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Blank paper on black money

The Indian government’s white paper on black money is a huge disappointment. It was expected to be a focused policy response to a chronic scourge.

Many thought it would contain official estimates of the size of India’s parallel economy and measures to deal with it. Instead, the white paper is blank on essential information, evasive about action and, while talking about many things, skirts real issues.

The entire exercise looks like an attempt at obfuscation. Thus, the report highlights an outdated 2007 World Bank figure that the weighted average of the Indian ‘shadow economy’ is only 20.7 per cent of the official GDP while the global average is higher at 31 per cent. It points out that the deposits of Indians in Swiss banks stood at Rs92.95 billion in 2010 — only 0.13 per cent of total deposits in these banks — and “safely” concludes from this that “the common belief that Indians hold the maximum deposits in Swiss banks is not correct”. The possibility of Indians holding deposits in the names of others is not even acknowledged. Similarly, it dismisses the high estimate provided by the Global Financial Integrity as being “on the higher side”, without saying why.

Among sources of black money, the paper lists real estate, bullion trade, financial sector as an involuntary conduit, non-profit sector and allocation of natural resources by governments. It cites multi-layered corporate structures used to avoid taxes, giving the example of the Vodafone-Hutchison deal. It also blames the transfer pricing route for aiding black-money generation. But there is only a passing reference to corruption in government as a source of black money. And there is no mention whatsoever of the biggest source of corruption and unaccounted money in the country: political funding. Political parties guzzle cash; and businesses and people who want permit or privilege supply it.

Coming to measures for dealing with the problem, the White Paper moots an immunity scheme as a one-time option to encourage Indians to bring back their illicit money stashed abroad. It also suggests examining a demand on tax immunity for a gold deposit scheme. However, as the paper itself admits, such schemes have often been tried before — so it will not be viewed credibly as a “one-time” option, it sets up perverse incentives for tax evaders and there is a general public mood against such immunity schemes.

Indeed, the main lesson from the white paper is that there is no quick fix solution to this chronic problem. The paper rightly says that reform of the financial and real estate sectors would help reduce the generation of black money in the long term the way the freeing of gold imports had helped check smuggling. However, under the Constitution, land is a state subject and India’s states are increasingly concerned about Central encroachment on their revenue flows, such as stamp duty.

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