Everyone is interested in black money now, especially black money stashed away abroad. There seem to be five reasons behind this renewed interest in black money. First, the Swiss have diluted their banking secrecy laws, under pressure from the G-20, OECD, US and even EU (though Switzerland isn?t a member of the EU). So, under international tax cooperation clauses, and for foreign clients, even if there is tax evasion and no tax fraud, Swiss will provide information. For UBS, though there is nothing comparable yet for Credit Suisse, they have done that with US and details of 4,450 UBS accounts have been provided. We are unlikely to get that information unless someone in the US embassies has talked about it and it surfaces through WikiLeaks. That?s a long shot. But there is a short shot too. A former UBS employee, Rudolf Elmer, has leaked to WikiLeaks. This leak has a list of 2,000 UBS accounts and presumably, there are Indians there. We have to wait and see. Second, there is another so-called tax haven named Liechenstein. The Germans got hold of information about 4,500 bank accounts in Liechenstein bank through a disgruntled ex-employee and offered this information to whichever country wanted it. After some waffling, India did want it.

At the Seoul meeting of the G-20 in November 2010, the OECD?s Deputy Secretary General and Chief Economist cited large revenue gains, using this information, in Germany, the UK, France, Italy and Greece. So India got this information and there is speculation there are 26 Indian names on this list. They aren?t necessarily resident Indians, some might be NRIs too. The Supreme Court has been given a CD with this information and there is a PIL pending on whether all of us have a right to know these names. How can we be content only with a name like Hasan Ali Khan? Third, we are re-negotiating double tax avoidance agreements to bring in clauses on exchanging tax information, or negotiating tax information exchange agreements. So perhaps, as the Finance Minister said in his press conference in late January, we are now really joining the global crusade against black money and will unearth tax defaulters. Fourth, this is the season of scams?CWG, 2G, Adarsh, Arvind and Tinu Joshi, and even the original Bofors has resurfaced. Fifth, there has been the Global Financial Integrity (GFI) report, more so, the one that surfaced in November 2010. This didn?t estimate black money in India, it estimated capital flight abroad.

What is black and what is white? Is black something that doesn?t show up in measurements of GDP? GDP is the marketable value of all goods and services that are produced in an economy over a period of time. Consequently, there are some transactions that are definitionally not part of GDP.

Domestic work is the classic example. The use of the word ?black? connotes a sense of illegality. However, there is nothing illegal about domestic work. It doesn?t show up in GDP and leads to the standard argument that GDP is under-estimated. In contrast with developed economies, India has a high share of the informal/unorganised sector. There is a high share of self-employment, a low share of employer-employee relationships. Monetisation is low and transactions occur in cash. Under GDP definitions, these ought to be part of the GDP and there is no conceptual problem. But there is a measurement problem because these are below the radar screen of collection of statistics. Stated differently, there is an informal economy that ought not to be confused with a black economy. Sometimes, there are deliberate reasons why people/enterprises wish to remain in the informal economy.

Tax evasion may be one reason, but it isn?t the only one. Vito Tanzi has been a pioneer in estimating the size of the underground economy, not just in the US, but elsewhere too. While the thrust of that work was on tax evasion, Tanzi himself recognised there were other reasons for the existence of an underground/ black economy. The high compliance cost of registration is one, which is one reason why the SSI sector remains unregistered. Labour laws can be another. Therefore, one should not jump to the conclusion that there is a black economy simply because one wishes to evade taxes, or because there is criminality associated with the source of income. And one should be careful in separating the informal economy from the black economy. Let?s think this tax evasion argument through. Both on direct and indirect taxes, tax evasion is one thing and legitimate availing of exemptions is another. Without exemptions, our tax/GDP ratio will probably be around 22%. If it is 16%, is that because of evasion or exemptions? Yes, the exemptions should go. Yes, the agricultural/rural sector should pay taxes. Yes, we need to jack up the effective corporate tax rate. Yes, lawyers and doctors should be brought under the tax net effectively. Yes, one should not avoid direct taxes by claiming deductions through registration under the Shops and Establishments Act. While these arguments are true and we should have tax reform, as long as those reforms aren?t introduced, illegality may not necessarily be involved.

There is a difference between tax evasion and tax avoidance. Whichever one we are thinking of, we essentially have the organised/registered sector in mind and the rural/agricultural sector is excluded. How much of GDP is the organised sector? Let?s say the shares of national income are 60% for services, 24% for industry and 16% for agriculture. If 40% of industry is SSI, we only have 14.4% of GDP left in industry. The bulk of services is imperfectly taxed. Hence, from the tax point of view, it is difficult to see how one can have more than 25% of GDP in mind. To complicate matters, some examples of corruption are transfer payments. The 1985 NIPFP study estimated the black economy to be 21% of GDP, Arun Kumar said 35%, GFI extrapolates (and interpolates) on the basis of a 1982 Gupta and Gupta study to suggest 50% of GDP in 2008. One of the problems with linear extrapolation based on a regression on time, is that we will eventually find that 100% of GDP is black. Reportedly, the finance ministry is commissioning a new study, roping in NIPFP, NCAER, CBDT, CBEC and DEA. Perhaps we will have more light then. Right now, the 50% figure seems to be based on faith, like the 50% below the poverty line is.

The author is a noted economist