in the form of Foreign Hot Money.
    Infact, the Govt itself created such provisions so that money from abroad could be invested in India and they themselves are the major beneficiaries.
    Foreign investment in India is increasing every year, but it is the underlying truth is that it is the politicans money that is being ploughed back in India

  • Vishal says:

    5 crore per kilometer!? How did you get that figure?

    • NHAI – the phase 1 and 2 were between Rs. 4 and Rs. 6 per km (which is extending the 2L to 4L). They’re quoting higher for fresh projects, of course – I think Rs. 9 and Rs. 10 per km are current quotes for the four laners, while 2 laners still come under 4 cr. per km.

  • Arghya says:

    Nice investigation and analysis..
    Forget about it Deepak, I don’t think Indian public would ever get back those black money. As you said it is quiet impossible to prove some money is black. There are thousands of ways to make them white (just to draw attention on 2G, Gov. might end up proving that there were no loss at all the).
    I would like to draw your attention to another point – It’s always good to reduce borrowing costs. But from whom Indian Gov. is borrowing at 8%? In an effect that is why we are receiving 8% return on our PF/PPF. What would happen to institute like LIC (the biggest robber), PF/EPF/PPF?? They would go bankrupt and so as the mighty Indian Government. And that is the only reason foreign investors are barred.

  • Srinivas says:

    Good analysis.
    There are other ways of looking at the issue.
    1. There are no sufficient checks in the system or enforcing machinery to curb black money.
    2. Human mind is innovative. When one is motivated enough, one can use the existing loop holes in the system for his benefit. One way of curbing this is to reduce ways. You suggested one such way.
    Similar one was suggested by Swami some time back. To provide subsidised wheat flour(mixed with 50:50 ragi flour) to all(who ever needs). This is not only nutritious but also less to the liking of those liking (soft) pure wheat flour. This type of innovative subsidies will curb unnecessary expenditure and the results will reach the targeted. But the moot point is whether the government is interested.
    3. After the above two, law enforcement authority needs to be strengthened(like singapore!!!) to bring culprits/defaulters to book faster.
    On the whole systems are to be strengthened where existing and put in place where missing.
    Difficult but not impossible.

  • Mitesh Puri says:

    There’s also an another trend which I have seen while working in the insurance industry. Black money is swiftly converted to white money through insurance plans. People take an insurance plan of a few thousand rupees and then apply for a free-look and then they have the white money.

  • Nerus says:

    I applaud you for this write-up.
    Three weeks ago, there was an article by Anil Divan in The Hindu, where he too bandied about figures such as $1.5 Trillion. Startlingly, the article claimed that the figures were taken from an affidavit submitted to the Supreme Court!
    I wrote to The Hindu criticizing the indiscriminate use of such figures of dubious authenticity, but my letter was not published.

  • Ishwar says:

    A good deal for India could be something like what the UK has recently arrived at with Switzerland. Key points seem to be:
    1. All current balances maintained by British residents in Swiss banks will have a one time tax levied (Anonymity will be maintained as per Swiss secrecy laws, but if the assets are legal, the resident can choose to declare it).
    2. Interest on these accounts going forward would also be liable to tax.
    3. Any new accounts opened by British residents will be chargeable to tax too.
    I guess even Germany is planning an agreement on similar lines…

  • amol says:

    I am not certainly agree with your explanation that bringing black money is not easy or trade off with it.
    Many countries have successfully brought back their money…
    Indian politicians truly lacks the will or they purposefully don’t want to bring it back
    I would encourage you to watch videos of Dr. Subramanian Swamy speech where he has explained the way in which money can be bring back.
    He has presented the facts with reasoning
    there are several parts of the video…
    here is part 1…