$500 Billion Black Market In Indian Economy

Corruption in India: 

More Government Is Not the Solution

 James Roberts and Derek Scissors, Ph.D.

Protesters took to the streets throughout India in the summer of 2011, demanding the establishment of a powerful new anti-corruption watchdog agency. In the aftermath of numerous high-profile corruption cases, the demonstrators’ wrath and intensity are understandable. Their demands, however, are misdirected.


Adding yet another agency to the bloated Indian government is not the way to reduce corruption. In fact, it is the size and scope of the Indian state that is the major cause of corruption.

Middle-Class Indians: Fed Up with Corruption

The traditional power base of the ruling Congress Party is benefiting from the corruption. This includes 700 million people in rural India who are involved primarily in farming, many of whom benefit from generous government subsidies and are therefore tolerant of graft in these programs. But as more people move from farms to cities in search of middle-class jobs, that power base shrinks.

In contrast, the middle class faces daily demands for bribes to process government-mandated documents ranging from “$45 for a driving license … $110 to be admitted to hospital … $130 for a marriage certificate” to $100 to a customs officer at Mumbai Airport because a wife’s name did not match her husband’s in their passports. In addition, beyond insult from petty bribery, there is injury from more sordid corruption:
In November 2010 Ashok Chavan, the chief minister of Maharashtra, one of India’s most prosperous states, was forced to quit over his alleged role in a scam involving homes for war widows. Retired senior army officers and relatives of senior politicians are accused of helping themselves to apartments meant for war widows in Mumbai.



[Indian government officials] were booed during the opening and closing ceremonies of the 2010 Commonwealth Games in Delhi due to … revelations of sleaze, incompetence and missed construction deadlines. The games cost $4.1 billion instead of the $270 million first estimated, while revenue was only $38 million.

BS Yeddyurappa of India’s main opposition Bharatiya Janata Party quit as chief minister of the southern state of Karnataka in July after he was indicted in a mining scandal. An anti-corruption report alleges the scam cost the exchequer more than $3 billion between 2006 and 2010.

Tapping into rising middle-class anger, former Indian soldier-turned-activist Anna Hazare used hunger strikes and other Gandhian tactics to try to change politics as usual. Citizens are better educated and better informed (e.g., via Twitter), and they are demanding changes in business as usual. Hazare is pushing for the creation of an anti-corruption watchdog to be called “Lokpal,” from the Sanskrit lok(people) and pal (protector), which would have jurisdiction over all government officials. Indian Prime Minister Manmohan Singh initially rejected the proposal on grounds that it could undermine parliamentary democracy.

Versions of the Lokpal legislation have existed for decades but foundered on special-interest opposition and constitutional questions. Reflecting the expansion of the middle class, Hazare has had more success with his version of Lokpal, and some variant is likely to pass the legislature in the next few months. Indians remain divided on Hazare’s approach, with some viewing “it as an emotive and misguided attempt to promote a utopian one-step solution.”

The Twisted Relationship Between Government and the Economy

No matter one’s view of Lokpal, it does not get at the most important issue. Lokpal targets corrupt entities within the state, but what if the very notion of state activity is the problem?

Perhaps the single biggest component of the corruption drama is an interesting case in which corruption has actually worked to the benefit of Indian consumers. It involves corrupt officials taking bribes from industry, causing the government to “lose” revenue it probably should not have sought in the first place.

In 2008, corrupt Indian government officials conducted an illegal sale of second-generation (2G) telecom bandwidth, depriving the government of a reported $40 billion in tax revenue that might have been realized had a proper and transparent auction taken place. (Some critics argue that the $40 billion figure is grossly exaggerated.) This 2G telecom has been a crucial part of the Indian success story, bringing modern technology into the hands of hundreds of millions and spurring both growth and inclusivity. That would hardly have been possible if the government had drained off tens of billions of dollars before any investments were made.

This unusual case illustrates an important point: Private industries should not serve as cash cows for the state. They are supposed to improve people’s lives, both directly through the products they create and indirectly by strengthening the economy. The telecom industry has done that, transforming society from medicine to farming. In this case, the industry’s investments were made possible by defrauding the government. Rather than extracting wealth from society, the government did not get its take this time—and consumers benefited.

The overbearing state’s restrictions on economic growth are not limited to the telecom industry. India’s recent growth is not rooted in policies that support economic freedom; market-oriented reform has been almost nonexistent of late. The state maintains an extensive presence in many areas through public-sector enterprises, and a restrictive regulatory environment hampers realization of the economy’s full potential.

While India rates highly in a number of important categories in the Wall Street Journal/Heritage Foundation 2011 Index of Economic Freedom, it receives very low scores in the connected areas of business freedom, investment freedom, and freedom from corruption. India ranks 87th of 182 countries in Transparency International’s Corruption Perceptions Index for 2010, which is used in the Index of Economic Freedom. Corruption is perceived as especially significant in government procurement of defense, electricity generation, and telecommunications contracts.

The Black Market

Much criticism has been leveled in India at the “black” economy. This includes not only illegal activities, but also legal activities that are not declared because it is too difficult to acquire government permission to engage in them.

All economies have black markets. The Indian economy has reached such a size that estimates of the underground segment are in the neighborhood of $500 billion annually. This spurs outrage at black marketeers who supposedly are robbing the Indian people. However, the black marketeers are the people—tens of millions of them. The only ones being “robbed” are federal and state governments, and that is usually the governments’ own fault.

India’s renowned entrepreneurs face severe challenges. India ranks 165th of 183 countries in the World Bank’s 2011 Doing Business measure of the difficulty of starting a business, and this is actually better than previous years. The regulatory framework is burdensome, and the legal framework is weak. For example, it can take almost 200 days to obtain a construction permit.

Banned activity does not represent lost revenue for the government, since the government’s position is that it should not occur at all. Revenue is lost in legal activity that is hidden. But avoiding taxes is not the main reason for individuals to hide from the government; the main reason is the difficulty of setting up a business. Rather than face endless delays and high costs, many ordinary Indians decide to proceed without the necessary authorization and then must hide their businesses. Black market activity is due to a predatory state’s attempt to control entrepreneurship.

The black market is also directly connected to recent headlines claiming that India has lost more than $400 billion due to illegal capital flows. Some of this is the result of ill-gotten gains from crime, which were illegally earned and ideally would never have existed. Other funds are “lost” either because they fled domestic restrictions or because India restricts capital movement.

Despite progress in the reform era, India retains tight capital controls even by the standards of emerging markets. What would count elsewhere merely as citizens and companies investing overseas—and bringing benefits back home in terms of financial returns, resources, corporate assets, and so on—is not permitted in India. As in all economies throughout history, people follow their self-interest and invest abroad anyway, but no benefits flow back to India, because the investments are deemed illegal by an interventionist state.

Could a Good BIT Help?

In some incidents of corruption, the Indian government’s guilt is directly apparent. The Commonwealth Games, for example, were plagued by lack of competition in contract awards. In other cases, the harm comes to the state, not the people, which should not be defined as corruption or any sort of problem in the first place.

India is wrestling with how to deal a decisive blow against corruption. The answer is plain: Deal a decisive blow against state interference in the economy. To help, the U.S. should offer a proposal for a bilateral investment treaty (BIT) that liberalizes Indian investment. This would sharply reduce the incentives for corruption. It also might serve as political cover for future Indian governments that want to make the difficult choices needed to defeat corruption in its many forms.

James M. Roberts is Research Fellow for Economic Freedom and Growth in the Center for International Trade and Economics, and Derek Scissors, Ph.D., is Research Fellow in Asia Economic Policy in the Asian Studies Center, at The Heritage Foundation.

Electrification of Indian Railways 50 year ago is the Biggest Scam of India

Power corrupts and absolute power corrupts absolutely.

If one goes by this age-old maxim one can say that from ancient time corruption is very much inherent in power. But, different religious communities may cite examples of golden era of their own, free from all sorts of corruption and evils. Jews and Christians may refer to the age of Biblical Prophets Moses, Joseph, David, Soleman, Jesus etc; Hindus may talk about Ram Rajya or Muslims about the Khilafat-e-Rashida (the rule of the first four Caliphs after Prophet Mohammad).

Apart from that, we find fewer examples of those possessing power yet are not carried away by the evil of corruption. In fact all the Prophets, Messengers, sages and other great men either kept themselves away from the lure of power or always tried to reform or fight against those who were corrupt.

The purpose here is not to convey that Manmohan Singh government is the corrupt-most in the Indian history nor to exonerate it of all the charges.

The truth is that scams of much larger proportion were very much there even in the immediate post-independence India. Some got exposed, but some never. The most important difference is that with the passing of each year we have more and more means to know about them, therefore, we are able to know more about them.

The expansion of media, the emergence of strong bi-polar politics, enactment of Acts like RTI, judicial activism etc have made the common citizens more aware of various charges of corruption. For example, till a quarter century back the CAG reports were never so much debated and discussed in the media. Print media journalism, barring a few exceptions, was not so strong. May be some opposition leaders were stronger in conviction than those now. But where was the space for them to be heard of and read about? A handful of newspapers were not able to create such a consciousness about any event as now.

So if a CAG report said that the country possibly suffered a loss of Rs 1,76,000 crore because of the 2G Spectrum scam the citizens were quick to become aware of it as now more than the opposition leaders the media succeeded in conveying this fact. It is other thing that the actual figure of the scam may be Rs 2,645 crore, as it is being now said in the same media.

In spite of information explosion the common citizens may not be able to know what 2G Spectrum scam is all about. Nor do they know anything about Jan Lokpal Bill. But thanks to the media they are now able to know that Manmohan Singh is leading the most corrupt government in Indian history. Today’s Suresh Kalmadi is in jail, but there might have been a Kalmadi––may be a much smaller in stature––during the 1982 Asiad Games too. But he could never be detected, thanks to weak media and opposition. Certainly everything was not hunky-dory then.

A senior railway official once commented privately that possibly the biggest scam in the country took place more than half a century back when the decision regarding the electrification of Indian Railways was taken. The decision in this regard was taken many years before the so-called Oil Crisis of 1973.

Today rail traffic gets stalled for hours and Accident Relief Trains could not reach the spot in time of emergency because the overhead wires get disconnected even after a minor mishap or derailment of one or two coaches.

Producing power to run electric trains requires lakhs of tonnes of coal every year. Huge dams were constructed causing environmental pollution and displacement of millions. Besides, the social cost it entails is much more than the amount spent on importing diesel.

According to that official the country may never be able to overcome the power crisis because these trains consume so much electricity. Diesel engines are equally efficient and powerful and do not pose any problem in reaching anywhere in the country in any circumstances. Incidentally, the first Rajdhani Express on electrified Howarh-New Delhi track introduced more than 40 years back was powered by diesel engine and it continued to do so for years. Even the US, China and many European countries prefer diesel engines over electric locomotives.

This whole exercise of electrification was taken under the influence of big lobbies––national and international. Yet nobody questioned it then and nor today some five decades later. But 2G Spectrum is on everyone’s lips.

Apart from that we have the habit of equating Indian ruling class with that of United States and other western countries. We call politicians of West clean and honest and paint our own in the blackest of colours. Yes, those ruling the western countries are apparently honest. But they have their own definition of honesty too. They may be to the pie honest in dealing with their own people or country. But when it comes to dealing with the others, especially Third World countries, the same honest western rulers become one of the most corrupt.

The destruction and reconstruction of Iraq, Afghanistan and many other countries have benefited big multi-national companies of the West. Many in US administration have business link with these firms and are direct beneficiaries of the illegal means. Yet nobody is questioning them because back home they all may be dry honest.

In case of Japan the story is different. Many of its prime ministers had lost their jobs because of the corruption charges.

Post-Mandal India saw the emergence of another form of corruption. Backward politicians who came to power in north Indian states, were unable to attract financial contributions from big traders and industrialists, who used to fund Congress or BJP. Deprived of this opportunity they resorted to their own means of making money by bleeding the treasury white. The lower functionaries of the party would earn by extorting money from petty shopkeepers and small time merchants. Thus they became defamed because they adopted crude method of corruption.

India does not participate fully in Automatic Information Exchange

India is ranked at 25th position on 

the 2011 Financial Secrecy Index. 

 This ranking is based on a combination of their secrecy score and a scale weighting based on their share of the global market for offshore financial services.

India has been assessed with 53 secrecy points out of a potential 100, which places it in the lower mid range of the secrecy scale . India accounts for slightly over 1 per cent of the global market for offshore financial services, making it a small player compared with other secrecy jurisdictions

The World Bank’s Stolen Asset Recovery (StAR) initiative has endorsed estimates that illicit financial flows across borders add up to $1-1.6 trillion per year, about half from developing and transitional economies. Others estimate that illicit financial flows out of developing countries alone stood at around $800 billion - $1.26 trillion in 2008. Looking at a related issue, the Tax Justice Network has estimated, conservatively, that about $250 billion is lost in taxes each year by governments worldwide, solely as a result of wealthy individuals holding their assets offshore. The revenue losses from corporate tax avoidance are greater. It’s not just developing countries that suffer: European countries like Greece, Italy and Portugal have been brought to their knees by decades of secrecy and tax evasion.

These staggering sums are encouraged and enabled by a common element: secrecy. Secrecy jurisdictions, a term we often prefer instead of the more widely used term tax havens, compete to attract illicit financial flows of all kinds, with secrecy as one of the most important lures. A global industry has developed where banks, law practices and accounting firms provide secretive offshore structures to their tax dodging clients. Secrecy is a central feature of global financial markets - but international financial institutions, economists and many others don’t confront it seriously.

The problems go far beyond tax. Secrecy distorts trade and investment flows, and creates a criminogenic environment for a litany of evils that hurt the citizens of rich and poor countries alike: fraud, evasion and avoidance of financial regulations, insider dealing, embezzlement, wholesale bribery, non-payment of alimony, money laundering, tax evasion and much more besides.

India’s 53 per cent secrecy score shows that it must still make major progress in offering satisfactory financial transparency. If it wishes to play a full part in the modern financial community and to impede and deter illicit financial flows, including flows originating from tax evasion, aggressive tax avoidance practices, corrupt practices and criminal activities, it should take action on the points noted where it falls short of acceptable international standards.

TRANSPARENCY OF BENEFICIAL OWNERSHIP – India

1. Banking secrecy: Does the jurisdiction have banking secrecy?

India does not adequately curtail banking secrecy

2. Trust and Foundations Register: Is there a public register of Trusts and Foundations?

India does not put details of trusts on public record

3. Recorded Company Ownership: Does the relevant authority obtain and keep updated details of the beneficial ownership of companies?

India maintains company ownership details in official records.


KEY ASPECTS OF CORPORATE TRANSPARENCY REGULATION – India

4. Public Company Ownership: Does the relevant authority make details of ownership of companies available on public record online for less than US$10?

India does not require that ownership of companies is put on public record

5. Public Company Accounts: Does the relevant authority require that company accounts are made available for inspection by anyone for a fee of less than US$10?

India does not require that company accounts be available on public record

6. Country-by-Country Reporting: Are companies listed on a national stock exchange required to comply with country-by-country financial reporting?

India does not require country-by-country financial reporting by companies.


EFFICIENCY OF TAX AND FINANCIAL REGULATION – India

7. Fit for Information Exchange: Are resident paying agents required to report to the domestic tax administration information on payments to non-residents?

India does not require resident paying agents to tell the domestic tax authorities about payments to non-residents
8. Efficiency of Tax Administration: Does the tax administration use taxpayer identifiers for analysing information effectively, and is there a large taxpayer unit?

India uses appropriate tools for effectively analysing tax related information

9. Avoids Promoting Tax Evasion: Does the jurisdiction grant unilateral tax credits for foreign tax payments?

India avoids promoting tax evasion via a tax credit system

10. Harmful Legal Vehicles: Does the jurisdiction allow cell companies and trusts with flee clauses?

India partly allows harmful legal vehicles.
INTERNATIONAL STANDARDS AND COOPERATION – India

11. Anti-Money Laundering: Does the jurisdiction comply with the FATF recommendations?

India partly complies with international anti-money laundering standards.

12. Automatic Information Exchange: Does the jurisdiction participate fully in Automatic Information Exchange such as the European Savings Tax Directive?

India does not participate fully in Automatic Information Exchange

13. Bilateral Treaties: Does the jurisdiction have at least 60 bilateral treaties providing for broad information exchange, covering all tax matters, or is it part of the European Council/OECD convention?

As of June 30, 2010, India had at least 60 bilateral tax information sharing agreements complying with basic OECD requirements

14. International Transparency Commitments: Has the jurisdiction ratified the five most relevant international treaties relating to financial transparency?

India has partly ratified relevant international treaties relating to financial transparency

15. International Judicial Cooperation: Does the jurisdiction cooperate with other states on money laundering and other criminal issues?

India partly cooperates with other states on money laundering and other criminal issues.










The main flavour of secrecy relies on jurisdictions, read countries putting up barriers to co-operation and information exchange. This may be achieved through deliberately refusing to pursue and obtain information held locally: even with the most impeccable information-exchange agreements with other jurisdictions (countries), these are worthless if the secrecy jurisdiction doesn’t have the information available to exchange in the first place. Alternatively, secrecy may be achieved through an unwillingness to share information with other jurisdictions – whether through a point-blank refusal to exchange information, or the erection of bureaucratic or other obstacles to information exchange.

The call for action is directed to civil society groups, politicians, economists, corporations, academics, and others, demanding they acknowledge the problem of global financial secrecy and illicit finance, take steps to learn about and understand it, and to take effective measures to tackle them.

Anna Effect: Fictitious (54.2 %) Growth In Export!! Black Money is Laundered back to India !!!

India’s exports figures in recent past continue to surprise everyone. It has gone quite unnoticed the post Baba Ramdev & Anna Hazare led Anti-corruption movement has witnessed a robust pace with an unnatural and suspicious growth in the Indian economy’s export graphs. The recent exports figures are encouraging for the sector, and the growth could be part of some larger developments in the world trade. But at the same time it is equally, if not more, plausible that black money has something to do with the recent export figures. To be or not to be - but the questions are in the air – Are the export figures real? Is black money behind the current flamboyant performance in exports?

.After jumping by a whopping 81.8 percent year over year (YOY) to US $29.3 billion in July, overseas shipments grew again at a robust pace of 44.2 percent YOY in August, reaching US $24.3 billion. During the April-August period, exports have reached a level of US $134.5 billion, registering a growth rate of 54.2 percent YOY. Interestingly, the skepticism is backed by recent IMF monthly trade statistics which indicate that other countries' import from India don't match with the Indian government's numbers on exports.

These numbers are spectacular but puzzling. How could Indian exports grow at a consistently scorching pace over a long time at this time of global economic uncertainty, particularly when two of its biggest export markets – the US and Europe – are battling fears of recession? The question is doing rounds probably everywhere now.

Black money is pushing Indian exports – such a claim is more difficult than anything else to prove. But I feel the argument cannot totally be ignored, particularly in the post Baba Ramdev and Anna Hazare scenario and after the recent nationwide hullabaloo over black money, forcing the government to put renewed efforts to tighten the noose on money launderers.


Is there a bigger cat in the bag? In the last few days a few exporters viewed that their (India’s) growth is not really so high. It is black money, as claimed by some industry pundits, that is playing a hidden role in the recent growth in India's export earnings. In a modus operandi of over-invoicing their exports, some people who have stashed money abroad bringing the wealth back to the country in the name of exports. These includes Indian Multinational conglomerates, high-placed politicians, past and present crickets, filmstars who have floated fictitious companies and trust to launder their black or unaccounted income.

While bringing back the black money, funding over-invoiced export earnings from illegal wealth held abroad is likely to be a preferred way, which, unlike the Hawala route, helps to make the black money white and even tax exemptions can be enjoyed. And if such exports could be shown from a SEZ or an EOU, that's icing on the cake with more benefits on avail.

Recently, the government has entered into the Tax Information Exchange Agreements with a number of countries and jurisdictions that are known as tax havens for black money. Also renegotiation of Double Taxation Avoidance Agreements (DTAA) with some other nations, including Switzerland (expected by September-October) is also being pursued. However, the Congress government is yet to close or cap the Mauritius route as well as enter into bilateral treaty with those countries where the black money is suspected to be stashed in cash and assets.

Mauritius Route:

In 1992 Foreign Institutional Investors (FIIs) were allowed into India. The same year, Mauritius passed the Offshore Business Activities Act which allowed foreign companies to register in the island nation for investing abroad. The benefits? Total exemption from capital- gains tax, quick incorporation (a company is formed in Mauritius within two weeks), total business secrecy and a completely convertible currency.

Indians could be using Mauritius as a route for bringing back black money into India, while taking advantage of low and friendly tax regime in the island nation located in the southwest Indian ocean.

For Mauritius’s foreign (Indian) investors willing to invest in India, it made sense to set up a subsidiary in Mauritius and route their investments through that country. By doing so, they would avoid paying capital-gains tax all together -- India won't tax because the company is based in Mauritius and Mauritius had anyway exempted investors from capital-gains tax. In addition, Mauritius also has low rates of dividend and income taxes. Of the 525 FIIS operating in India, 136 are operating through Mauritius. The Double Taxation Avoidance Treaty ( DTAT) between Mauritius & India allowed investors to invest in India and bypass its high taxes and lengthy regulations.

A six storey building in the heart of Mauritian capital Port Louis serves as a bogus address for tax evaders to park black money. It is the same address that is also being investigated by the CBI. There are other routes such as Malaysia, Dubai, South African countries, which are yet not capped by Government of India.

However, policy makers say that high growth in exports is the result of India's market diversification policy. The government denied that there was anything wrong with the export data, although earlier in March it had admitted that the merchandise import data for February 2011 were underestimated because of a technical problem in a government e-commerce portal.

Eggs are put in many baskets and the economy is reaping benefits, claims government of India. But still experts are skeptical about the fact that our exporters are moving away from the traditional export markets so fast!

Keeping the above developments in mind it seems quite plausible that Indians who secreted away their black money in these tax havens would try everything to shift the wealth to some safer place or bring it back home.





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