The
money is tainted; it is a drain of wealth from the country,
being located in secretive Swiss banks; and the sums
involved are large. Not surprisingly, the issue of monies
stashed away by India's rich and powerful in numbered
accounts in Swiss and similar banks is periodically
raised, provokes controversy and then enters a period
of hibernation. This periodic revival is understandable
for a number of reasons. Most often the transfer of
money to Swiss bank accounts involves a violation of
tax, foreign exchange and/or other laws of the country,
and therefore is illegal and morally repugnant. To boot,
the sums involved are not small. Finally, these reflect
surpluses that can be used to finance much needed development
initiatives in the country, but are now being kept idle
abroad to facilitate illegal accumulation. Their existence
is symbolic of an elite that places self before nation.
This is even truer in the case of alleged payoffs for
award of defence contracts. The moral and nationalistic
indignation this generates leads to the correct demands
that the violations of law that permit the accumulation
of such wealth abroad need to be investigated, the offenders
must be prosecuted and the money brought back and directed
towards pushing growth and improving welfare. Morality
aside, equity demands that the rule of law should prevail
for all.
Currently, three factors have combined to revive the
controversy in India. First, early this year, in a major
breakthrough, prosecutors from the Internal Revenue
Service investigating violations of tax laws by American
citizens, managed to force UBS, Switzerland's largest
bank, to reveal the names of 250 nationals who were
suspected of evading payment of about $300 million in
taxes by using offshore accounts. The bank also agreed
to pay the US government a sum of $780 million to settle
the issue.
These sums are indeed small. But this decision on the
part of a banking system that thrives because of the
country's secrecy laws was a huge concession with major
ramifications. Even in the case of the US, the 250 names
involved were a small proportion of the 19,000 accounts
that are allegedly held by Americans in Swiss banks.
The sums held by these 250 would only be a small fraction
of the $20 billion that the IRS suspects was illegally
ferreted away between 2002 and 2007. Pressure on the
Swiss banking industry to reveal more was bound to increase.
And, the US was just one country. If secrecy laws were
being relaxed to accommodate the US because it is an
important economic player, it would become difficult
for the system to resist pressures to reveal the names
and details of account holders from other countries,
including developing countries like India, which need
the money to raise low per capita incomes and reduce
poverty. On the other side, the pressure on governments
to demand, obtain and act on similar information increases.
Thus, the possibility that the sums involved could be
tracked and investigated was bound to revive the issue
in India.
The second factor leading to a revival of the debate
was the release of estimates of how much money could
be illicitly flowing to accounts abroad from developing
countries in general and India in particular. Provided
by Global Financial Integrity, a programme of think-tank
Centre for International Policy, these estimates based
on accepted methodologies suggest that illicit flows
from developing countries amounted to between $858.6
billion and $1.06 trillion in 2006. India ranked fifth
among developing countries with illicit outflows of
around $22 billion to $27 billion a year during 2002-2006,
following Russia ($32- $38 billion), Mexico ($41-$46
billion), Saudi Arabia ($54-$55 billion) and China ($233-$289
billion). At current exchange rates, the figure at the
lower end of the range amounts to more than Rs. 110,000
crore a year. If a quarter of that could be recovered
as tax, it could go a long way to finance the National
Rural Employment Guarantee Scheme each year. And if
the whole amount is spent within the country, it would
amount to a demand stimulus of close to three and a
half per cent of GDP, which could help reverse the current
slowdown in growth. If there is so much money that could
be kept back at home the issue is bound to be controversial,
even if the figure is just an estimate.
Finally, all this occurred when India was in election
mode. With an issue at hand which can provoke moral
indignation and fuel nationalistic sentiment, it would
be too much to expect the opposition to let it be –
never mind the fact that flows of this kind were occurring
even when the principal opposition party, the BJP, was
in power at the Centre.
Whatever the combination of circumstances that have
brought the issue to the fore once again, the case for
exploiting the opportunity is strong. Domestically,
tax and foreign exchange laws must be implemented more
stringently. And internationally, the government must
exert itself to obtain the information that could reduce,
even if not put an end to, this menace. One route to
take would be to use the opportunity afforded by the
hole in the Swiss banking wall created by the recent
limited success of US law makers, to suck out information
on Indian offenders as well. The other is to work towards
a better global environment for obtaining information
that can help reduce this form of accumulation of black
money. As Raymond Baker, the Director of Global Financial
Integrity and author of Capitalism's Achilles Heel:
Dirty Money and How to Renew the Free-Market System
puts it in the Financial Times (April 24, 2009): ''Most
effective in curtailing the massive illicit outflows
from developing countries would be a requirement for
automatic cross-border exchange of tax information on
personal and business accounts and country-by-country
reporting of sales, profits and taxes paid by multinationals.''
With increasing concern the world over regarding the
role of tax havens in promoting tax evasion and money
laundering, there is an opportunity now.
All this having been said, however, a few words of caution
are in order. First, the concern with illicit outflows
should not divert attention from the larger issue of
tax evasion and avoidance which plague developing countries
like India. Illicit outflows to Swiss and other foreign
banks are only one part of the black money generated
in the system. Much of it remains in the country. Such
domestically retained illicit wealth can be more easily
identified and taxed and the generation of new illicit
wealth (that may or may not go abroad) more easily plugged.
And estimates on the size of the black economy, the
volume of tax evasion, and the amount of disputed and
unresolved claims on Indians by the tax department are
all as mind-boggling as the figures on illicit outflows
of wealth. Moreover, the issue is not just of tax evasion
but of tax avoidance facilitated by the loopholes present
in and concessions afforded by the tax laws. Examining
the revenues foregone because of tax concessions is
a first simple lesson on what can be done to find the
money to do a lot that remains undone for ''want of resources''.
Second, concern with illicit outflows should not divert
attention from the licit flows that are on the rise
because of financial liberalisation. Till the early
1990s Swiss accounts allegedly held by Indians were
seen not just as the result of ill-gotten wealth. They,
it was argued, were the result of the limits placed
on accessing foreign exchange. It was not just that
the rupee was not convertible on the capital account,
preventing Indian's from converting rupees into dollars
(say) to acquire assets abroad. Even foreign exchange
for current account purposes such as imports of commodities,
travel, health and education was scarce and rationed.
This, it was argued, encouraged those who could afford
it and find ways to ensure it to transfer and hold money
abroad. Economic policy was forcing many to exploit
Swiss banking secrecy and violate the law. What the
more recent estimates show is that this argument was
not all true. Even after the substantial liberalisation
of rules relating to accessing and using foreign exchange,
monies are being transferred and held abroad.
The real change now is that such transfer occurs in
both illicit and licit forms. For example, trade and
exchange rate liberalisation notwithstanding, the practice
of over-invoicing imports and under-invoicing exports
to evade taxes and transfer funds abroad continues.
Simultaneously, funds are being transferred abroad to
acquire assets and hold balances. The outflow of capital
in the form of foreign direct investment from India
during the first nine months (April-December) of financial
2008-09 was close to 12 billion dollars or more than
two-fifths of the $27 billion that of FDI that flowed
into the country. Not all such outflows are necessary.
There has also been an increase in the outflow of foreign
exchange from the country in the form of outward remittances
under the liberalised remittance scheme for resident
individuals. These remittances totalled $9.6 million,
$25 million and $72.8 million in the three years ending
2006-07. But they shot up to $440.5 million in 2007-08.
The point to note is that this transfer of foreign exchange
abroad is not linked to the earning of such foreign
exchange. Nor is it accompanied by an increase in the
ability of India to earn a positive surplus of foreign
exchange through trade in goods and services and incomes
generated from investment abroad. India records a deficit
in its current account, so that the any excess foreign
exchange it possesses has not been ''earned'' but has
been ''borrowed''. It is a part of that borrowed foreign
exchange that is being transferred abroad with no likelihood
of return. It could happen that there could be occasions
where demands to fulfil commitments on past debt substantially
exceed current earnings and inflows, leading to instability
and crises of a kind that are now common in the developing
world. At that point of time, the burden of adjustment
falls on all, not just on those who have ferreted away
foreign currency in the past. This too is unacceptable.
Preventing such an outcome requires restricting unnecessary
and restrictive inflows and unwarranted outflows in
countries where a historically determined subordinate
position in global trade and investment flows makes
foreign exchange a valuable resource. This should not
be forgotten either by the ruling party or its leading
opponents when they vent their moral outrage at illicit
outflows. Unfortunately that is what they seem to do.
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