PROFESSOR Arun Kumar is the Sukhamoy Chakravarty Chair Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University (JNU). An expert on the black economy in India, he has been a member of the group that has been producing the Alternative Economic Survey for the past 15 years. He is also associated with the anti-corruption and Right to Housing movements. He is the author of The Black Economy in India (Penguin, 1999) and Indian Economy Since Independence: Persisting Colonial Disruption (Vision Books, 2013). In this conversation with Frontline , he speaks about his latest book and on the Special Investigation Team (SIT) set up by the Central government to bring back the unaccounted money stashed away by Indians in foreign bank accounts abroad.
Your recent book has a whole chapter on the black economy. The distinction you draw between anecdotal and the larger picture of the black economy is interesting. Would you describe the setting up of the SIT to investigate the black money stashed away in foreign bank accounts as dealing with the anecdotal or the larger picture?
My first point would be that urgent steps could have been taken by the new government. This [Narendra Modi] government has taken advantage of the Supreme Court’s directive in the Ram Jethmalani vs Union of India case to set up the SIT. All the agencies which are in it—such as the Enforcement Directorate [E.D.], the Intelligence Bureau [I.B.], and the Research and Analysis Wing [RAW]—already have a lot of information. The question is why they are not acting on it? Politically it is not convenient to act on information that is already available. To cite one instance, hawala takes place in Delhi, Mumbai, Kolkata, and every other city. These places are tracked by government agencies. So, this is not as if they do not know where hawala originates; who the operators are; or who the people visiting their houses are? If the Prime Minister wants to stop hawala, he can do so in a matter of five minutes because information about hawala operations are already available to the government agencies. So, why was this not the first step? Hawala is the main conduit for taking the money out and bringing it back. How was the Jain hawala case discovered in a hostel in JNU? A Kashmir terrorist was caught with a demand draft for Rs.15 lakh. Where did the draft come from? The agencies raided the residence of S.K. Jain, and got hold of the names of politicians. L.K. Advani [who was then the president of the Bharatiya Janata Party] admitted that he got money for the party. Janata Dal (United) leader Sharad Yadav admitted that he took Rs.3 lakh. But nobody was prosecuted. So, the point is this information about where hawala operates from is known to the intelligence agencies. So that could have been the first step.
In the HSBC case, where the stolen data were received from the French government, it was found that around 700 Indians had bank accounts in the bank’s Zurich branch. The modus operandi was like this: if I wanted to transfer money, I would call a certain number, and they [in whose name the number is registered] would send somebody, an account would be opened, and then when I wanted to transfer money, somebody would come and pick up the money, the next day, I would be given a receipt for the money deposited in the Zurich bank account, and when I need the money, I would have to call the same number, and somebody would bring the money home. This is what the HSBC Bank was allegedly doing as a hawala operator. Now, I am told that all multinational banks do this. So, the other thing that could be done is to curtail banking secrecy. The SIT has been set up because the Supreme Court has directed the government to do so. But independent of the SIT, if the government was serious, it could have taken immediate steps to control the black economy by curtailing hawala, by moving against the places where hawala takes place, by immediately moving to curtail the secrecy in the banking system, and so on.
I doubt the sincerity of the government in setting up the SIT and doubt whether it is serious about bringing the black money back.
Since 1947, more than 40 commissions and committees have been set up to look at different aspects of the black economy. They have analysed the different aspects of the black economy seriously in the past 65 years. These committees and commissions have made thousands of suggestions. The Wanchoo Committee was rich with suggestions. Hundreds of these recommendations have been implemented. Yet, the black economy has continued to grow.
The black economy is characterised by waste of capital. I call it digging holes and filling them. You set one man to dig a hole during the day, and at night set another person to fill it. It is activity without productivity. Capital is being utilised but the output is zero. A large part of the black economy is like that. Because of the black economy, there is a large amount of illegality associated with economic activity. The point is, there is output in the black economy, but the potential is not reached due to waste. The Indian economy today has a potential for 12 per cent growth rate. Because of the black economy, it is only growing at a rate of 7 per cent. In the 1970s, when the growth potential of the economy was 8.5 per cent, we were growing at 3.5 per cent. South-East Asian economies are examples of successful state intervention, while the Indian economy is not. But in China, corruption is growing despite successful state intervention. It is not as if the black economy does not exist there. It does not come in the way of policy implementation. They have a sort of strict vertical hierarchical structure in which once the policy is decided, it gets implemented. People make money, but work is done. India has lagged far behind the South-East Asian countries. We have democracy, while these countries do not have. China does not have it. There is a big difference in the political structure. Because we have democracy everything has to go through the political process, and this process gets subverted by the black money. And this subversion of the political process results in policy failure.
When I say the black economy is today 50 per cent of the gross domestic product [GDP], it means almost all activity has some associated illegality. In my book, I have described many sectors where black incomes are generated, but I could not have discussed all since the list is long. Whether it is education, health, environmental regulation, traffic on the roads, law and order, industrial regulation, mining, whichever sector you take, it has black income generation. So it is widespread. It is systematic and systemic. It is not anecdotal. It is not that one day I do it, next day I don’t do it.
Under the system followed in production, the excise person will be bribed, the sales tax person will be bribed, and the local politician, policemen, and so on are taken care of. It does not matter what the tax rate is, because the system is in place. So whether the rate is 7.5 per cent or 10 per cent, the businessman will evade taxes. That is why in India, even when the tax rates have come down, black income generation has gone up. Over the years, tax rates have been reduced, controls have been reduced, the MRTP [Monopolies and Restrictive Trade Practices] Act, FERA [Foreign Exchange Regulation Act], small-scale reservation, licensing, and many other controls have gone, and yet the black economy is increasing. Why? Because laws are violated systematically. How are the laws violated systematically? By having the policymaker and the implementer of the law as parties to its subversion. So, underlying the black economy is a triad. The triad consists of the corrupt businessman, the corrupt politician and the corrupt executive. The corrupt executive consists of the corrupt bureaucracy, the corrupt police and the corrupt judiciary. Judicial corruption is also enormous as many recent exposes have shown.
Private information exists in the entire system. Bureaucrats know, judges know, policemen know, who are the people to be contacted for hawala, who are the people to be contacted for setting up bank accounts [in the tax havens]. All this information exists. But it is not being used to tackle the problem, because it is political in nature and because all parties are involved in it, the will to deal with it is not there.
Can the SIT provide this political will?
No. The SIT cannot. What will come out of this?
Ram Jethmalani, the petitioner in the case before the Supreme Court, says the SIT can file the first information report.
But then what after that? Proceed and prosecute one or two? But there are tens or thousands of them. The big fish is very clever. If it wants to send some illegal funds abroad it will do so through layering. It will always be through various shell companies. Big fish have a lot of money there [in the tax havens] but it is not directly in their names. How will the SIT find that out? It has to catch them here in India.
The terms of reference of setting up the SIT entrust it with the responsibility of preparing a comprehensive action plan, including the creation of necessary institutional structures that can enable and strengthen the country’s battle against the generation of unaccounted monies, and their stashing away in foreign banks or in various forms domestically. Don’t you see this as a broad mandate, which will help fight the black economy?
This kind of mandate was there with the earlier committees as well. It was there with the Wanchoo and Santhanam Committees. It is also discussed in the reports of the National Institute of Public Policy, which studied the problem in the early 1980s. This is not the first time.
But this time the Supreme Court will be monitoring the investigation. That is the big difference.
But who are the people involved? Whom will you catch? The point is, there is no dearth of knowledge about how black income is generated, how it is taken abroad, and how it is round-tripped. But we don’t have specific names. Who will investigate now? The same E.D. The same I.B. The same Income Tax department. The same Central Board of Direct Taxes [CBDT]. Why were they not doing it until now? The data are available but not being used. There is private information, but it does not become public information which can be acted upon. How will the SIT get hold of all the data? The SIT can establish general institutions, principles, which are already established. But how will it catch individuals? Only through raids? The CBDT can do it on its own and has done so selectively? It does not need to be told by an SIT. But raids have been political weapons and hence discredited. The Member (Investigations) of the CBDT is supposed to get the raids conducted.
Why do you think the SIT does not inspire confidence?
The SIT may do something different and surprise us. But what has been the experience of the committees and commissions? I am not despondent. It is one more attempt, when much more serious things could be done even without the SIT—raid hawala houses, close them down, end banking secrecy. I am not, in principle, opposed to the SIT. What I am saying is it may be a diversionary move. Now whenever questions are asked, the government can conveniently say that the SIT is looking into the matter. When under public pressure, three institutes were asked to look into the problem of the black economy, the government used them to say it would answer questions when their reports come. Pranab Mukherjee [Finance Minister in 2011] said he would present the reports in his next Union Budget. Three years down the line, it has not been done. So, this can also be a convenient excuse for the government not to answer inconvenient questions.
Is the apprehension that the court may take over the functions of these executive bodies valid?
The court may make them accountable. That may work positively. The question is why is the E.D., with so much information on hand, not acting? It is not acting for political reasons. So, how will the SIT get over that [political compulsions]? Even though the E.D., the I.B. and RAW may be part of the SIT, will they reveal the full information?
The Chairman and the Vice-Chairman of the SIT can ask them.
They can ask what? If they ask for something specific on Hasan Ali, yes. Beyond that, the agencies under political guidance can also say they do not have the information. In the Hasan Ali case, what have they done? In order to nullify the Right to Information, very often the reply given is that the information sought for is not available. So the same thing can be done. If the political bosses want information revealed, it would be done. The judges [the Chairman and the Vice-Chairman] won’t know what to ask for. They are outsiders to the system. Political control is very important. That is why it was important to keep the Lokpal outside political control. As long as the political control is there like in the case of the CBI, the agency will play games. Wherever it wants, it will reveal something. Wherever it does not want, it will not reveal information. Wherever it likes, it can spoil the cases. Very often, the courts have reprimanded the CBI for spoiling the cases. So, it is political will that matters finally.
What then is the logic of this SIT?
Well, the Supreme Court perhaps thought that monitoring the two cases [Hasan Ali and LGT] may help. But how will it help curtail the black economy? We have got any number of institutional structures that are already supposed to be doing all this. Our agencies tracking hawala operations. What more can they set up? The instruments are already there. The IT Department used to have a survey ward, which was supposed to investigate whether people are filing returns or not. But it has become corrupt. Similarly, the valuation department is supposed to arrive at the correct valuation of properties for the purpose of taxation, but this has also not served its purpose due to corruption.
Do you think the SIT can encroach on the powers of the executive, as the previous government told the Supreme Court?
The SIT can only ensure that the executive functions as per the law. In that sense, the SIT can monitor specific cases. The court is not saying that the SIT will be involved in policymaking. It can only suggest changes and it is for the government of the day to accept it or not.
The Modi government has come to power on the plank of corruption-free governance. Should not the court wait and see whether the agencies responsible for unearthing black money fulfil their responsibilities without fear or favour?
The order in the case was delivered before the new government was formed. Therefore, it is a continuing process. The court ordered in 2011 that an SIT should be set up. All I am saying is, don’t expect too much from the SIT. It may help in specific cases. Like the case of 700 people who are caught up in the HSBC disc. In the LGT disc, 26 names have come up. They can try and investigate whether there are there other names which the government is not revealing. Or suppose if a new case is discovered, the SIT can take it up. Beyond that, our expectations may be far-fetched. It is a very complex political question since it involves the nexus between politicians, businessmen and the executive; the ruling elite. That nexus has to be broken.
The Chairman of the SIT, Justice M.B. Shah, has said there are complexities in the SIT’s task. What are the complexities involved?
The SIT’s task is complex because the nexus of the triad hides a lot of things. They are working in secrecy. This nexus can be broken politically. When the anti-corruption movement was at its peak with Anna Hazare and Baba Ramdev leading it, you could see that the government was almost shivering. When Baba Ramdev came to New Delhi, four Cabinet Ministers went to receive him. The Cabinet Secretary was there. Suddenly, the government was willing to act on corruption. Public opinion is the only thing that can change the government’s apathy. As long as the government was fearful that something was going to come out, it promised Lokpal. As soon as the movement subsided, it again started to go slow on Lokpal. Towards the end, just to show that it is against corruption, the government allowed the [Lokpal] Bill to be passed. Only public pressure will change things for the better. The government can put pressure and make the SIT ineffective by telling the government officials who are members of the committee not to reveal certain information, not to be proactive. The SIT has to function within the parameters set by the politicians or the executive. From the SIT, I expect only limited gains. Because it won’t be able to generate public information, which would be actionable. Maybe, we can expect some results in two or three cases, but these are of 2007 vintage. By now, the money will not be there. In the Hasan Ali case, when the compact discs were recovered, it [the account] was supposed to have $8 billion. In 2011, the Finance Minister, in his press conference, revealed that only $60,000 was left [in the account].
Ram Jethmalani, in an interview to a television channel, has said that footprints can be easily identified, and the money trail can be followed.
Not so easily. What happens is when you transfer money from one shell company to the other, you close the previous one. Then, how do you go back? India cannot investigate tax havens belonging to other countries. The advantage developed countries have is that the money they get from tax havens is giving them additional capital. Why is it that developed countries were happy with these tax havens and not acting against them earlier? Because capital was flowing from the developing world to them. One of the arguments has been that after colonialism ended, these tax havens were deliberately set up by developed countries so that capital, which was earlier coming from developing countries as drain of wealth, could now come through these tax havens into their economy. And they were benefiting from it. Latin Americans lost hundreds of billions of dollars through these tax havens to European countries.
India and other countries lost to Britain because money was going through these tax havens. After the global economic crisis in 2007-08, there has been pressure from the Organisation for Economic Cooperation and Development [OECD] countries that taxation secrecy should go. That is why the Swiss banks have opened branches in Singapore and Dubai. Even if Switzerland complies with pressure from the OECD, its branches operating in other countries will continue to act. That is why Credit Suisse was caught in the U.S. and fined $2.5 billion. UBS was caught in 2007. Therefore, banking secrecy should end globally. Only then we can catch them.
One important thing I must point out. In 2008, when the financial crisis took place, Fortis Bank collapsed and the Netherlands government took over the bank. It found that Fortis Bank had 700 subsidiaries in tax havens. So the whole purpose of subsidiaries in tax havens is to allow high-networth individuals to move money. This is a standard practice of multinational banks, especially the Swiss, British, and big American banks. So this should be checked. Now, HSBC has been caught for allowing hawala operations to take place through its official channels. But no action has been be taken against them as yet.
