Terrorism costs us

Does India have terror-stained money flowing into the capital market and, if so, should something be done about it? Both the national security advisor and the finance minister have confirmed that a Saudi businessman, linked to Osama bin Laden, is suspected of having made investments in India’s financial markets through participatory notes. That security should be taken seriously and that there are cross-border links is a truism. However, the moot point is how many additional transaction costs is a country going to bear in the interests of security?

In reducing the risk of terrorism, one imposes higher compliance costs on the innocent. For instance, in the post-9/11 US, additional costs on business have been documented. To take perverse examples, a ban on participatory notes or on capital inflows would solve the problem as would a complete ban on cross-border labour movements with Bangladesh and Nepal. But in every such case, benefits are not commensurate with costs. In a similar vein, one cannot ban capital inflows from the Middle East. For a start, it is impossible to differentiate terror-stained money from that which is as pure as driven snow, or even capital account transactions from current ones. One should be careful not to accept an apparently sensible solution, because it solves India’s capital inflow problem. More serious is the argument advanced by the Congress against the erstwhile TADA. There is evidence that TADA hurt the innocent and wasn’t successful in neutralising terrorism. The constraint is not the absence of legislation but an inability to enforce it, compounded by a lack of coordination across security agencies. For instance, with an anti-money laundering law in place, do FCRA clearances add anything to information gathering when information processing and dissemination is the problem?

Therefore, any new piece of legislation (apparently some laws are being planned) should be regarded with caution, particularly if it is directed at capital markets and succeeds in dampening growth. Instead, one should focus on enforcing effectively the laws that already exist. To state the unpalatable: anti-terrorism action is less a finance ministry/SEBI/RBI affair. The MEA, too, figures only tangentially. The buck really stops with the home ministry, and it is there that the problem really lies.