Global Financial Integrity’s lead economist Dev Kar today said getting black money back to India was a myth and an impossible task.
According to Kar, India lost $213 billion in illegal flow of money out of the country between 1948-2008. The present value of the amount would stand at $462 billion on the short-term US Treasury bill rate as a proxy for the rate of return on those assets.
However, estimates by the noted economist are nowhere near the $1.4 trillion in illicit assets quoted by the Indian news media. Kar said the estimate of $213 billion was significantly understated because economic models can neither capture all channels through which illicit capital can be generated nor the myriad ways in which the capital can be transferred.
Kar was speaking on the sidelines of a lecture on ‘Black Money Outflows from India’ organised by the Maharashtra Economic Development Council.
He explained that it was the high networth individuals (HNWIs) and private companies that were the primary drivers of illicit flows from the private sector in India rather than the common man. “This is a possible explanation behind my findings that the faster rates of growth in the post reform period have not been inclusive in that the income distribution is more skewed today, which in turn has driven illicit flows from the country. Thus, the result does not hold in the pre-reform period when growth rates were low and income distribution was more equitable.”
Kar suggested that the generation of black money, especially on account of tax evasion, can be addressed by revising the tax policy. “India can consider decrease in indirect tax, improve direct tax collection, reduce interface between the government and the people by going in for a massive automisation. Besides, the government can also carry out customs reforms and improve governance.”
Further, Kar noted that illicit financial flows cannot be curtailed without the collaborative effort of both the developing and developed countries. He emphasised the need for automatic cross border exchange of tax information on personal and business accounts and curtailing trade mispricing.
According to Kar, the total value of illicit assets held abroad represents about 72 per cent of the size of India’s underground economy which has been estimated at 50 per cent of India’s GDP – or about $640 billion by end 2008 – by several researchers. The figures imply that only about 28 per cent of illicit assets of India’s underground economy were held domestically, buttressing the argument that the desire to amass wealth without attracting government attention was one of the primary motivations behind the cross border transfer of illicit capital.