Opinion No black-or-white

This is how black money is generated in India on a large scale. No wonder economists have varying estimates of 25 per cent to 45 per cent of GDP as the potential black economy. There is no way of ascertaining the real extent of the cash economy that operates in India. Some proxy methods can be applied to understand this phenomenon. For instance,the extent of tax evasion can be gauged from the fact that the income tax department had only about 4,50,000 individuals who showed a taxable income of Rs 10 lakh and above annually in its records until 2007. By any stretch of the imagination,it is difficult to believe that only 4.5 lakh persons in this nation of 1.2 billion show a taxable monthly income of

Rs 85,000-plus! It is clear that a large number of self-employed professionals remain outside the tax net.

In fact,the cash economy in India has got a major boost in the past decade of easy global and domestic liquidity,which has driven land prices up substantially across small-town India. The real estate sector remains the biggest generator of black money today. Real estate dollar millionaires — connected in some way to the real estate business — are proliferating. There is so much anecdotal evidence of this around you that it is hard not to see it.

The Centre told the Supreme Court last week that it would do a fresh and comprehensive study of black money generated by Indians here and abroad. There must be a special focus on the real estate sector in any such study.

Gold remains a big vehicle for hoarding unaccounted income. The World Gold Council estimates that Indian households have up to 15,000 tonnes of gold in their possession. At current gold prices,this amounts to $650 billion — more than 50 per cent of India’s GDP. It is reasonable to assume that a large part of this gold was purchased over the years with incomes on which no tax was paid historically. The government could devise ways of bringing this into the mainstream saving stream.

The stock market,during its boom period of the last decade,has also played a big role in the burgeoning deposits of rich Indians in tax havens abroad. It was only a few years ago that the stock market regulator discovered that Indian businessmen were illegally taking money out of the country and then bringing it back in the guise of foreign institutional investment in the stock markets,sometimes investing in their own companies’ shares. As the Indian stock market consistently rose,the same investment would get liquidated at higher values and the money would again be taken out with capital gains. Such funds would come into the stock market and move out seamlessly. The market regulator tried to impose a ban on such activity,but cross-border capital has 100 ways of sneaking in.

Typically,businessmen would use methods like under-invoicing of exports or over-invoicing of imports to illegitimately take money out of the country,and then use the funds to play the Indian stock markets which gave them the highest of returns over the past decade and more. If the Sensex has risen over three times in the past decade,it can safely be assumed that the wealth of rich Indians kept abroad may also have gone up that many times.

For money doesn’t have the habit of lying idle and it chases the highest returns — which is what the Indian markets have offered over the last 10 years. It is common knowledge that the diamond trade is the largest source of money-laundering,which brings massive funds into the stock market from abroad. Many diamond merchants in Belgium,Zurich,etc offer ready-made shell accounts for laundering money back and forth.

The larger point is some of our well-meaning politicians are being naïve when they say over $500 billion stashed away by rich Indians abroad must be brought back to India. Actually,this money must already visit India once or twice every year,like many rich NRIs. Such funds may temporarily be lent to hedge funds on Wall Street who in turn would invest them in the Indian stock market for short periods.

In 2010,a total of $85 billion of foreign portfolio funds were committed to emerging markets with high returns. Of this,$28 billion came into India. A good 33 per cent of this came as hot money from hedge funds,in which the identities of the real investor would not be known to anyone.

We are living in a world of seamless cross-border capital flows,where money has really no name and face. So the notion that rich Indians can be asked to bring back their funds stashed abroad needs a reality check. It is government policy,indeed double taxation treaties,that allows such money to move seamlessly across borders. Names are also not easily revealed under various treaties signed by nations. There is enough hypocrisy at the level of global governance —just as there is at the local level,where you and I buy our small groceries or go to the dentist without taking a proper receipt.

The writer is Managing Editor,‘The Financial Express’

mk.venu@expressindia.com