Funny Money Fumbles

Black money remains a nightmare, and it is not a battle easily won

One of the shrewdest tricks in the game of attracting attention is an old one: inflation. Not the regular old kind, but the inflation of numbers: the exaggeration of data for shock effect. Echoing Peter’s Principle—by which everyone in a hierarchy is promoted to his/her level of incompetence—these numbers tend to get blown and overblown till their point of unreliability. This happens fast in a country where wild guesses are matched only by wide perplexity vis-a-vis financial figures, especially those bigger than a few crore.

The Global Financial Integrity (GTI) report that recently estimated Indian black money at something like one-third of India’s economy has set off a season of wild guesses, with the GTI’s figure taken up zealously and overleapt by a political party whose vaulting ambitions never fail to rub off on its facts, the BJP.

Says Dr Surjit Bhalla, chairman, Oxus Investments, “The figures that are thrown about are basically impossible.” Not only are most of them pulled out of a hat, comparing them with GDP stirs up fury but also mixes up hidden wealth with secret income. This is a false comparison, for wealth denotes the value of assets you can sell, while income is what flows into your wallet on a regular basis. Including real estate and the like, all of India’s wealth amounts to $3.5 trillion, according to Credit Suisse’s Global Wealth Report 2010. This figure is twice as big as all of India’s annual internal flows of income added up: the $1.7 trillion GDP for 2010-11. So even if an amount between $500 billion and $1.7 trillion—the prevailing range of allegations by the BJP and its acolytes—is actually stashed away somewhere, it is not an overwhelming part of India’s overall wealth, huge though it would still be.

Even more absurd is the impression that retrieval of black money is a matter of playing the brave buccaneer, daring other pirates of the high seas and digging up a treasure chest to be brought back home amid the deafening cheers of a billion people. “For one, even money supposedly in Swiss banks is not just sitting around, it is in portfolios invested in far corners of the world,” says a former global investment banker, “and this is done by wealth managers based not in Zurich but Geneva.”

What caused a flurry of excitement over the possibility of extracting the cash was Germany’s success in cracking secret accounts in Liechtenstein Global Trust bank. There were 18 Indians on the list, and Berlin dutifully disclosed their details to New Delhi. The point to note, however, is that this was the result of a cloak-and-dagger operation that had no legal backing. “Liechtenstein remains one of the world’s two most secure places to hide money, Panama being the other,” adds the ex-banker, “especially after Swiss banks dumped the facility of ‘numbered accounts’ (owned by codes rather than names).” Swiss banks now know who their account holders are, but resolutely refuse to disclose anything about them except in specific cases involving the credible indictment of an individual for a crime they recognise as such (tax evasion, they do not). They think of it as a matter of the right to privacy, something they believe every individual ought to have as a shield against possible tyranny of the State. “Their secrecy laws were originally designed to keep Jewish money hidden from Nazis,” explains the former banker, “so their stance remains, ‘We will not disclose anything; if we did not buckle under Hitler back then, why should we yield to any other pressure?’”

So when UBS turns down a request from India, it is not a failure of morality, diplomacy or nuclear-tipped superpowerhood, but a matter of procedure. In the infamous case of race-horse runner Hasan Ali Khan, for example, India’s Enforcement Directorate is convinced of the man’s guilt in assorted matters, such as money laundering, beyond just tax evasion. But the documents submitted as evidence against him were rejected in late February by UBS as ‘forgeries’.
So that’s that. Or is it?

Tracing black money is an exercise in frustration, but the Indian Government cannot afford to slacken in its efforts, given the popular angst against it. ‘Black money’ has always been a broad term for all shady acts of enrichment, regardless of specific laws broken. In that sense, it may well be a sign of broad discontent with inequality by and large, a problem Indian policy wonks typically ignore by invoking the usual all-is-well mantras of the ‘Kuznets curve’, ‘Gini coefficient’ and so on.

The discontent is real. The more flashy the wealth, in fact, the more gnashy the teeth. The World Gold Council points India out as home to 18,000 tonnes of gold, over one-tenth of all the bullion ever dug. Almost all of it is privately held; the Reserve Bank has just 558 tonnes. And by the dazzle on display at Indian weddings, this is a figure that is easily believed. “Since black money is unaccounted for,” observes Santosh Desai of Future Brands, “it is either locked up or shows up in the loudest acts of expenditure.” Real estate is the other sector where black money turns up in all its glittering glory. In fact, gold and property are India’s two big havens of hidden value, even if globalised financial markets offer more innovative ways to use such cash. ‘Round tripping’ is one such ‘innovation’; it involves cash sent abroad via hawala (give the fellow rupees, get dollars picked up by your agent overseas) that returns to Indian asset markets by way of inward investments under anonymous control.

Indian authorities make periodic efforts to plug the holes through which black money gets around, but it’s a case of Swiss cheese: the holes are inherent. Getting people to own up is another suggestion. In 1997, India ran an amnesty scheme for tax evaders that turned up roughly Rs 33,700 crore in unspotted income from about 455,500 declarations. It was a case of cheese spread: a one-off that could be applied smoothly, but laughably squishy as a real structural solution.

There are other ideas too, the latest being schemes to arm-twist foreign governments that do not cooperate with Indian tax authorities. But, but, but. For all the global groups India joins, for all the information sharing deals New Delhi signs with tax havens around the world, for all the overseas tax units it opens, and for all the sleuths it sends off to investigate offshore holdings, little is likely to change until incentives to hide money do.

The thing is, black money funds Indian politics. This is not a State Secret, though ending it could require the State funding of elections and public scrutiny of party accounts, acting in combination with a sharp reduction in the discretionary authority exercised by those ‘in power’. But how well it would work is anybody’s guess. It’s an American model, after all, and the proposal demands yet another Free Market thrust—which, badly done, might end up worsening the scenario. “If you over-regulate, you kill the Market. If you under-regulate, the Market kills you,” as author John Ralston Saul quipped on a 2006 visit to Delhi.

(Additional reports by Pramila N Phatarphekar)

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Aresh Shirali