Crack down on P-notes

The real way to go after black money

The government has, with much fanfare, set up a special investigation team (SIT) to "bring back" black money. In fact, that was the new Narendra Modi-led administration's first act. On May 27, the freshly appointed Union Cabinet met and constituted the SIT, to be headed by a retired Supreme Court judge. Over the course of the election campaign, and even earlier, much has been said and implied about the "bringing back" of black money - the numbers claimed are huge. One widely reported estimate is that illegal assets of Indians abroad are worth twice India's yearly output. Another, from the Bharatiya Janata Party's own literature, is that Indians have a fifth of gross domestic product (GDP) hiding in Switzerland alone. A bit of deflation of these expectations, however, comes from the Swiss central bank, which places India only 58th in terms of how much foreign money is lying in that country's banking system.

While there is good reason to continue with efforts to discover the names of Indian taxpayers who are evading their responsibilities and then bring them to justice, this is a law and order matter, not a sustainable administrative fix. Sometimes it appears that the narrative has become so distant from reality that "bringing back" black money is being seen as a coherent act of economic policy reform. It is not. What would be is a change in the incentives and mechanisms that allow for and indeed encourage the creation and circulation of black money. It is this aspect that the government should be focusing on, not quixotic attempts to recover unimaginably vast sums supposedly lying untouched in dusty foreign bank vaults.

The biggest step that the government should take on ending the black economy is to make it more difficult for people to bring black money back to India. That is, in the end, what tax evaders wish to do with their unaccounted-for cash - put it back to work in the economy they know best, not store it in distant vaults. To this end, the government must seek to de-anonymise investment into India. Participatory notes, or P-notes, marketed by foreign institutional investors must become transparent. Disclosure norms, in other words, should be made more binding. Where this conflicts with tax treaties, the treaties should be renegotiated. Doing so will ensure that Indian regulators know who lies on the other side of more foreign exchange transactions, and will end the ability to freely launder black money.

When an attempt was made to do so in 2007, the stock market fell about 10 per cent. This spooked the government. India, since then, has become even more dependent on sustained foreign exchange inflows. This has been used essentially as a stick with which to ensure that the routes for black money back into India are not cut off. The government cannot give in to this blackmail forever; a point at which the Sensex is at a record high might be a good time to call this bluff. Once the routes to bring black money back into the Indian economy without consequences are shut off, the incentives to the creation of black money domestically change. It becomes less attractive. That is how you deal a genuine body blow to the black economy, and the government should act to do so now.