Who is afraid of illicit finance?

Illicit capital outflow has increased significantly after neoliberal policies were introduced in 1991. Committed as it is to the same economic model, can the NDA government curb generation of black wealth and bring back the black money stashed abroad?

Published : Jun 11, 2014 12:30 IST

L.K. Advani showing a report on the black money deposited in Swiss banks and demanding that the government take action against those involved, on April 17, 2009.

L.K. Advani showing a report on the black money deposited in Swiss banks and demanding that the government take action against those involved, on April 17, 2009.

“BRING back the bad money.” This seems to be the slogan the National Democratic Alliance (NDA) government is committed to, judging by the appointment of a Special Investigation Team (SIT) tasked with identifying money illegally held abroad, bringing to book its holders, and helping retrieve those assets for the nation. But, money held in Swiss banks or elsewhere abroad is, of course, only one form in which some Indians within and outside the country have accumulated illicit wealth. So the task at hand is much larger and it is unlikely that the NDA government would meet that broader remit.

Broadly speaking, illicit wealth is that which is associated with some form of illegality in its origin, circuit or use, varying from tax evasion to criminality such as corruption and drug trade. Once generated, its subsequent circuit is partly or fully outside the realm of recorded transactions, and therefore associated with secrecy and an effort to hide from the law.

Given this character, such wealth, by definition, consists of a “surplus”, the mode of utilisation of which is affected by its illicit status and by the fact that a part of it does not accrue to the state as may be rightfully required. Its effects are difficult to define because such surplus income or wealth can either remain in the “source” country as a separate circuit of money that does on occasion intersect or merge with the “licit” economy, or can leave the country for tax havens that also promise secrecy. Depending on where it goes and how it is put to use if it stays in the country, it can have a range of effects on the level and patterns of demand and supply of goods and services and, therefore, on incomes and employment.

However, there are some more likely consequences of the accumulation of illicit wealth. To start with, if such wealth is transferred abroad, there is obviously a drain of surplus from the country, with attendant effects on domestic absorption in the form of consumption and investment. With expenditures and their multiplier effects on employment and income leaking abroad, the development impact of wealth of the kind the SIT has been tasked to investigate is obviously adverse. Illegality and criminality are here mixed with economic retrogression.

Secondly, even if the money is not transferred abroad, the mode of utilisation of this surplus would be very different if it had not moved to a separate circuit by virtue of having turned illicit. Black wealth is more likely to transact in non-productive asset markets such as the secondary stock market or real estate rather than get invested in the productive economy. And a higher share of black wealth and incomes is likely to be directed towards consumption rather than investment, with a focus on areas such as luxury services. Thus even if illicit or “black” wealth and incomes are in circulation, the pattern of demand they generate would be significantly different if that wealth had remained in the legal economy.

Third, since black incomes are by definition outside the legal economy when first generated or when they flow from accumulated black wealth, the revenues that should accrue to the state from taxes on those incomes do not reach it. This means that the ability of the state to finance, out of its own resources, a range of development and welfare expenditures is eroded. When combined with a neoliberal obsession with fiscal consolidation, this significantly constricts expenditures that would have benefited the poor and less well-to-do with means of livelihood or an improved quality of life.

Finally, since black incomes and wealth are likely to accrue to and reside with the better off, especially the really wealthy in the population, an expansion of the illicit economy would imply a worsening of inequality.

Thus, besides the unacceptable criminality of the black economy, its other aspects militate against just and fair development. These aspects acquire significance when seen together with its estimated size. According to an estimate by Dev Kar for Global Financial Integrity (“The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008”), the size of the underground economy in 2008 was about half as large as India’s GDP or about $640 billion (based on a GDP of $1.28 trillion). Illicit assets held domestically were estimated at $178 billion, or 27.8 per cent of the total, and those held overseas were placed at $462 billion, or 72.2 per cent of the total. Being ranked the fifth largest exporter of illicit money between 2002-2011, with a total of $343.04 billion sent abroad, India was a winner here, in contrast to its position on the human development scale. The country was placed third in 2011 when $84.93 billion was exported. But, here too, India was beaten by China, which topped the list with $1.08 trillion in black money outflow, followed by Russia ($880.96 billion), Mexico ($461.86 billion) and Malaysia ($370.38 billion). If the illicit economy is as large as this, or even larger as some other estimates suggest, then the case for coming down heavily on those who generate and then perpetuate this so-called parallel economy is obvious. The question is, which government, particularly the new NDA government with its show of anti-black-money bravado, will do so?

BJP’s record

There are a number of reasons to be sceptical about the real intent of the Bharatiya Janata Party that leads the NDA government. The most obvious reason is the huge amount it has spent to win 31 per cent of the votes cast in elections 2014, which incredibly translated into 282 seats to give it a majority. That capital spent on the elections was not earned by the BJP but collected by it. And it is difficult to believe that those who favoured the current ruling party with more than a fair share of donations would not have had a black economy till at their command and not put their hand into it in order to finance their monetary support. Would the BJP turn against the very forces that may have helped bring it to power?

A second cause for scepticism is the BJP’s own record in assisting those who have accumulated wealth at a rapid rate, raising doubts about the fairness, if not the legality, of the way in which they accumulated it. Consider a business group from Gujarat that has been known to have grown hugely during the Modi regime. According to Forbes Asia , a conservative, pro-business media outlet, the Adani group has, over the years, leased from the Gujarat government a massive 7,350 hectares of land—much of that from 2005 onwards—in the Mundra region in the Gulf of Kutch. Forbes claims to have in its possession copies of the agreements that show that the Adani group got the 30-year, renewable leases for as little as one U.S. cent a square metre, whereas market rates were known to go as high as 45 cents a square metre. Adani itself has reportedly sublet a part of this land to other companies, including state-owned Indian Oil Corporation, for as much as $11 a square metre.

This is, of course, the result of a set of legal agreements and not formally illicit. But it does create an ambiguity. Should we exclude from the illicit economy surpluses generated in transactions that are formally “legal” but reflect improper use of state power (with or without corruption intervening) or exploitation of lax regulation for private gain and to accumulate private wealth at the expense of the exchequer or society? Often, the line between licit and illicit is thin or unobservable.

Two types of beneficiaries are associated with instances of possible misuse of powers resulting in substantial surplus accumulation (such as 2G spectrum sale, coal block allocation, or land use redefinition and sale at cheap prices). The first is among those in high positions serving the state apparatus. A consequence is the growing nexus between politics and business, with big business having strong links (direct or indirect) with politicians, and individual politicians elected to Parliament and the legislatures reporting huge increases in their assets over time. The second set of potential beneficiaries of surpluses accumulated in this fashion consists of the business groups that derive gains from the purchase of pecuniary benefits for a small price. Such transfers to private capital are not always seen as the result of corrupt practices. There are many instances of sections of the private sector having made huge gains through means that are “unfair”, even if not illegitimate, though they have not been associated with credible allegations of corruption.

Underlying all this is a connection between liberalisation and corruption. Contrary to what the advocates of liberalisation argue, deregulation aggravates generation of illicit incomes. Under the policy of liberalisation, the state increasingly dilutes or gives up its role as an agent influencing and regulating the nature and scale of private activity and takes on the role of being a facilitator of private investment. According to Global Financial Integrity, 68 per cent of India’s aggregate illicit capital loss occurred after India’s economic reforms in 1991, indicating that deregulation and trade liberalisation actually contributed to/accelerated the transfer of illicit money abroad. In real terms, outflows of illicit capital accelerated from an average annual rate of 9.1 per cent before the introduction of economic reforms to 16.4 per cent in the period after.

There are a number of trends in the post-liberalisation period that point to how this occurred. To start with, there are allegations of under-pricing of public assets in the process of disinvestment of public enterprises. There has been a substantial increase in measures to incentivise private investment, by helping the private sector acquire land, grow in new areas, and expand its activities with explicit or implicit transfers.

And there has been the use of the nationalised banking system to transfer resources to the private sector. In fact, the banking system has been used as an instrument to further an aspect of the larger liberalisation agenda, which was the entry of the private sector into core infrastructural areas involving lumpy capital-intensive investments in power, telecommunications, roads and ports and sectors like civil aviation. Overall, neoliberal reform has involved an engineered redistribution of wealth and assets in favour of Indian and foreign businesses.

The point to note is that when the NDA was in power at the Centre (during 1998-2004) and the BJP led by Modi was ruling in Gujarat, they aggressively pursued the neoliberal agenda that the Congress had favoured but could implement only in bursts. Already, the evidence is clear that the present NDA government would push rapidly ahead in these directions during the early years of its majoritarian tenure. That makes its commitment to fairness and legality suspect. So the declaration that it would root out black money from India and bring back black wealth from abroad is likely to prove nothing more than empty rhetoric.

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