The 'black money' problem is bigger than perceived! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The 'black money' problem is bigger than perceived! 

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In this issue:
» Misreported export numbers the tip of the iceberg?
» Should India vouch for independent rating agencies?
» NHAI pledges efficiency before bond issue
» India serves as talent pool for global R&D
» ...and more!

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00:00
 
At a time when India's GDP growth is getting scarily close to long term average of 6%, here is a malaise that is crawling into it, unnoticed. The size of the problem is so gargantuan that it already accounts for almost 7% of India's GDP. Popularly known as 'black money' laundering, the system of sending out illicit funds to foreign shores has hit developing economies like India the hardest in the past decade.

As per the findings of Global Financial Integrity, an agency which promotes policies to curtail the cross-border flow of illegal money, as much as Rs 64,000 crore (US$ 128 bn) has left India between 2000 and 2009. That is not all! The entire universe of developing countries lost US$ 8.4 trillion to illicit outflows during the decade. In 2009 alone, they lost US$ 903 bn, down marginally from US$ 1.4 trillion lost in 2008.

What is important to note here is that 90% of the illicit outflows were due to trade mispricing. Inefficient tax collection and a low base for tax incidence have coupled the problem of black money leaving India. While targeting politicians and seeking to bring back black money stashed abroad is in vogue, flight of capital is a problem that can undo the merits of all political and economic reforms. And nobody seems to be caring about it! Swiss banks should certainly be made accountable to disclose receipt of funds from India. But nipping the problem at its bud will serve the purpose better.

Expanding India's tax base and improving tax collection has the potential to curtail illicit outflows. Fiscal reforms are a necessity not just to address the problem of black money but also to narrow the tax deficit. However, they remain at the behest of political will rather than economic urgency. As India struggles to fight corruption, get reforms in place and hold its position amongst the fastest growing economies, flight of capital to foreign shores needs to be curtailed at the earliest.

Do you think it is more important to curtail illicit flight of capital rather than focusing on bringing back black money stashed abroad? Let us know your comments or post them on our our Facebook page / Google+ page.

01:15  Chart of the day
 
That the debt problems for India Inc has increased manifold in recent quarters is evident in the rise in NPA levels for the banking sector. However, the problem may just be at an inflection point if the data on corporate debt restructuring is to be considered. As per data from Economic Times, the last two quarters have seen an unprecedented number of applications for restructuring of debt. If liquidity and interest costs remain a problem for Indian corporate for a prolonged period, the restructured debt may soon start turning into NPAs.

Source:Business Standard

01:48
 
We know how governments across the world have become masters at creating money out of thin air. The Indian authorities though don't seem to be content with a voodoo of this kind. So it has gone ahead and created the base metal copper practically out of nowhere! What else would explain the fact that while India's copper related exports grew by a whopping 350% in FY11, there was no corresponding rise in either the domestic production of the metal or its imports? This shocking fact was brought to light by a leading daily who after consultation with the relevant firms and organisational bodies, came to the conclusion that there has been some serious misreporting in copper export numbers. Although there is no conclusive evidence, it is alleged that the numbers have been inflated so that illicit money can be made to enter into the country. And this could be just a tip of the iceberg. Using similar strategy perhaps, a lot more money could have already found its way into India. And where would have the money gone after entering Indian shores? Maybe in asset classes such as real estate as despite no genuine demand, their prices are just not willing to go down.

02:33
 
The big 3 rating agencies have been criticized time and again for assigning ridiculously high ratings to things that just didn't deserve it. Moreover, they tend to downgrade only after things have already gone horribly wrong. One reason for this is that the rating agency gets its income from the very same borrower that they are apprising. Another reason that is more relevant to country ratings is that the international agencies have very little understanding or knowledge of the local nitty gritties that influence the country's finances.

To combat these problems, head of China's central bank has proposed setting up a domestic rating agency that would earn fees from the investors and not the borrowers. This in turn would bring about a truly independent rating for the borrower. Maybe it is high time that India also set up a similar system. Though we do have our own domestic rating agencies but these are still paid for by the borrowers. As a result, they tend to have a bias in their judgment.

03:05
 
After making tall claims and then failing to deliver them, the National Highway Authority of India has again said that it will achieve its target of building 20 km of national highways a day in the next three years. All these roads are expected to be built under the public-private partnership model. The highway authority is also in the process of raising about Rs 100 bn by selling tax-free bonds in order to meet some of its funding requirements. NHAI is aiming to award road contracts for about 7,300-7,500 km in the current financial year. From the next financial year onwards, it targets a minimum of 7,000 km every year. Though some delays are being witnessed due to issues relating to land acquisitions as well as shortage of civil engineers, there are no major problems in executing national highway projects.

Will NHAI be able to achieve 20 km of national highways a day? Well, it is difficult to foretell given the lousy track record. However, there are some promising signs. For one, the government is helping NHAI in raising funds and acquiring land. Secondly, private companies are quoting a premium for securing road projects despite the overall gloominess in the economy. If contracts continue to be awarded without interruptions and projects are executed without much delay, the 20 km target may become a reality. We sincerely wish that the promise of impeccable execution does not turn out to be false hope ahead of the fund raising.

03:41
 
At a time when economy is slowing down and India Inc is chiding the government for policy inertia, salt to software conglomerate Tata group has decided to face the situation head on by emphasizing on the need to improve efficiency/execution in all aspects of its businesses. Ratan Tata, at a meeting held recently, underlined the importance of execution especially in 2012. Amidst uncongenial macro-environment and lack of policy initiatives, execution will play a key role for India Inc in the near future. Corporates that are well equipped functionally to execute what is there on their platter will be better off in the next year. And having recognized that fact, Tata's have made execution a priority. Apart from this, in order to share best practices amongst the group companies Tata's have also roped in an in-house strategy consultant. We believe that such steps to streamline and improve the business operations can prove to be a turning point as far as the overall group performance in the next year is concerned.

04:16
 
India has always been an attractive IT outsourcing destination. This is because of the large pool of engineers available here who are ready to work at 25% of costs compared to their western counterparts. India, however, has now moved one step further. The country is now emerging as a base for R&D jobs in various other industries. With the global spending on R&D estimated to increase by 3.6% and the pressure on MNCs to lower their costs in weak economic scenario, many global companies are shifting their research and development base to India due to its cost advantage and available talent pool. The highest traction is being seen in the pharma, auto and defense sectors. This has led to a huge increase in hiring in the R&D segment. In 2011, hiring went up by 20% in R&D space with FMCG and IT companies paying the maximum remuneration. Looking at the opportunity, many universities have also ramped up their PhD and other research related programs to attract students aspiring for a career in this segment. All in all, it has been a great year for employees who have chosen R&D as a career. With the global economic environment continuing to be in a lackluster mode, more companies may follow the trend of establishing their R&D base in India.

04:45
 
Taking cues from its peers in Asia, the indices in Indian stock markets started off on a positive note today. However, selling pressure in realty, infrastructure and banking stocks pushed the indices into the negative territory. At the time of writing, the BSE Sensex was trading lower by 103 points (down 0.7%). Indices across other key Asian markets closed a mixed bag while major markets in Europe and the US remained shut due to Christmas holidays.

04:55  Today's Investing Mantra
"Hold no more stocks than you can remain informed on." - Peter Lynch
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15 Responses to "The 'black money' problem is bigger than perceived!"

Ashish.Mehta

Nov 10, 2012

Dear Sirs,

I stopped reading most of your Articles when you said Gold is an unproductive Asset.

Clowns like you have no clue what the Real Role of Gold is -Gold is Insurance against political Stupidity and guaranteed debasement of Fiat Currencies by elected Politicians(or otherwise).

As for your fawning and love for Warren Buffet-The Less said the better.

Warren Buffet is just another Crony Capitalist ala Mukesh Ambani /Naveen Jindal,etc.

Spend sometime reading up on his role in the 2008-2009 crisis as well as his constant unflinching love for Moody's[The worst perpetrator of the Financial Crisis-which has not been fixed yet]& will never be fixed until all Bad loans are restructured.

Trouble wid doing that is that it will cause the Crony Capitalists globally[WHo control The Fiat currency systems] to lose everything they have-so it won't happen.

First understand the role of money and debasement of Fiat currencies.Then write.

Like (1)

H P Gupta

Jan 9, 2012

There is no doubt that Manmohan Singhji is the right man for Economic Growth in the country.Unfortunately he has not been rightly understood by the Allies.As a matter of fact to start with all the Allies should have been kept in confidence by discussing with in all the subjects before they were brought to the Parliament.Unfortunately his advisor is Mrs.Sonia Gandhi who is considering herself the Supreme underminig the Allies.

Like (1)

Tikam Patni

Dec 31, 2011

Money is never Black or White. It is always Green. The other colors are just a matter of perception brought out by the rules and laws of the day as promulgated by the rulers of the day. While all monies are earned thru human enterprise and efforts, it is simply termed Black if Governmental Income Taxes are not paid. And in India where is the this Tax Money going? Mostly wasted. India should be declared a Tax Free country.

Like (2)

Naveen

Dec 28, 2011

YEAR 2012: YEAR to JUST LISTEN and ACT (photo of an HUMAN EAR on the big known magzine - " Colour of the EAR? you decide)

1st Point: Gold may be a hedge. However making the black money to white by the elite who are in action currently is a big a reason for its shine. Resultant- dollar strenthning against rupee. Adding to this, also the new export scam surfacing just before election. We can tie all up for a real staggering natural story.
The ENTIRE western stock market earning for last year is nothing and ashamed when compared to this big money juggernaut. Please see how this is going to explode as the parliment handles that agreed upon $1700 bn + (8925000 crores meaning 90 lakh crores) and some more + and ++++ of black money in switz bank coming back to hinterland in this route. Lets make it white : 90 lakh crore taxed at 30%+ 20% penalty = 36% = approx 32 lakhcrore = 600+ bilion dollars in the india coffer and freedom for the those elites, yes, without taking names...

2nd Point: As we look closely through the shadowwy glass door there is some big stench from the doors eminating and the look is quite disgusting.. Am referring to the downtown PSU banks (27 in total) which are exposed to this Rupee 22450 crore Air India juggernaut and to what are thier % exposure and also not to mention the least the weight on them from REC and PFC's which are exposed to approx Rs. 33billion (170000 crores) debt????
And should these banks get ready for a Big (3 - 4 notch) DOWNGRADES coming half.....

3rd point: What it means to investor- Afterall money has no value as long as we look at the benefits it brings: more recognition, respect, health, freedom and education and overall growth... In that respect its about positive flow of it is what should be the resultant. Considering this point, as we are all here as investors on this site- Market is going to head south at this preliminary big picture kind of view..So related benefits except for few who are willing to educate and learn at this point in time- Will be the beneficieries in the Bigger frame of the same Picture/View.

Like (2)

ashish

Dec 28, 2011

Curtailing flight of illicit capital is first step. Bringing back in black money will help also. Improving overall system is most important.

Like (1)

srinivas

Dec 27, 2011

All parties should take a oath and bring a strong law to attack this problem. However, Lallu may say that the law may be used against OBCs because of their caste and therefore should be kept away from the scope. Mayawathy will anyway demand that the law should not be used against Dalits. Owaisi may so similarly for muslims. In the light of so many exceptions, congress will conclude that such a law is not needed.BJP amy grudgingly agree.

Like (2)

Jawahar Mathews

Dec 27, 2011

The flight of capital under whatever premises,whether under invoicing while importing to avoid customs and tarifs and overinvoicing and dummy exporting to encash export benefits should be brough under money laundering and expanding the premise and the defition of ML.What we see are all eye wash by the authorities.The real culprits are not the business world but those ubscrupulous politician fooling under various pretex and plaforms and dupe the common man,
The issue here is whether moneys to be brought back-yes the laundered money should come back and flight of capital should be arrested

Like (1)

BAPTY.S

Dec 27, 2011

Any money outside the country shld be brought back. this applies to PAST,PRESENT & FUTURE. Any money where tax is paid ,disclosed kept for specific purpose is o.k as long as its reasonable, for studies,hospitalisation, specific disclosed investments covered under our laws,etc. whether its SWITZERLAND OR ANY OTHER TAX HAVENwe need to bring back countries wealth & put to good public use, & shld be reflected in rbi deposits .
why not you ask our 2 major parties CONGRESS & BJP THEIR INACTION ALL THESE YRS,& EVEN EQUITYMASTER GIVE SPECIFIC SUGGESTIONS TO GET IT BACK IN A TIME FRAME.
NOT LATER THAN 12 MONTHS. NEED IS FINE GREED IS BAD.& THIS WILL CREATE SERIOUS POLITICAL & SOCIAL PROBLEMS FOR FUTURE GENERATIONS. THIS APPLIES NOT ONLY TO INDIANS &INDIA BUT TO ALL COUNTRIES.

Like (1)

P.S.Dinachandran

Dec 27, 2011

Can all Parties in India together take a decision to Ban all these Illicit trafickers.

Like (1)

B.SUDHAKAR

Dec 27, 2011

Let us understand the magnitude of black money stashed abroad.This activity is going on unhindered for several decades.Even if you bring back 50% of that money and distribute it among Indian masses, India will join the league of Developed Nations. This is the corrective action for the past mistakes.If you can stop of flight of capital, it is preventive action,that nips in the bud of black money.For centuries, safe havens like swiss banks have enjoyed the fruits of bank deposits of Hitler, Mussolini and the like,whose accounts are confiscated.

Like (1)
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