Existing studies, starting from an NIPFP study in the mid-1980s, have shown that the extent of black money has been growing over a period of time. One might attribute this to the nature of the growth of the economy itself, which has been uneven. Indeed, the growth of the service sector (such as retail trade) could have translated into a substantial rise in the black money. At the same time, it is also important to appreciate the role of institutions, technology and civil society that are contributing to increasing transparency in the system.
But given its character, estimating the extent of black money (even near accurately) is going to be difficult. It would, therefore, be more prudent to look at the roots of black money creation so as to limit the extent of parallel money.
In the post-reform period, it has been very well documented that the size of the informal sector has grown tremendously. Some (such as the Arjun Sengupta committee) have estimated it to be more than 60% of GDP. In addition to this, there are other distortions that are policy induced. As FE?s editorials have argued, the black economy is not just tax evasion. It is much broader and includes tax exemptions that contribute heavily to the black economy.
In terms of estimation, one may have to follow a sectoral approach. Sectors such as real estate and trade are perceived to be the biggest contributors of black money and they need to be dealt with separately. International trade, similarly, is known to follow mis-invoicing for quite some time. For instance, it would be extremely difficult to understand the recent high growth trends in India?s monthly exports growth by any theoretical determinants such as exchange rates, price differentials, demand factors, etc.
Another issue is money laundering. We do have many stringent laws to track big money transactions, particularly across the borders. But money laundering may also be prevalent within the borders. A recent report by RBI shows that even the small savings schemes such as KVP and NSC have become important instruments for money laundering and, hence, recommended an end to these schemes. Along such lines, it is important to identify sources of black money and then amend the same to reduce illicit transactions.
Overall, in my view, looking at the process rather than the extent should be the focus of the government and in that sense, it is hoped that the committees that have been formed recently would be able to identify sources of black money to help in mitigating its menace. In a way, the recent uprising in the civil society should be an opportunity for the government to look at the laws that are creating distortions and ambiguities. Strengthening the regulatory system is crucial. (For instance, one is not sure about the extent and effectivity of regulation in the real estate and trade sectors). It is also pertinent to look at the ways by which one can reduce the extent of the informal economy. Training tax officials to deploy technology and other dynamic innovations is also the need of the hour.
The author is professor, NIPFP. Views are personal
Gurumurthy Swaminathan
Black money is money unaccounted to the government. It was originally a product of high taxation. A study in 1982 postulated that a 1% rise in overall taxes led to a 3% increase in the black economy relative to the official economy. The size of India?s black economy is now estimated at 50% of its official one.
Surprisingly, the underground economy has grown more in liberalised India despite a fall in rates of taxation?both direct and indirect. The peak rate of income tax was as high as 97.5% in the 1960s. It continued to remain high in the 1970s. Earlier, along with wealth tax, gift tax and estate duty on the direct tax side and very high levels of excise and customs duties, the high income tax rates had increased the propensity for generation of black money. Now, with no estate duty or gift tax, a nominal wealth tax and benevolent indirect tax rates, the maximum rate of income tax is 33%, which places India amongst the lowest taxed nations in the world. So, if high taxes had driven business and money underground in the socialist regime,the propensity for generating black money should have been considerably lower in liberalised India. But the story is the other way round.
Global Financial Integrity (GFI), a global NGO committed to financial transparency, says that during the period from 1948 to December 2008, illicit monies transferred out of India amounted to $462 billion. This constitutes 72.2% of the black money generated in India and only the balance, $178 billion, is retained in India. Another shocking dimension of the GFI finding is that, out of the total monies stashed away since 1948, more than two-thirds ($323.5 billion) has been moved across in the post-reform period. The buccaneers not only generated three-quarters of the black money after 1990, they also found it necessary to keep black money outside India rather than in India. Why? GFI says that the primary reason for illicit transfers of three-quarters of India?s underground economy outside is ?to avoid attracting government attention?.
GFI says that the illicit financial flows of $313.5 billion post-liberalisation are products of ?corruption, bribery and kickbacks, and criminal activities?, besides tax avoidance. With the rate of taxes in India being so benevolent, not many tend to avoid tax now. But corruption, bribery, kickbacks and criminal activities are ventures of non-business actors that need a total bar against government attention. The new ventures are the reason for the huge proliferation and cross-border transfer of black money. The GFI view is validated by Hassan Ali, Quattrocchi, 2G, CWG and similar cases. Tax avoidance is not the driving motive for the illegal cross border transfer in such and similar cases. Much higher stakes than tax influence such activities. The suspected involvement of the higher echelons of the government makes it difficult for the government to pursue even well-known cases. The leadership of India is suspect today. Their corruption promotes a high volume of black economy, with the government being just a witness to the generation and cross-border transfer of black money.
The author is the co-convenor of the Swadeshi Jagaran Manch