Anatomy Of Black Money: Will The Pandora Papers Tackle It

In a freewheeling chat with Outlook Business, Arun Kumar, Malcolm Adiseshiah Chair Professor at Institute of Social Sciences, points out why successive governments have failed to curtail the black economy, despite promising to tame the beast in almost all the elections.

There have been quite a few lists of Indians parking their money in tax havens by creating shell companies. What has been the progress on the issue from the government's side?

There has been very little progress. When the current government came to power in 2014, the first thing they did was to set up a court-monitored SIT to meet the Supreme Court’s deadline. That SIT is supposed to have filed its report, but nothing has come out and no person has been arrested so far. Then, they brought in the Undisclosed Foreign Income and Assets Bill, but it hardly managed to bring Rs 3,000 Crore. It’s very difficult to track the money that is going out of India because it is done through a process called ‘layering’.?

Layering means that you move through 5-6 different tax havens and then finally park money at a chosen destination. So, the money that goes to Switzerland is not seen as Indian money, because it takes the route from Seychelles to Jersey Island To Havana and then to the Cayman Islands. So when it finally reaches the Swiss Banks, it’s seen as the Cayman Island money and not as Indian money. It’s only when data leaks out, as happened in the case of the Panama papers, those people who first sent the money to Panama will get named, Whereas, those people who moved their money to Panama through Cayman Island will not be identified. That’s why, when the Indian government asks the Swiss government on the amount of Indian money that is deposited in their banks, they give a very small figure of Rs 8,000 Crore to Rs 14,000 crore, because that is the money that is deposited in the name of Indians. And that money is actually legitimate. The illegitimate money would actually have moved from other destinations to the Swiss Banks. In the Swiss banks, the largest amount of money is the British money, because the British own the highest number of tax havens in the world. Also, the fact that all the leaks happen through the stolen data and the tax havens never accept that it’s their data, it becomes difficult to prove anything in the court.?

Then what’s the way to bring back black money or punish the culprits?

If you want to track the black money, then, then your best chance is to track it in India, because that is what is being moved out. Government and policymakers need to understand that only 10% of the black money goes abroad. The rest of it remains in India in different forms of asset classes. Even of the 10% that goes abroad, 30-40 per cent of it is round-tripped back to India through the Mauritius, Singapore or the Dubai route.?

But how can the government track black money within India?

It requires political will. The black money is generated with the connivance of the corrupt politicians, businessmen and the executive ( government). In this, everyone from the income tax department, to police to other authorities are involved. That’s how drug trafficking takes place. How else will drugs worth Rs 21,000 crore land on Indian shores? There has to be some nexus between the top authorities that allow such trade to happen and only once in a while due to some reasons such cases come to light.

Is there any government in the world that has done a good job of controlling the generation of black money?

In places like New Zealand and the Scandinavian countries, the size of the black economy is only 1 per cent of the GDP. How have they achieved it, you would ask. I would give the example of Sweden which has a tax rate of 85% and that’s why the black money is just 1 per cent of their GDP.

But, the liberal economists say that the higher the taxes, the larger would be the black economy, because people will have more incentive to hide real income.

That’s not the case in reality. Anyone who says that high taxes lead to a high black money generation is talking through their hat. If you look at India, it’s a moderately taxed economy. In 1971 India’s tax rate came to 97.5%. With the wealth tax, income above Rs 15 lakh attracted a tax of 102%. So nobody could have an income of above Rs 15 lakh. Yet the black economy in that period was just 7% of the GDP according to the Wanchoo committee. And now we have a 30% tax rate with cess, yet the black economy is roaring, So, you can ask under which tax regime black economy was curtailed? There have been 40 Committees so far suggesting ways to control the black economy. The question is not what can we do to control the black economy. The question that needs to be asked is do we want to actually control the black economy? All political parties are compromised today and unless there is a political will,?

It’s said that going after the black economy will affect India’s GDP growth. This is what happened during demonetisation. There was an assault on black money, but the ones who suffered were poor, not the rich. What’s your take?

It's a completely incorrect argument. Because of the black economy, India’s effective growth rate has come down drastically. In my 2005, ‘Southasia Journal’ paper, I have shown that the Indian economy has been losing its 5 per cent growth rate since the mid-70s. If you are losing 5 per cent every year for the last 30-40 years, imagine what would have been the size of the Indian economy today if we had not lost it. We would have been a $20 trillion economy today instead of just around $2.5 trillion. And we would have been the largest economy in the world. The black economy leads to inefficiencies, which leads to loss of output. As a result, only the incumbent politicians and businessmen make money, and it does not percolate down to the common man. While it’s a fact that a? large part of the black economy is reinvested in the country, the output it gives is far less than it would give if that money came through a legitimate channel. For example, a government spends money to repair the same road every year to benefit a particular contractor. That road gets damaged every year because of the usage of bad quality building material. Now, instead of creating new roads with new money next year, that money is spent on the same road every year, keeping the productivity of people low who could have benefited from newly built roads. So, the argument that black money helps keep the economy afloat is flawed.

Then, why did demonetisation not yield the desired results?

That’s because it was done on the premise that the entire black economy runs on cash. We need to distinguish between income and wealth. The amount of black money which is stored in the form of cash was just about 1 percent. It’s a proven fact that nobody hoards black money in the form of cash. Demonetisation, instead, killed the economy, because it killed cash for everyone, and not necessarily for those who hold black income. And ironically, today, the cash in the economy is somewhere around Rs 28 trillion, as compared to just Rs 18 trillion at the time of demonetisation. All we managed to do through demonetisation was squeeze the informal economy, which contributed 45% to the Indian GDP.