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Not black-and-white

Fixating on black money recovery is pointless. The only thing that works is real domestic reform

Written by Subhomoy Bhattacharjee |
May 13, 2009 11:48:36 pm

At the risk of sounding highly unpatriotic,the repeated calls to get black money back into India are naïve at best — calls that lack,frankly,any logic.

It just creates a moral position that,like all such positions,is eminently avoidable. First of all,black money is not a hoard of cash that is stashed away under the Swiss Alps. The money,like any other deposit made in any bank,doesn’t stay in its vault,waiting for hubris to catch up.

If a future Indian government’s persuasive skill makes the banks in various tax havens reveal the total amount held by Indian citizens,the money will return to India as Swiss Francs,US dollars,UK pounds — in short,anything except Indian rupees. This means the sum will go to the Reserve Bank of India as any foreign exchange does in India.

What will the Indian government do then? Going by the logic being dished out by the BJP and other parties,the government will use it to do social good — like waiving interest on loans for small farmers and others. This,in banking terms,means the government will borrow humungous amounts from the RBI,by floating additional debt. The sum would be used to recap the banks which have made the debt. Some could also be used to finance additional infrastructure spending.

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The same role is being performed at the moment by the government through the use of local currency. The cap on this expenditure is set by the government’s borrowing capacity — a variable that is subject to questions of inflation,the fiscal deficit and so on — but nowhere does the amount of foreign exchange held by the RBI in an economy with limited capital account convertibility make any difference. So,till this point in the discussion,it is clear that the additional sum of black money brought in from abroad is hardly going to help build up the capacity of the economy any more than otherwise.

If instead,the government,as Mr Advani perhaps envisages,borrows against the sum brought in,it would unleash huge economic peril. All that would do would be to push excess liquidity into the eco-nomy from the banks and from the government’s own spending on assorted social development programmes. Real variables would hardly be affected; the net impact of the spending would therefore drive inflation up in the economy,hardly an efficient thing to do.

The other possible use of the money is as “helicopter money” — direct subsidies — perhaps the more popular understanding of the subject. If Mr Advani were to do that,the immediate impact of the measure on the economy would be to raise food price inflation. The rush to the local grocer would just raise the prices,presumably presenting the grocer with the problem of how to handle his newfound riches,and therefore create another Indian entrant to the ranks of numbered Swiss bank accounts.

The key problem glossed over in the zeal for black money “return” is that,unlike an oil well or something equally tangible,cash recovered from abroad has no intrinsic value. The total amount of cash in the economy at all times must bear a proportionate relationship with the total stock of goods and services produced. Unless the sum is sequestered in the RBI,releasing any of it into the economy would be totally counter-productive,as we have seen.

What Mr Advani has not conjectured is that a large part of the black money has,in any case,already returned to the Indian economy,as our growth rates have accelerated. This has happened very simply. As an analogy one should look at the foreign investment that for instance comes into India through the “Mauritius route”. The route was set up in 1984,but all statistics from the ministry of commerce show that it became big only when liberalisation took hold. Investors in the economy from abroad,either through the share markets or through foreign direct investment,put money in as they felt their returns would be substantial. Despite the recent downturn,that confidence has not ebbed. Except in October 2008,the total FII outflow has been very thin; it has now turned positive again.

In the same way,investment by the Swiss banks and others would also be substantial if the investment possibilities in the Indian economy showed promise. Since presumably,going by Mr Advani’s logic,that is funded by huge hoards of black money — and I have no doubt that to some extent that is true — it makes enough reason to offer investment avenues for private equity and venture capital to pour money in. That,in turn,can be easily furthered by putting in a massive range of infra-projects that do not just remain as plans but become on-going projects with clear deadlines.

These arguments should not come as a complete surprise to

Mr Advani. After all,Mr Vajpayee did not bother with this issue,and instead pushed the investment plank. It paid more dividends in terms of returning black money.

In the 58 years since India became a republic,we have tried all the other popular options. The government in the ’70s imposed a punitive level of income tax hoping that would do the trick. It did,sort of — it created the most sizable rise in the amount of black money recorded. Since then there have been two specific schemes to get black money back into the “mainstream” — the bearer bonds floated in the ’80s by the then-finance minister,Pranab Mukherjee,and the more recent attempt by P. Chidambaram,known as the Voluntary Disclosure of Income Scheme. Compared to the less-than Rs 10,000 crore generated by both schemes,the flow of actual investment into the economy through just the Mauritius route has been $4 billion in 2007-08.

As has been argued in these pages by the original author of the “black money” report,there are enough avenues left in the economy for the generation of black money,almost all of those through the still-labyrinthine process of controls. The Value-Based Advance Licensing Scheme (Vabal) was one particular favourite; but,as Dr Kelkar has pointed out in his report on indirect tax,transaction cost of the exporters itself costs the economy about Rs 5,000 crore every year. If these are plugged to restrict the creation of black money,the sum stashed abroad will find its way into the economy in a far more virtuous way. What’s actually needed: the new government must get serious about reforms.

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