Bringing Back Black Money Held Abroad

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A Diversionary Move

By Arun Kumar *

Black incomes generated in India are more than 50% of GDP or in 2013-14 more than Rs. 55 lakh crores. Of this about half is saved in various forms – gold, investments, undervalued inventories and so on. A small amount of it is held in India in the form of hoarded cash in the box bed or in lockers.

Around 10% of the black incomes generated in India are taken abroad via flight of capital. A part of that is consumed and the rest is saved in secret bank accounts and other assets. Flight of capital takes place through havala, under and over invoicing of trade and transfer pricing. Since the mid-1990s, a part of the illegal funds taken abroad is round tripped back to India, say, through the Mauritius route. Thus, a bulk of the capital lost to the country has been accumulating abroad. It has also been increasing because it earns a return. Thus, the opportunity cost of the capital that has gone abroad illegally since 1947 is high - over two trillion dollars.

The implication is that a country that is poor and short of capital for investment in education, health, infrastructure and so on has been exporting capital and remains one of the most backward countries  in the world.

The corollary is that if this capital could be brought back, shortage of resources in India would be over for some years. Hence, many politicians, like, Mr. Modi, have given the call to bring back this money. The Mauritius route was deliberately created as an amnesty scheme for this purpose. But, it has led to more black income generation because it provides a route for money laundering.

The government has projected DTAA and TIE as steps to tackle the menace but these are for getting information about the legally held capital abroad. Capital is taken out of the country through layering via different tax havens (of which there are more than 70) so that when it reaches its final destination, it does not appear to be Indian money but, say, from Caymen Island. So, the Swiss government can legitimately claim that Indian money deposited in Swiss bank accounts is only around Rs.10,000 crores and not the staggering figures that are often mentioned. GOI flaunts these figures to show that the problem is not big.

 The above points to two things. First, one cannot easily get back the money held abroad by pressurizing tax havens. Information has been obtained from stolen data – regarding LGT bank from Germany and HSBC bank from the French. Second, if black income generation is checked in India, its flow abroad (which is only 10%) would also decline. If black income generation in India is caught the trail of money being spirited out of the country could be revealed, especially, if banking secrecy is truncated. So, is the call to focus on bringing back the illegal capital held abroad a red herring?/

* The author is the Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. The article was first published in the Economic Times. He can be contacted at e-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it. / This e-mail address is being protected from spambots. You need JavaScript enabled to view it.  

JULY 2018

Vol. 12 - No. 12


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