On the highly complex and emotive issue of black money, the Parliamentary Standing Committee on Finance in March tabled its 73rd report on the status of unaccounted wealth.
One of the highlights of the report, titled the “Status of Unaccounted Income/ Wealth both Inside and Outside Country —A critical analysis”, was that three leading economic institutes of India, working under identical terms of reference, made varying estimates on the size of the black economy. It is obvious that the task of estimating unaccounted income and wealth was going to be a herculean one, given the very emphasis on their “unaccounted” aspect. However, the fact that the estimates of the size of the black economy in India varied from 7 per cent to 120 per cent of GDP is a matter of surprise — and some concern.
In order to flag key issues, I draw reference to paragraph 10 of the report dedicated to “Estimates of Unaccounted Wealth Outside the Country”, largely dealing with illicit financial flows across international borders.
Cross-border illicit financial flows (IFFs) may happen due to tangible illegal activities, such as trafficking of drugs or wildlife, illicit trade, or due to intangible activities such as corruption, betting in sports and piracy or import of services related to software or consultancy. In this analysis, I exclude drugs or wildlife crimes, which are more difficult to quantify. The article, therefore, identifies the most sensitive sectors prone to illicit cross-border trade in goods or services. In India, gold and jewellery; diamond; and software and consultancy imports are sensitive. These sectors are considered risky globally as well.
The two sectors—gold (precious metals) and diamonds (precious stones)— may generally be considered identical in their mode of generating black money
and integrating it into the economy. However, in reality, they may not be so. While black money
generation in gold is primarily export-driven, for diamonds it is largely import-driven. While gold frauds add to black money
generation within India, diamond may be misused to legitimise black money by inserting it into the financial mainstream and facilitating transfer of this illicit wealth abroad.
These two risk prone sectors complement each other in this sense. In fact, most sectors generating and consuming black money are complimentary. These debit / credit requirements in such sectors makes hawala (informal banking) thrive in India.
Law enforcement agencies have made a number of detections of fictitious exports of gold jewellery from India. This includes gold jewellery that were never actually exported. This is done by adopting Bollywood-type modus operandi involving exchange of bags at Indian or international airports or alternatively exporting just scrap, while mis-declaring them as gold jewellery. After making such fictitious exports, the gold would then be diverted and sold within India in cash. A number of these fraudulent businesses are running on high quantum of bank credit.
UN COMTRADE (International Trade Statistics Database) reveals that over the past 10 years, in quantity terms, 75 per cent to 85 per cent of India’s gold jewellery export is made only to two countries, viz the UAE and the US. This is not a diverse export basket. In 2008, when the Lehmann Brothers collapsed, sending tremors across the world, the export of gold jewellery from India to the US (normally in the range of 15-20 per cent) shot up to 97 per cent in quantity terms. Data during periods of such disruption are critical for black money estimation.
In the diamond sector detections by law enforcement agencies indicate overvaluation in imports of rough diamonds. This basically means that the importer is ready to pay ~100 for an import that is actually worth ~10, thereby paying an excess amount of ~90. No prudent business would enter into this kind of transaction, unless it is dealing with public money, which is being used for making excess import payment, or it is proceeds of crime being laundered.
UN COMTRADE data indicates that more than three-fourths of Indian rough diamond imports
in caratage (quantity terms) are from Belgium and the UAE. These two countries again figure as prime destinations for Indian exports of finished diamonds. Notwithstanding the major trading country status of the two countries, a closer look at this sector is required for black money estimation.
Imports of services, such as software, consultancy and tours and travels, result in outflow of foreign exchange, which is indeed welcome for genuine transactions. However, these imports of services, when they are fake transactions, may also be used for laundering money.
Globally, intangibles contribute significantly to illicit money transfers using the formal banking channels. The use of intangibles is preferred because it is difficult to establish whether services were actually offered or not, as unlike trade in goods, there is hardly any physical footprint of these transactions.
Quantifying black economy
This analysis provides a snapshot as to how businesses can be misused to generate and launder black money. Sensitive sectors such as real estate, pharmaceuticals, mining, pan masala & tobacco, plastics (to name a few) have their own peculiar methodologies for contributing to the black economy.
One approach of quantifying black economy could be: Identifying sensitive sectors, estimating quantum of black money in each in consultation with stakeholders and doing a summation of their estimated contribution; and statistical analysis of estimates in the other less risky sectors.
Inability to effectively tackle this chronic problem of black money results in injury to domestic industries, job losses and credit squeeze for genuine businesses. Identifying these sectors, dealing with them holistically and introducing fair-trade practices would make them globally competitive.
The writer is an Indian Revenue Service officer | Views expressed are personal