BBC report :India lost $462bn in illegal capital flows

[fzgorum]

India has lost more than $460bn since Independence because of companies and the rich illegally funnelling their wealth overseas, a new report says.

The illegal flight of capital through tax evasion, crime and corruption had widened inequality in India, it said.

According to the report from US-based group Global Financial Integrity, the illicit outflows of money increased after economic reforms began in 1991.

Many also accuse governments and politicians of corruption in India.

Shadow economy
Global Financial Integrity, which is based in Washington, studies and campaigns against the cross-border flow of illegal money around the world.

It said that the "poor state of governance" had been reflected in a growing underground economy in India since Independence in 1947.

Global Financial Integrity director Raymond Baker said the report "puts into stark terms the financial cost of tax evasion, corruption, and other illicit financial practices in India".

Some the main findings of the report are:

India lost a total of $462bn in illegal capital flows between 1948, a year after Independence, and 2008.
The flows are more than twice India's cheap dreamweaver external debt of $230bn.
Total capital flight out of India represents some 16.6% of its GDP.
Some 68% of India's capital loss has happened since the economy opened up in 1991.
"High net-worth individuals" and private companies were found to be primary drivers of illegal capital flows.
The share of money Indian companies moved from developed country banks to "offshore financial centres" (OFCs) increased from 36.4% in 1995 to 54.2% in 2009.
The report's author, Dev Kar, a former International Monetary Fund economist, said that almost three quarters of the illegal money that comprises India's underground economy ends up outside the country.

India's underground economy has been estimated to account for 50% of the country's GDP - $640bn at the end of 2008.

'Under-estimate'
Mr Kar used a World Bank model to calculate India's missing billions.

He compared India's recorded sources of funds, such as foreign direct investment and borrowing, and its recorded use of funds, like foreign currency reserves and deficit financing.

Illegal outflows are considered to exist when funds recorded exceed those used. India's exports and imports over the past six decades were also taken into account.

Adjusted for inflation, that all added up to $213bn missing since 1948. Taking estimated investment returns into account, Mr Kar calculated that was worth $462bn in today's money.

The figure could be much more, he warned, as it did not include smuggling and cash transfers outside the financial system.

 

[maomao]

Its Sad and we all know who has benefited the most and these ruling elite, babus and businessmen can be counted on finger tips!!

 

[Ray]

It is the most unfortunate thing that could happen to India, it it is true!

 

[plugwater]

Oh boy.. we are losing lot of billions these days !!!

 

[thakur_ritesh]

the only good thing about this, as claimed this is not running into trillions of us dollars, advani once went on to claim swiss a/cs were staked-up with around 5t usd.

 

[Singh]

1. Only 500billion $ ? That's ridiculously low.
2. Most of the money is coming back. India is booming, world is in recession.

 

[Iamanidiot]

most of that money comes through Maurtius.Has anyone wondered how Maurtius became the topmost FDI investor in India

 

[thakur_ritesh]

most of that money comes through Maurtius.Has anyone wondered how Maurtius became the topmost FDI investor in India

thats because maurtius has a non-double taxation treaty, which i think is under review. india now has alloted that to singapore since most of the MNCs operating in asia have their offices there so its becomes easy, they other place india would like such a treaty with would be dubai which is as full of MNCs but i guess that has to wait till FTA happens with gcc.

 

[ejazr]

$462 billion — India's loss in 60 years because of corruption
http://arabnews.com/economy/article195691.ece

MUMBAI: India has lost hundreds of billions of dollars over the past six decades as companies and the rich stashed cash overseas to avoid taxes and hide ill-gotten gains, widening inequality and depriving the poor of crucial resources, a new report shows.

The flood of illegal cash has swelled to ever greater heights since the early 1990s, and averaged $16 billion a year from 2002 to 2006, as India's opening of its economy created more wealth and opportunities to move it across borders, according to the study by Dev Kar, a former International Monetary Fund economist.

Kar, now senior economist at Global Financial Integrity, a Washington D.C. group that researches the flow of illicit money, said India's black money — at least $462 billion since the late 1940s — could have paid for its entire infrastructure needs and much else.

"We could have had better schools, better health programs, better nutrition programs for the poor. Children could have been vaccinated and given access to fresh drinking water. Many areas don't have electricity," he said.

The gap between India's rich elite and the poor who number in the hundreds of millions has widened amid rapid economic growth over the past two decades, adding to social tensions, and the report says the funneling of wealth overseas has contributed to that inequality.

"The high net worth individuals are the ones driving illicit flows," Kar said. "The average Joe is eking out a living. He's not connected to the global world and even if he were, he doesn't have enough money."

The Ministry of Finance and spokespersons for the ruling Congress Party did not respond to requests for comment on the report.

Other analysts aren't taking issue with Kar's research methods but question whether the blame should be pinned on companies and privately wealthy individuals. They argue the government and corrupt politicians are the main culprits.

Kar used a World Bank model to measure the gap between the nation's recorded sources of funds, like borrowing and foreign direct investment, and its recorded use of funds, like financing the current account deficit and foreign currency reserves. Illicit outflows are considered to exist when a country's recorded source of funds exceeds its recorded use of funds.

Kar supplemented that by looking at differences between the value of what India says it exports and what other nations say they import from India. This captures practices such as understating the value of export contracts to hide money overseas.

Adjusted for inflation, that all added up to $213 billion missing since 1948, the first full year of India's independence from British rule.

Using the short-term US Treasury bill rate to estimate a conservative investment return, Kar calculated that money would be worth, at minimum, $462 billion today.

The figure could be understated by half, Kar said, partly because it doesn't cover harder to track activities including smuggling and cash transfers outside of the financial system.

Nishith Desai, founder of Nishith Desai Associates, an international tax and corporate law firm based in Mumbai, argues that corrupt officials and government agencies have more to do with illicit money than tax avoidance in the private sector, which he says is more transparent than in the past.

As individual tax rates dropped — from as high as 97.5 percent in the 1970s to about 30 percent today — the major motivation for tax avoidance evaporated. In its wake however, is a cultural habit of evasion, which is only now beginning to erode, he said.

Desai said officials, who face public scrutiny when they accumulate wealth while on a low government salary, have more motivation to stash illicit money overseas than company executives, and the government, as India's biggest trader, likely indulges in more manipulation of export and import contracts.

Much private-sector corruption is also done under government compulsion, he said. Though economic liberalization ended the so called License Raj — during which New Delhi kept tight, lucrative control of business permits — many opportunities for corruption remain.

Private players pouring into sectors like telecoms and banking still need licenses. This week, the telecom minister resigned over alleged licensing irregularities that may have cost the treasury 1.76 trillion rupees ($39 billion).

The government is also the major intermediary in land deals. Desai and others say bribes are common in land sales, which are proliferating as India's growth spurs the development of mines, factories, buildings and special economic zones.

Regardless of debate about who is most to blame, the report shows the tide of money has been unrelenting even as India makes some efforts to clamp down on the hidden economy.

The government has ramped up tax collection efforts and renegotiated its tax treaty with Switzerland to give it greater access to information for investigations of tax fraud.

It already has good access to information from Mauritius, a major offshore financial center for rich Indians and companies. Many hope the government's ambitious plan to give every citizen a unique identity number will also widen the tax net and make evasion harder.

And under pressure from opposition politicians, the Congress Party in recent weeks forced three high-ranking officials including the telecoms minister to step down amid corruption allegations.

But critics say such gestures are cosmetic and will do little to stem growing popular frustration at India's elite.

"Catch some of those high profile guys, Bollywood fellows and cricket stars and make an example out of them," Kar said. "If they don't address this now, they're going to be stuck with a much bigger problem which will tear at the heart of India. Mark my words. People are losing patience."

 

[Singh]

Illegal financial flows: the great drain robbery

Illegal financial flows: the great drain robbery​

India has lost nearly a half-trillion dollars in illegal financial flows out of the country, says a new study by Global Financial Integrity.

India is losing nearly Rs.240 crore every 24 hours, on average, in illegal financial flows out of the country. The nation lost $213 billion (roughly Rs.9.7 lakh crore) in illegal capital flight between 1948 and 2008. However, over $125 billion (Rs.5.7 lakh crore) of that was lost in just this decade between 2000-2008, according to a study by Global Financial Integrity (GFI). These "illicit financial flows," says GFI, "were generally the product of corruption, bribery and kickbacks, criminal activities and efforts to shelter wealth from a country's tax authorities." GFI is a programme of the Center for International Policy, Washington D.C. It is a non-profit research and advocacy body that "promotes national and multilateral policies, safeguards, and agreements aimed at curtailing the cross-border flow of illegal money."

In just five years from 2004-08 alone, the country lost roughly Rs.4.3 lakh crore to such outflows. That is — nearly two and a half times the value of the 2G telecom scam now exercising Parliament and the media. The Comptroller and Auditor General of India (CAG) pegs the 2G scam at almost Rs.1.8 lakh crore.

Accounting for the rate of return on those illegal outflows, the present value of that $ 213 billion reaches $ 462 billion (Rs.21 lakh crore) says GFI. Astonishingly, over $96 billion of that amount left the country between 2004 and 2008. As the report's author, Dev Kar, told TheHindu: "India is losing capital at an average rate of $19.3 billion per annum ... India can ill afford to ignore such a loss of capital."

As the report puts it: "Had India managed to avoid this staggering loss of capital, the country could have paid off its outstanding external debt of $230.6 billion (as of end-2008) and have another half left over for poverty alleviation and economic development."

At the 2004-08 pace (if it has not gone up), the economy is haemorrhaging at a rate of nearly Rs.240 crore every day on average. And even the total $462 billion, says GFI Director Raymond W. Baker in a letter prefacing the report, is "a conservative estimate. It does not include smuggling, certain forms of trade mispricing and gaps in available statistics." Factor these in, and "it is entirely reasonable to estimate that more than a half-trillion dollars have drained from India since independence."
The study

The GFI study is titled "The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008." Authored by Dr. Kar, formerly a senior economist at the International Monetary Fund (IMF) and now Lead Economist at the GFI, it defines 'illicit flows' as "comprised of funds that are illegally earned, transferred, or utilised — if laws were broken in the origin, movement, or use of the funds then they are illicit." Such fund transfers are not recorded in the country of origin for they typically violate that nation's laws and banking regulations.

So massive are these illegal outflows, says the study, that the "total capital flight represents approximately 16.6 per cent of India's GDP as of year-end 2008." Its estimate falls far short of the $1.4 trillion figure cited in the India media prior to the 2009 general elections. But, says the report, "the figure still represents a staggering loss of capital." Illegal flight of capital, it says, "worsens income distribution, reduces the effectiveness of external aid, and hampers economic development."

That does seem an obvious outcome in a country where according to the National Commission for Enterprises in the Unorganised Sector (NCEUS), 836 million human beings live spending Rs.20 a day or less.

The illegal outflows also account for most of India's parallel economy. "The total value of (such) 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 at end-2008) by several researchers. This implies that only about 28 per cent of illicit assets of India's underground economy are held domestically." It also strengthens arguments that "the desire to amass wealth without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital."

The GFI study makes two vital points amongst others that will surely stoke ongoing debates in the country. One: the drain bloated massively in the era of economic liberalisation and reforms starting with 1991. Two: "High net-worth individuals and private companies were found to be the primary drivers of illicit flows out of India's private sector." Conversely, "India's underground economy is also a significant driver of illicit financial flows."
Tax havens

As Mr. Baker says: "What is clear is that, during the post-reform period of 1991-2008, deregulation and trade liberalisation have accelerated the outflow of illicit money from the Indian economy. The opportunities for trade mispricing have grown, and expansion of the global shadow financial system accommodates hot money, particularly in island tax havens. Disguised corporations situated in secrecy jurisdictions enable billions of dollars shifting out of India to "round trip," coming back into short and long-term investments, often with the intention of generating unrecorded transfers again in a self-reinforcing cycle." Interestingly, the points about high net-worth individuals (HNWIs) and corporates and 'mispricing' take the debate way beyond the clichéd 'corrupt politician' explanation.
Lauds reform

The report, while stressing these factors, says that given the limitations of available data, it found "scant evidence that imprudent macroeconomic policies drove illicit flows from the country." It lauds the post 1991-reform era. And praises Prime Minister Manmohan Singh for launching "India's free market reforms that saved the country," in its view, "from financial ruin and placed it on a path to sustained economic growth." On the role of macroeconomic policies in the outflows, it says there is yet work to be done, data to be generated.

But its own evidence on how the outflows escalated post-1991 is pretty damning. And India's liberalisation itself — in which period the GFI study records the greatest drain — was about a sea change in macroeconomic policies. The study notes a rise in inequality in the reform period. And acknowledges, in its summary, that "A more skewed distribution of income implies that there are many more HNWIs in India now than ever before." It implies that governance issues, deregulation without new oversight and a complex web of other factors were more to blame.

GFI calls for measures that would require country-by-country reporting of sales, profits and taxes paid by multinational corporations. It recommends India should curb 'trade mispricing.' Because "transfers of illicit capital through trade mispricing account for 77.6 per cent of total outflows from India over the period 1948-2008." It advises steps that would require automatic cross-border exchange of tax information on personal and business accounts. And actions that would harmonise vital matters under anti-money laundering laws across nations.

http://www.thehindu.com/opinion/op-ed/article892140.ece

 

[hit&run]

Last time i heard planed Australian Premium league was flooded with Indian money.

Can not be possible without the help of media, judiciary and politicians.
We say in Punjabi ''Khaan nu ikathey'', Only together at meals. I reckon their is unsaid understanding between both side of politics to loot by turns. Only fair bet is, who wins the election has the right to suck. I can see how opposition has reacted so benign and functional dumb. Fair game isn't it ? even thieves have some honesty left.

 

[ejazr]

I think its time for a party to come up with a one-point agenda to tackle corruption including Capital punishment for scams proven to be above a certain amount like 10 lakh or similar.

If it wasn't for this blatant looting, we would be doing double digit growth rate since 2005 and not lost 1-2% every year in Swiss and Mauritus bank accounts.

 

[Rama]

if you want to get rid or control corruption speed up the decision making process in india decision making takes years

 

[The Messiah]

It is the most unfortunate thing that could happen to India, it it is true!

Ofcourse it is false. The amount wired out of India must be 10 times the amount quoted by bbc.