In response, Finance Minister Arun Jaitley justifiably pointed out that the bulk of black money was within India. For the government, this is a belated but welcome realisation. The truth is that there are multiple mechanisms in existence which create and perpetuate black money, and also allow it to move into India. What is unfortunate is that, while the government has insisted on its strong approach to black money, it has chosen the wrong ways to go about curbing the menace. It has introduced draconian laws that give too much power to the already intimidating taxman. What is needed instead is structural, legal and policy changes that minimise the creation and transfer of black money. Sadly, this is where both the executive and regulators have fallen short.
One major roadblock in the way of tackling the black money issue is the dilatory approach of the market regulator, the Securities and Exchange Board of India or Sebi. For example, India continues to permit participatory notes, or P-notes - derivative instruments issued by foreign portfolio investors against underlying securities in domestic markets. These allow foreign investors to speculate in India without the costs of actual investing in Indian markets - or subjecting themselves to adequate regulatory supervision. Unfortunately, this effectively permits the return of unaccounted wealth held abroad to India. While Sebi has made the requirements for P-notes more stringent over the past years, resulting in a decline in the proportion of foreign funds held through such instruments, it is inexplicable why a method so open to abuse has not yet been banned.
Another area where Sebi has been slow to act is the possibility that fictitious long-term capital gains (LTCG) claims can be used for tax evasion. Worryingly, Sebi appears to have not acted on this issue even though the then revenue secretary, according to recent reports, wrote a letter to the regulator's chairman pointing out that the income-tax department had found that LTCG was being "misused for large-scale systematic tax evasion". Sebi, he went on to say, had tied the hands of the income-tax department by not recording any adverse findings about the dubious transactions. This is in spite of the considerable powers, including those of search and seizure, the regulator has been granted in the last few years.
There is no question that the need to minimise India's black economy is urgent. However, the fight should focus on regulatory and policy fixes. When such fixes are clear, as in the two cases outlined above, it is mystifying that they have not been properly implemented.