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Unchain the jumbo: show us the black money, Mr Modi

Arun Kumar | Updated on: 30 June 2015, 21:52 IST

Stark facts

  • India\'s black economy accounts for nearly 50% of its GDP.
  • Only 10% is stashed abroad; 90% remains in India.
  • This year alone, India\'s black economy would equal Rs 65 lakh crore.
  • There are about 90 significant tax havens across the world.

The promise

  • Prime Minister Narendra Modi promised to bring back India\'s black money.
  • He claimed if every paisa is brought back, every Indian family would get Rs 15 lakh.

Action Not Taken report

  • HSBC Bank was exposed operating hawala accounts. Government did nothing.
  • Frenchman Herve Falciani stole HSBC data. Said only 1% of the data had come out. Government didn\'t try to get the rest from him.
  • ICIJ - a consortium of investigative journalists - had put out the British Virgin Islands list. Government did not act on it.
  • It set up a Special Investigation Team only after directions from the Supreme Court. But sent no political signals for agencies to co-operate.

The solution

  • More laws are not the answer. Nor are technical solutions like demonetising high-value currency notes and making PAN cards compulsory.
  • The only way out is to break the triad between corrupt businessmen, corrupt politicians and corrupt officials.

During the elections, Narendra Modi had repeatedly promised he would bring black money back to India. In fact, he had gone to the extent of stating that if every paisa stashed away illegally in offshore accounts was brought back, every Indian family would get Rs 15 lakh.

Is Mr Modi serious about addressing the black money issue or was it just, as BJP party chief Amit Shah put it, a 'chunavi jumla'?

How big is the problem?

The black economy accounts for more than 50% of the GDP. So it will generate roughly Rs 65 lakh crore this year.

This is not a stock figure. It doesn't refer to what has been 'stashed away since Independence' as is often asserted rhetorically. This is what will be generated this year alone.

Now, for any economic activity to be black, there has to be some illegality involved in it. If 50% of the economic activity in the country has an element of illegality, then it is not an anecdotal or ad-hoc phenomenon. It is 'systemic and systematic'. For this to happen, those in charge of the state have to be a party to it.

People have evolved a system to generate black income. If illegality has to be committed systematically, three elements are important: corrupt businessmen, corrupt political class and corrupt executive class.

The black economy accounts for more than 50% of the GDP. It will generate roughly Rs 65 lakh crore this year

This is what I call a triad. The corrupt executive class further consists of corrupt bureaucrats, corrupt police and corrupt judiciary.

This triad is driving the black economy. Therefore, the problem is a political and a systemic one. Unless it is tackled politically, this triad is not going to dissolve on its own.

Does the NDA have the political will to tackle the black economy? Possibly not since some of its own people are probably involved in black income generation.

What steps have been taken so far?

There have been at least 40 committees and commissions of different descriptions that have looked at various aspects of the black economy since 1948. They have made thousands of recommendations, of which hundreds have been implemented.

For instance, voluntary disclosure scheme was implemented six times. The last was in 1997. But since this kind of scheme is considered to be unfair to honest taxpayers, the government was forced to give an undertaking in 1997 to the Supreme Court that no further such schemes would be brought.

Further, the CAG in its report on the scheme argued that it has made people 'habitual tax offenders' and is counter-productive.

The income tax rate has been systematically reduced since 1971, when under Indira Gandhi, the tax rate was as high as 97.5%. That has been reduced to the present rate of 30%. But in 1970, the black economy was 7% of GDP. Today, it is more than 50%. So tax rates have gone down but black income generation has gone up.

Controls have been significantly reduced, especially after 1991. Foreign Exchange Regulation Act (FERA), Monopolistic and Restrictive Trade Practice (MRTP), licensing, etc, are gone and yet the black economy is proliferating.

High-denomination currency notes were demonetised in 1978, but it had no effect. A policy for the acquisition of under-valued properties was introduced but it had little impact on the under-valuation of property in real estate.

PAN cards were brought in; but people went in for multiple PAN cards. None of these steps have worked.

Under Indira Gandhi, the tax rate was as high as 97.5%. It is now 30%. But the black economy then was 7% of the GDP. Today, it's more than 50%

For a law to be effective it needs to be followed both in letter and spirit. Unless the spirit is willing, the letter of the law can be circumvented.

We must understand that no law is perfect and human ingenuity can be used to circumvent it. For instance, at one point it was said that payments above Rs 10,000 should be made only in cheque, otherwise businesses will not be allowed to include it in their balance sheets.

So people began carrying out multiple transactions of Rs 9,900.

Black economy is not just a technical issue. It is a political issue. The only way we can tackle it is by breaking the corrupt triad.

Does Modi have the political will?

The NDA government thinks it can tackle the black money problem by changing laws. This is where the problem lies. They have to display the political will to implement them.

There are some very obvious things that could have been done as soon as they came to power such as acting against HSBC, which was acting as a hawala operator.


Some of the people whose names had come out in the first list had revealed HSBC's modus operandi. It seems HSBC was working as a hawala operator. It used to take cash from the client, deposit it in the bank in Switzerland and give it back to the client when required.

Many other multinational banks and some Indian private banks are known to operate the same way under the garb of providing services to their High Net-worth Individuals (HNI).

So why didn't the government take action against HSBC? Why didn't it introduce new rules to check this hawala operation?

Further, only 626 names had come into the public domain. Herve Falciani, the Frenchman who had stolen the data, was shouting from the rooftops that only 1% of the data has come out. But the government made no effort to get the remaining 99% data from him.

It is embarrassing for the government that the second list of 600 names was released by the International Consortium of Investigative Journalists (ICIJ), of which The Indian Express was a partner. Why was there no effort from the government's side?

Herve Falciani, who stole the HSBC data, said only 1% of the data had come out. But the government didn't try to get the rest of the 99% from him

Other than banks, there are hawala houses that operate in India. Intelligence agencies track these places. Yet there has been no effort to bring them to book.

Three years ago, ICIJ released the British Virgin Islands list. The government could have acted on that. It has done nothing, so far.

Of course, it did set up the Special Investigation Team but that was because the Supreme Court had ordered it (initially in July 2011). The problem is that various official agencies are a part of it but without the political will, none of them, like the CBI or the Enforcement Directorate, would help the SIT the way they should.

Under the new 'Black Economy Bill' to bring back funds held abroad illegally, the government has offered an amnesty to people who declare their undeclared income in the next three months. This will help those who hold their black wealth abroad in their own names.

Under this bill, if anyone is caught under its provisions they would be fined 300% of the tax and could be jailed for up to 10 years. However, the moot question is how will anyone be caught?

There are no provisions for that. Since most of the money goes out via 'layering', the true identity of the person controlling an illegitimate account abroad is hidden. If people are not caught then these provisions will be mere paper tigers.

Why isn't the government revealing names?

Even on the issue of revelation of the names of offshore account holders, the NDA has been as coy as the UPA. Both took a position that the government shouldn't be forced to release names because there was a secrecy clause in the agreement under which the foreign governments provided the names.

This is a mere play of words. The government claims it cannot reveal the names because of the Double Taxation Avoidance Agreement (DTAA). But this agreement does not apply either to the LGT disk case or the HSBC list since these do not pertain to incomes in either Germany or France but to accounts in Liechtenstein and Switzerland.

Why didn't the government act against HSBC? Why didn't it introduce new rules to stop this hawala operation?

The DTAA essentially means that if a person declares an income in India but is a Swiss national, then he or she should be required to pay tax only in one of the two countries, not both.

It seems the government is only trying to hide behind the clauses to avoid revealing the names. It moved the Supreme Court but the court struck that down. As a result the government was forced to give the data to the Supreme Court and SIT.

At one time, transactions of Rs 10,000 and above had to be by cheque. People switched to multiple transactions of Rs 9,900

The government could have moved under the UN Convention Against Corruption rather than under the DTAA and revealed the names without any difficulty.

It is clear that the government never wanted to make these details public. In fact, it refused to take the data even when it was offered in 2007 and 2008 and eventually took it under the pressure of the SC.

About 1,250 names have come out so far but this is a drop in the ocean since the number of offenders could run into lakhs.

Offshore accounts are only part of the problem

Contrary to the popular rhetoric about black money, of the black incomes generated annually, only about 10% goes abroad. Nearly 90% remains in India. A substantial portion of the 10% that goes abroad is routed back to India via 'round tripping'.

Of the money that remains abroad a part is invested in real estate and businesses. So, what remains in liquid form in banks is a small part of what goes abroad.

What is left in offshore accounts actually forms a very tiny part of India's black money.

Also, there are no accurate estimates of where this money is. With about 90 tax havens in the world, the authorities have not revealed how much is in Switzerland and how much is in Jersey Island, etc, if they know it. So where do we get the black money back from? The Swiss government has mentioned that Indians have only Rs 14,000 crore in Swiss banks. But this is most likely the legitimate amount held by Indians in Switzerland.

Black money is also used to fund election campaigns of political parties. In fact, election financing plays a key role in the formation of the triad between the corrupt businessmen, corrupt politicians and corrupt officials.

The money stashed abroad is an inflated issue and there is a very little chance of getting it back. What the government needs to focus on is action here. For this, it needs to display political will.

The views expressed here are personal and do not reflect those of the organisation.

Reported by Charu Kartikeya. Edited by Aditya Menon.

First published: 27 May 2015, 13:53 IST