Busting a few myths about black money - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 5 November 2014
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Busting a few myths about black money A  A  A

- By Vivek Kaul

Vivek Kaul
Growing up in erstwhile Bihar in the late 80s and early 90s, one of the first economic terms that I came across was "black money". Those were pre Android phones, pre Google, pre internet, pre mobile phones and in large cases even pre landline phone days.

So, what did one do when one had a doubt like this and wanted to know what black money really was? One asked. Parents. Friends. Friends of friends(Okay, these were real friends of friends, not the Facebook variety that we have these days). Neighbourhood uncles and aunts. Bhaiyyas and Didis preparing for the UPSC or the state public service exam. And hopefully an economist.

Ranchi was a small town during those days. My social studies text book even called it a "hill station". And the chances of finding an economist there, were next to none (not that the chances have gone up now).

So, what you got were vague explanations like, black money was black money. People looked at you and probably wondered, why is the fellow even asking this.

And so the doubt remained. As time went by, as happens in such small towns, everyone who could leave the place, got up and left, including me. Of course, over the years, I figured out what black money was. Black money was black money, one of the few economic terms which are a definition in themselves.

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In April 2009, the newspaper I worked for back then, asked me to interview Proffesor R Vaidyanathan of the Indian Institute of Management at Bangalore. The professor put a number to the entire black money debate, which thanks to the Bhartiya Janata Party (BJP) was just about erupting then.

He said that around $1.4 trillion of Indian black money was stashed away abroad. This money, he elaborated could be in Switzerland and various British/US islands which are tax havens.

His estimate was based on a report titled Illicit Financial Flows from Developing Countries: 2002-2006, brought out by Global Financial Integrity(GFI), a Washington based non profit organization.

The 2013 report of GFI said that nearly $343 billion of black money left India during 2002-2011. This amounted to around 3% of India's economic output during the period. The number was particularly high in 2011, when around $84 billion may have left the country, the report suggested.

The GFI's estimate does not take into account criminal activities as well as corporate tax evasion. These are massive sources of black money. Nevertheless, this is the most comprehensive study of black money which leaves emerging markets like India and hence, does give us a good idea of the amount of black money leaving the country.

In the recent past, prime minister Narendra Modi has taken up the issue of bringing back black money that has left India. In his latest radio broadcast over the weekend he told the country that

"As far as black money is concerned, you should have faith on this 'pradhan sevak'. For me, it is an article of faith. Every penny of the money of poor people in this country, which has gone out, should return. This is my commitment."

While this is a good stand to take in public, getting back all the 'black money' that has gone out, back to India, is not a feasible proposition. The simple reason is that all this money is not lying around at one place.

There is a great belief that all this black money is lying around in Switzerland. This isn't true. Data released by the Swiss National Bank, the central bank of Switzerland, suggests that Indian money in Swiss banks was at around Rs 14,000 crore (2.03 billion Swiss francs). India was at the 58th position when it came to foreign money in Swiss banks. The total amount had stood at Rs 41,400 crore in 2006.

The reason for this is simple. Over the last few years as black money and Switzerland have come into focus, it would be stupid for individuals or companies sending black money out of India, to keep sending it to Switzerland.

There are around 70 tax havens all over the world. And so this money could be anywhere. Getting all this money back would involve a lot of international diplomacy and cooperation. Also, the question is why would tax havens return this money. Their economies run because of this black money and no one undoes a business model that is working.

An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland and beyond the reach of any tax authorities. Some of this money must have definitely originated in India.

Further, in the aftermath of the global financial crisis, interest rates in Western economies have crashed. Switzerland is no exception on this front and hence, Swiss banks have been paying very low interest rates over the last few years. Given this it doesn't make any sense for Indian black money to go to Switzerland, when there are better returns to be made elsewhere.

Indian black money found its way into places like Switzerland when India had limited investment opportunities. But that is not the case now. Hence, chances are that over the last few years, Indian black money has largely stayed in India where it has been invested in areas like real estate or in metals like gold. Further, chances are that a lot of black money is being round-tripped into India through hawala to be invested in physical assets like land, apartments etc.

Hence, it is important that instead of chasing black money stashed all over the world, the government starts looking at transactions which generate black money in India. The two sectors which generate a lot of black money are real estate and education. No real estate deal is complete without paying a certain amount of the deal amount in "cash". And even school admissions these days lead to money changing hands in the form of a "donation".

Why can't the government start local when it comes to unearthing black money? The answer is fairly straightforward. Many real estate companies and education institutes are run by politicians. Try taking a taxi around Mumbai and you will realize that most so called "education institutes" are run by politicians. The way this works is that the education institute is run by a non profit organization but all the assets(like the building in which the education institute is run) are owned by a private limited company and the education institute pays a rent to the private limited company for using all the assets. This is how money is tunnelled out. Why can't the government look at these transactions?

It is ironical that we don't even have a decent estimate for the total amount of black money in this country. As a 2012 white paper released by the ministry of finance stated "There are no reliable estimates of black money generation or accumulation, neither is there an accurate well-accepted methodology for making such estimation."

If the government is serious about tackling the black money menace it first needs a reasonable estimate of the total amount of black money in this country. It needs a comprehensive mechanism to figure out how black money is being generated and how and where it being hidden.

Further, the central idea in unearthing black money should be to bring more and more people under the tax bracket. The situation is abysmal on this front. As the former finance minister P Chidambaram said in his February 2013 budget speech "There are 42,800 persons - let me repeat, only 42,800 persons - who admitted to a taxable income exceeding Rs 1 crore per year." This is a totally ridiculous number. There are probably more people making that sort of money just in South Delhi.

If the government is serious about the black money issue, it should be going after these people who are hiding their income and not paying taxes. But the question is can it do that? The income tax department is one of the most corrupt institutions in the country and given half an opportunity they are ready to sell themselves out lock, stock and barrel.

Further, it is worth remembering that a lot of black money that is generated is ultimately used by politicians to fight elections. Hence, it is in their interest that the status quo continues. To conclude, black money stashed away in foreign destinations is not the real issue. The real issue is the black money that continues to be generated and hidden in India and the inability of the government to tackle it.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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11 Responses to "Busting a few myths about black money"

Vijay

Nov 15, 2014

If Hindutva and the renaming of India as Bharat means the end of mother corruption and its child called black money then we all have a new golden era of virtue to look forward to under the BJP and its RSS leadership.

Like (1)

Ralph

Nov 15, 2014

We already have transparency in the deals awared by listed companies to related parties.

What we are lacking is transparency in the deals awared by governments and PSUs.

I knew the son of a Coal India stockist for Maharashtra. He was wallowing in cash due to the privelege awarded to him. His own son disclosed how his father had obtained those priveleges.

Like (1)

Swaminathan

Nov 7, 2014

Very realistic

Like (1)

harsh vardhan

Nov 6, 2014

Congrats Mr Kaul.A great analysis explained in simple terms easily assimiliated by all.

Like (1)

Imtiaz

Nov 6, 2014

You have hit the nail right on the head. Its fancy to talk about switzerland. Who will catch the theives (politicians) when they rule the country. Prime example is perks and facilities they get at the expense of the tax payer (the famous list of prices at the parliament canteen for example)

Like (1)

Jayant Chakravarty

Nov 6, 2014

Absolutely correct. Focus should be on the black money circulating in the country. Good article, Vivek. I worked with his father in Coal India for 20 years. Saw him as a boy growing up. Feel proud of him.

Like (1)

Om Prakash Sharma

Nov 6, 2014

Let the political party's accounts be audited by CAG

Like (1)

Dharmendra kapur

Nov 5, 2014

Absolutely true Mr. Kaul, Gaon mein Chora aur shehar mein dindhora !
And please tell us how are the real estate transactions being conducted in Gujarat? After all land is a state subject and we were all sold the 'Gujarat Model' and it would be replicated all over India.

Like (2)

jasdeep

Nov 5, 2014

As the former finance minister P Chidambaram said in his February 2013 budget speech "There are 42,800 persons - let me repeat, only 42,800 persons - who admitted to a taxable income exceeding Rs 1 crore per year."

this statement is indeed funny. i had heard it before and this is the exact reason why it can confidently be said that, come what may, the government aint going to be serious about bringing back "black money"

Like (2)

Satya Verma

Nov 5, 2014

Simplest exhaustive account on Black Money.LOOTAT HAI DIN RAIN SABHI MIL BHOLE BHARAT KO. Solong Catie watches milk things will not change.KUDOS TO VIVEK.

Like (2)
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