India has lost nearly a half-trillion dollars in illegal financial flows out of the country, says a new study by Global Financial Integrity.
India is losing nearly Rs.240 crore every 24 hours, on average, in illegal financial flows out of the country. The nation lost $213 billion (roughly Rs.9.7 lakh crore) in illegal capital flight between 1948 and 2008. However, over $125 billion (Rs.5.7 lakh crore) of that was lost in just this decade between 2000-2008, according to a study by Global Financial Integrity (GFI). These “illicit financial flows,” says GFI, “were generally the product of corruption, bribery and kickbacks, criminal activities and efforts to shelter wealth from a country's tax authorities.” GFI is a programme of the Center for International Policy, Washington D.C. It is a non-profit research and advocacy body that “promotes national and multilateral policies, safeguards, and agreements aimed at curtailing the cross-border flow of illegal money.”
In just five years from 2004-08 alone, the country lost roughly Rs.4.3 lakh crore to such outflows. That is — nearly two and a half times the value of the 2G telecom scam now exercising Parliament and the media. The Comptroller and Auditor General of India (CAG) pegs the 2G scam at almost Rs.1.8 lakh crore.
Accounting for the rate of return on those illegal outflows, the present value of that $ 213 billion reaches $ 462 billion (Rs.21 lakh crore) says GFI. Astonishingly, over $96 billion of that amount left the country between 2004 and 2008. As the report's author, Dev Kar, told TheHindu: “India is losing capital at an average rate of $19.3 billion per annum ... India can ill afford to ignore such a loss of capital.”
As the report puts it: “Had India managed to avoid this staggering loss of capital, the country could have paid off its outstanding external debt of $230.6 billion (as of end-2008) and have another half left over for poverty alleviation and economic development.”
At the 2004-08 pace (if it has not gone up), the economy is haemorrhaging at a rate of nearly Rs.240 crore every day on average. And even the total $462 billion, says GFI Director Raymond W. Baker in a letter prefacing the report, is “a conservative estimate. It does not include smuggling, certain forms of trade mispricing and gaps in available statistics.” Factor these in, and “it is entirely reasonable to estimate that more than a half-trillion dollars have drained from India since independence.”
The study
The GFI study is titled “The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008.” Authored by Dr. Kar, formerly a senior economist at the International Monetary Fund (IMF) and now Lead Economist at the GFI, it defines ‘illicit flows' as “comprised of funds that are illegally earned, transferred, or utilised — if laws were broken in the origin, movement, or use of the funds then they are illicit.” Such fund transfers are not recorded in the country of origin for they typically violate that nation's laws and banking regulations.
So massive are these illegal outflows, says the study, that the “total capital flight represents approximately 16.6 per cent of India's GDP as of year-end 2008.” Its estimate falls far short of the $1.4 trillion figure cited in the India media prior to the 2009 general elections. But, says the report, “the figure still represents a staggering loss of capital.” Illegal flight of capital, it says, “worsens income distribution, reduces the effectiveness of external aid, and hampers economic development.”
That does seem an obvious outcome in a country where according to the National Commission for Enterprises in the Unorganised Sector (NCEUS), 836 million human beings live spending Rs.20 a day or less.
The illegal outflows also account for most of India's parallel economy. “The total value of (such) illicit assets held abroad represents about 72 per cent of the size of India's underground economy which has been estimated at 50 per cent of India's GDP (or about $640 billion at end-2008) by several researchers. This implies that only about 28 per cent of illicit assets of India's underground economy are held domestically.” It also strengthens arguments that “the desire to amass wealth without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital.”
The GFI study makes two vital points amongst others that will surely stoke ongoing debates in the country. One: the drain bloated massively in the era of economic liberalisation and reforms starting with 1991. Two: “High net-worth individuals and private companies were found to be the primary drivers of illicit flows out of India's private sector.” Conversely, “India's underground economy is also a significant driver of illicit financial flows.”
Tax havens
As Mr. Baker says: “What is clear is that, during the post-reform period of 1991-2008, deregulation and trade liberalisation have accelerated the outflow of illicit money from the Indian economy. The opportunities for trade mispricing have grown, and expansion of the global shadow financial system accommodates hot money, particularly in island tax havens. Disguised corporations situated in secrecy jurisdictions enable billions of dollars shifting out of India to “round trip,” coming back into short and long-term investments, often with the intention of generating unrecorded transfers again in a self-reinforcing cycle.” Interestingly, the points about high net-worth individuals (HNWIs) and corporates and ‘mispricing' take the debate way beyond the clichéd ‘corrupt politician' explanation.
Lauds reform
The report, while stressing these factors, says that given the limitations of available data, it found “scant evidence that imprudent macroeconomic policies drove illicit flows from the country.” It lauds the post 1991-reform era. And praises Prime Minister Manmohan Singh for launching “India's free market reforms that saved the country,” in its view, “from financial ruin and placed it on a path to sustained economic growth.” On the role of macroeconomic policies in the outflows, it says there is yet work to be done, data to be generated.
But its own evidence on how the outflows escalated post-1991 is pretty damning. And India's liberalisation itself — in which period the GFI study records the greatest drain — was about a sea change in macroeconomic policies. The study notes a rise in inequality in the reform period. And acknowledges, in its summary, that “A more skewed distribution of income implies that there are many more HNWIs in India now than ever before.” It implies that governance issues, deregulation without new oversight and a complex web of other factors were more to blame.
GFI calls for measures that would require country-by-country reporting of sales, profits and taxes paid by multinational corporations. It recommends India should curb ‘trade mispricing.' Because “transfers of illicit capital through trade mispricing account for 77.6 per cent of total outflows from India over the period 1948-2008.” It advises steps that would require automatic cross-border exchange of tax information on personal and business accounts. And actions that would harmonise vital matters under anti-money laundering laws across nations.
Keywords: Illegal money, Global Financial Integrity, bribery, kickbacks
What is to be noted is the extent of loss in the last four 4 years compared to sixty years between 1948 and 2008, Considering 2009 and 2010 it should have gone up heavily. Some where somehow we will need an answer from PM and UPA chairperson. A teacher will ask to shut up and a judge will say irrelevant to current answers UPA is offering pointing to BJP or BS Yeddyurappa when asked by media their problems. Of course BJP is answerable to their issues but we cannot let one point at another for an answer.
Pay the whistleblower incentive as a % of amount uncovered when he
she submits proof of money transfer to tax havens as the USA has enacted. You will see the country getting a lot of information to
detect money laundering, kickbacks etc. Just act. Germany used the tapes provided by a ex bank employee to scoop the unaccounted money
kept in Liechenstein.
Here is a solution: I agree with Mohan Singh on creating legal and a powerful IRS enforcement organization. Now to do that we need public funds and we are running a fiscal deficit that ends up tightening funds and compensation needed to attract talent to government. Additionally, we need to set up world class public policy institutions similar to IIT's to educate our future policy makers. Maybe that will be a cheap start, the govt. could spend a small amt of money (compared to reforming the tax collection) to pay for top notch public policy teachers from Harvard and UC Berkeley. Most of them would be willing to come to India on a sabbatical at even a lower pay (but lets pay them a lot more to incentivize them). Second, apart from these long term structural changes, lets get this capital back to India for Infrastructure spending (According to Mckinsey, we need $1.2trillion of FDI investment into ports, roads and airports by 2020 to keep the current growth rate. Thats 10 years from now...however we have received a smaller amount annually towards that goal. We need to get $100b atleast and grow that aggressively. Foreign investment is going into the equity markets (thats hot money) and only helps to increase the wealth inequity. The short term solution (and a well-researched practice in the west) is to give a one time allowance to allow this money to get back into the open economy after paying a 1% penalty to the exchequer. The other condition should be that half of the money being brought in should be used to purchase "Build India Bonds" guaranteed by the GOI with a 10yr maturity and 4% PA interest rate (competitive rate compared to US government bonds - assuming these funds are held in US treasury which is only yielding 2.5% P.A currently) This is a great time to do this given that the Rupee is on a long road of strengthening and it can be framed as a window to convert thats fast closing not only due to govt. policy but also due to macro exchange rates. So if I sent $1 back to India I will get Rs.45 in return today and if I waited for another 3 years I might get only Rs.35.
There is a lot of Moral Hazard in this policy prescription, but what is a bigger sin, giving amnesty to greedy people or letting 65million infants become malnourished?
Note to editor: Can you please mention if the dollars quoted are in Real Inflation adjusted or Nominal terms. The numbers are misleading.
JPC,independent enquiry commission,separate ministry, judiciary, police, army, politician, etc etc are all collection of corrupt individuals. Will we have a system in which all transactions involving money above Rs 1000// should be by means of either account payee checks or credit/debit cards?
Such outflows always bypass domestic laws that are themselves vulnerable to loopholes. Tax havens are so only because we recognise them that way.. Our treaty with Mauritius, for example. Most US companies fund their Indian subsidiaries by routing money through Mauritius banks/subsidiaries.
those who think that india is a poor nation read this: India is a very rich nation with very large number of poor people because its wealth is in stealth mode as black money with very few individuals!
Simple arithmetic will show that if a babu or neta is bribed ten rupees, then the briber will expect a gain of anything from 20 to 30 times. So what is all the hangama about corrupt babus and netas, when the Armani-suited businesswala now mistily called "corporate house" is raking it in 20 fold more? Why doesnt the paper do a study on where the wealth came for so many of the new boys on the block now each worth billions? Pick any ten and you will find they were nobodys a mere 30 years ago and are now masters of the universe. What busines practices got them there? The Hindu will find the age-old tried and tested one of suitcases of cash to make things happen was the magic wand that transformed these fellows to god's chosen few.
Now the Indian public has got so used to these scams that it sees it as a not a great news.But it needs to be remembered that this menace is growing multiple folds with time.It is high time that we come with a procedure to track this menace which is out of the ambit of the influential and has the trust of the people.
Indian poor committing suicide as a simple solution to come out of their state of poverty day in day out. In future there will be no service providers for rich. They have to lay and sweep their own roads,grow their own food do what not. The money they are stacking becomes worthless in no time if it is not used for productive purposes, good money or bad money.
I have always felt that the 'original sinner' label must be attached to the corporates who lure the corrupt politician to favour them. While public accountability and some right to information in the public domain provides the grist to the media mill on corruption scams, lack of such mechanisms coupled with the media's dependence on the corporates for survival through ad revenues make the media go soft on corporate scandals. No 'sting' operations will ever be done to expose corporate loot.
One hears on our TV channels some persons being referred to as 'molester' or 'scamster' so and so. One shudders to think of the adjective foreign media may soon use while referring to India.
We can now understand why are there so many poor people in India. Things will not change because vested interests who control the black economy belong to all walks of life (except the poor) and are in control of all institutions in the country. They are not going to surrender easily. Unfortunately, a fundamental change for the good looks dim.
We cannot change India unless we strengthen the Judicial System. Corruption is at everyone's level and we have no fear on the rule of law. Our Judicial system is notoriously slow and it is known by everyone and world famous too. It takes years and years to deliver a small verdict which can be delivered in a week. People do not have respect or fear on the Indian judicial system at all. Indian visiting other countries like Singapore, USA, Europe and Gulf follow that country's law without fail. The reason, he/she knows that he/she will be punished immediately if the law is violated. The same Indian just break the law once landed in Indian soil. Reason: Everyone knows we can simply escape from the law system by bribing anyone. Most of the crimes happen because of the judicial slow response only. He/she knows that he can extend the case for years without verdict. o politician has been punished so far. Luckily Indian people are gifted with free Media. It exposes most of the corruptions that government fails to bring out. People have lost faith in politicians already. People had lost faith in Police forces already. People are losing faith in the judicial/court systems - it is being damaged systematically by the politicians only.The last hope for the people is Media.
While the Indian economy and Indian society suffer the ill-effects of the illegal transfer of funds abroad, the beneficiaries are the openly operated tax havens of London and New York who indulge in double dipping, taking advantage of different treatment of taxable incomes in various jurisdictions to avoid and evade taxes in more than one country on the same income stream.On top of it, the legal and tax collection framework in India is so weak that we cannot enforce our laws within our own country let alone follow the illegal transfers overseas and fight for what is our due as the USA, UK, Deutscheland have been doing with Swiss account holdings of their own high net worth citizens. With the economic changes introduced since the early 1990's we also have to construct the necessary legal and tax-collection infrastructure to fit the new economic landscape.
Scams and corruption cases have become rampant that it requires an independent ministry to deal with.
This also seems to be another scam which needs to be thoroughly probed by either a JPC or by any independent enquiry commission.
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