Opposition’s black money bogey

Last week’s parliamentary debate on “black money” abroad has been hailed by many as an example of how well our often dysfunctional legislature can function when it has a mind to do so. What was surprising, though, was that the issue was raised by the Opposition as an adjournment motion when the problem is manifestly a national and not a partisan problem, one that needs to be dealt with collectively.

No one in our country disagrees that black money is a serious problem or that the black money stashed abroad should be identified and brought back, if possible. Black money — generated by real estate transactions, diversion of government resources from welfare programmes, kickbacks on government contracts (especially those involving international procurement) and malpractices in international trade, especially under-invoicing — is particularly pernicious for a developing country like India, because it siphons resources away that could be spent for much-needed investments in health, education, roads and general public welfare.
The scale of the problem is immense. Various numbers, including some fanciful ones, were flung about in the course of the debate. The most realistic figure comes from a widely-circulated report called The Drivers and Dynamics of Illicit Financial Flows from India 1948 to 2008, published in November 2010 by the reputable US-based Global Financial Integrity. It concludes that India has lost a total of $213 billion in illicit money since 1948, the value of which in today’s dollars would be about $462 billion, or Rs 20 lakh crores. Hefty enough, but not as bad as alleged: even when it comes to Swiss banks — the burden of the BJP’s song for some years now — official Swiss figures show that only 0.07 per cent of all the assets in Swiss banks are held by Indians, some $2.5 billion out of $3.5 trillion, or under Rs 10,000 crore. We are not, therefore, the country with the largest Swiss bank deposits (“more than all the other countries combined,” one Opposition MP alleged). Even one illegal rupee in a Swiss bank is unpardonable. But the real dimensions of the problem should be understood.
Yet the Swiss banks are a red herring in this debate. Swiss banks pay one per cent interest at the most; it is highly unlikely that Indians with black money are leaving it there, and far more probable that the bulk is being reinvested more profitably elsewhere, including in our country. Why not? In India, in the last decade, housing prices have risen 10 times since 2000, the Sensex has gone up six times, and government bonds offer eight per cent while the best terms abroad are at three per cent. This makes India a very attractive investment destination for Indian money, which can be routed back to the country in a practice called “round-tripping” — taking illegal money out but bringing it back as a legitimate investment.
In our desire to facilitate foreign investment, we have unwittingly made “round-tripping” easier, through, for example, the anonymity guaranteed by participatory notes: 55 per cent of the foreign institutional investments in India in 2009-10, totalling $85 billion, were made through the participatory notes route. Whereas our domestic investors have to fulfil stringent “know your customer” norms, these are much more lax for participatory notes. While we need productive investments from abroad, we must not allow them to become a contemporary equivalent of the old “voluntary disclosure schemes” under which the government used to soak up black money. A specific concern is Mauritius, the source of 40 per cent of the total FDI coming into India. We have been trying to renegotiate our Tax Treaty with Mauritius, but inevitably our strategic interests in that country affect how far we can push its government to accede to our demands. Indian entities may be setting up paper companies in Mauritius and making our Double Taxation Avoidance Agreement in fact a double non-taxation agreement for us.
To suggest that the Government of India has not been strong in its efforts is particularly unfair because, since the Pittsburgh G-20 Summit in 2009, India has led the push in the G-20 against banking secrecy and opaque cross-border financial dealings that protect black money. Some in India presume that the tax haven countries are just waiting to hand over information and money to us, if only our government is tough enough to ask. The opposite is true. Whatever India can do in relation to the banks of foreign countries is subject to the domestic laws of those countries, and treaties to which India is a party. Under the Indo-Swiss DTA Agreement, information on Swiss bank deposits cannot be revealed by them until we provide the names of the individuals we are investigating, of the banks where they have their money, and evidence of criminality; the Swiss have made it clear they will not support “fishing expeditions” for names in their banks. In addition, we are bound to secrecy clauses; releasing names (except for prosecution) would violate our undertakings and jeopardise future co-operation.
While it is easy to shout slogans or to clamour for adjournments, the real question is what our country’s political parties can do together to resolve it. I would like to suggest a brief list: We have to tackle the problem of tax evasion, which would require tax reform and rationalisation and financial sector reform. We need to incentivise compliance. We have to tackle black money in real estate, which requires reforms in land titling, land revenue and land record systems, the elimination of policy distortions, and rationalising onerous stamp duties. We have to tackle black money in education, which means ending the scarcity of good education supply in our country. We need effective implementation of government spending programmes, especially their financial management. Action to strengthen law enforcement and criminal justice will help eliminate terrorism-related funding, which also relies on black money. And we do need to tackle electoral reforms to ensure that politics does not remain a major locus of black money. The Lokpal Bill is only one of several measures needed to tackle corruption effectively.
In other words, instead of adjourning Parliament over this issue, we need to use Parliament to create the policies and reforms that will enable us to effectively deal with black money here and abroad.

The writer is a MP from Kerala’s Thiruvananthapuram constituency