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LATEST NEWS UPDATES | How not to tackle the black economy in India by Arun Kumar

How not to tackle the black economy in India by Arun Kumar

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published Published on Feb 25, 2011   modified Modified on Feb 25, 2011

Technically, we know how to check the black economy but the problem is political. More studies or committees and treaties with foreign governments are only to stall action.

Another Joint Parliamentary Committee has been announced. The government has been trying to create an impression of being proactive with regard to tackling the black economy. The President's address and the speech by Sonia Gandhi in January mentioned the need to curb it. The Prime Minister at various fora, while expressing helplessness, has emphasised action. The Supreme Court has been applying pressure to tackle black savings spirited out of the country and for unearthing wrongdoings in cases of corruption like the 2G spectrum allocation case. Home Minister P. Chidambaram admitted in Davos that in road construction, 50 per cent of the funds are misappropriated. He has stated that there is deficit in governance and ethical functioning of government and the Prime Minister has endorsed this. Finance Minister Pranab Mukherjee has announced studies into different aspects of the black economy and a Group of Ministers has been set up to tackle the problem. Talks are on for Double Taxation Avoidance Agreements (DTAA) with various countries — supposedly to unearth wealth kept abroad by Indians.

Is the government finally serious about bringing back the black funds stashed away abroad, variously estimated to be between $ 462 billion and several trillions of dollars? These figures seem credible when one considers the scale of the current scams (tens of billions of dollars) and the case of Hasan Ali where the tax demand runs into billions of dollars. The CD containing names of Indians with bank accounts in the LTG bank which the Indian government accepted in March 2009, a year-and-a-half after it was offered by the German government, has added to the pressure on the government. There are 77 tax havens where illegal funds are stashed away; Switzerland is only the biggest and best known.

The government's actions seem to be in direct proportion to the public pressure on it as exposes come in thick and fast. The problem is not new, so what explains the earlier inaction? Consider Bofors or the 2G spectrum case. Initially there has been denial and then minimal action, allowing the culprits time to escape (as in Hasan Ali's case where the money has disappeared). Rs.35 lakh crore in black income is generated annually and about 10 per cent of it goes abroad. The capital lost through this route is greater than annual net foreign investment, yet action is minimal.

The government pleads that tax havens do not reveal names unless criminality is established and that the Swiss government does not treat tax evasion as a crime. The moot point is why did the Swiss government announce the immediate freezing of Hosni Mubarak's assets without the Egyptian government giving any evidence of criminality? Further, why did UBS agree first to give the names of 250 U.S. citizens and then another 4,500 names to the U.S. tax authorities in 2007-08 without any criminality being individually established? In the Hasan Ali case, the Swiss government has said that it has not been given the information required. Similarly, in Ottavio Quattrocchi's case, the Indian government has twice lost in foreign courts because the case has not been properly established. In 1992, Madhavsinh Solanki, then Minister of External Affairs, passed on a chit to a Swiss Minister apparently to slow down the Bofors case but the Narasimha Rao government quietly buried the embarrassment by accepting his resignation. The few cases of corruption initiated against the high and mighty are apparently spoilt or not pursued.

Given this history, will there be seriousness this time or will the government wait out the storm? In the last 60 years, dozens of committees have studied various aspects of the black economy and given thousands of suggestions. Hundreds of these suggestions have been implemented but the size of the black economy has grown exponentially. The Wanchoo Committee report bulges with suggestions. Since 1971, when the highest tax rate was 97.5 per cent, tax rates have fallen but the black economy has grown from 7 per cent to 50 per cent of GDP. Controls and regulations have been drastically eliminated after 1991 but the size of black economy continues to rise. The causes of black income generation lie elsewhere. The recent rise in corporate tax collection is a reflection of rising disparity and not better compliance.

Plugging loopholes has only made the laws more complex, as in the case of taxation. The ingenuity of the corrupt thwarts the enforcement agencies by either devising newer ways of circumventing the law or simply bribing the officials. In India, laws on paper and in practice differ because of the ‘Triad' of the corrupt business class, the political class, and the executive (see the article “Honesty is indivisible,” The Hindu, January 29, 2011) who bend rules to their advantage. The philosophy is: if I am in power, I can bend rules for the favoured.

In brief, technically we know what needs to be done to check the black economy — but the problem is political. The top echelons of the leadership are the prime drivers of the black economy. They do not wish to forgo the massive illegal profits they generate. So how can the political will be generated?

A voluntary disclosure scheme to bring back black savings stashed away abroad for ‘development' is being considered. Wasn't the Mauritius route created to allow round tripping of funds? It has accelerated black income generation by facilitating it. A National Security Adviser alerted the nation to terror funds entering the stock markets to destabilise the financial markets. The Wanchoo Committee argued that this kind of scheme makes honest people dishonest. A report of the Comptroller and Auditor General of India on the 1997 voluntary disclosure scheme pointed out that the same people who declared their black incomes earlier took advantage of the 1997 scheme — becoming habitual tax offenders.

Some argue that elections underlie black income generation and corruption. Presently, when a Lok Sabha constituency sees the expenditure of crores of rupees per serious candidate, state funding will make little difference. At best, it can be to the tune of the allowed election expenditure of Rs.25 lakh — just a few per cent of the actual expenditure by most candidates. Further, what is spent on the national elections officially and unofficially is not even 1 per cent of GDP for that year; so this cannot be the cause of black incomes. It is the black economy that works to subvert the elections. Our present day legislators are largely the representatives of the monied and the powerful and not of the people; so they need to keep the public confused to win elections. They resort to vote bank politics and bribing voters and that is what makes elections costly. Genuine democracy would not be expensive. Today, we have formal democracy with weak content.

In this background, it is clear that the government's actions against corruption will be in proportion to the public outrage and that too the minimum necessary. It is likely that there will be pretence while the real culprits go scot-free. Setting up a committee is to buy time and to stall questions on the subject since the government can claim it is waiting for the report. Later, it can buy time by pretending to look into the recommendations or bury an inconvenient report (like the Vora Committee report).

The Supreme Court is going after the names of those spiriting away money abroad but not after the generation of the funds. The black incomes generated in the country are ten times the size of what is siphoned out. In the liberalised environment, those with black money stashed away abroad can turn into non-residents overnight and escape prosecution in India. This is perhaps the reason the Indian government is unable to proceed against the eight entities named in the Liechtenstein disc. For the rest, little money may be left in their accounts, given the inordinate delays. Taxation treaties being entered into by the government with other governments are all about legal incomes traceable to known individuals. But black incomes are typically parked via shell companies and in benami accounts.

What is needed is serious investigation and prosecution in the country that will also expose the money siphoned off abroad. The government functionaries generating black incomes personally indulge in various illegalities such as using hawala. So, in principle, there is private knowledge but not public information to stop these activities. The help of foreign governments is hardly needed in this matter. Intelligence agencies provide the leadership with information through tapping and so on, which can be mined instead of being used for political blackmail. The prosecution agencies deliberately spoil cases for political reasons. If prosecution is not possible in India, how can the case be made in foreign lands for booking the culprits?

In brief, the policy pronouncements are delaying and diversionary tactics to allow those generating black incomes to escape via shell companies and benami accounts. There were limited gains from earlier JPCs but will this time be different? It will be only if there is political will and action — and not more studies or treaties with foreign governments.

(The author is Chairperson of the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. He is the author of The Black Economy in India, Penguin India, 2002. He can be reached at arunkumar1000@hotmail.com.)

The Hindu, 26 February, 2011, http://www.hindu.com/2011/02/26/stories/2011022665791400.htm

Tagged with: Corruption



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