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"How real are the figures on black money abroad?"

Last updated on: April 22, 2009 22:12 IST
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Though there are different views on the Global Financial Integrity numbers that the BJP cites, getting the money back to India is not going to be an easy task

S Gurumurthy
Convener, Swadeshi Jagran Manch

'The OECD threat of sanctions has got some tax havens to cave in - so India can get its funds back if it joins the global crusade. Apart from the Congress, other political parties want this'

A lot of 'black wealth' from India flows to Switzerland every year. This is not what LK Advani is saying, but is something Dominique Dreyer, the Swiss Ambassador to India, said at the 60th anniversary of the Indo-Swiss Friendship Treaty last year.

The first serious work on the global stock of illicit money was done by Raymond W Baker, a Harvard and Brookings scholar. His book Capitalism's Achilles Heel - Dirty Money and How to Renew Free Market System (2005) estimates the stock of illicit money at $11.5 trillion, to which one trillion gets added annually. Around $500 billion a year flow to the rich from the rest, according to Baker.

Aided by the Ford Foundation, the Baker-headed Global Financial Integrity (the GFI is a programme of the Washington-based Centre for International Policy) has estimated the country-wise flows of illicit money.

It puts the outflow from India during 2002-06 at $137.5 billion (Rs 6.88 lakh crore). How much more could the loot since 1947 be? Dev Kar, who was involved in the GFI study, has clarified that the GFI estimates of the loot from India are an understatement.

Can India win the loot back from Swiss banks and elsewhere? It's doable, but this requires a sustained global effort. India needs to get the past loot back and to stop ongoing plunder. Safe havens and secret banks make this pillage unstoppable by any nation on its own. Collective coercion is needed.

The Organisation for Economic Co-operation and Development (OECD) formulated transparency rules which were approved by the G20 in 2004; and by the UN Committee of Experts on International Co-operation on Tax Matters in 2008.

The US, UK, France and Germany are now using the OECD and G20 platforms to threaten the Swiss and the rest with sanctions if they do not mend their laws to comply with the OECD norms.

So far, six tax havens including the Swiss have succumbed. Forced by the economic crisis, the West, for whom financial secrecy was a sacred part of an individual's privacy, has taken a U-turn to declare it as evil today. The day secret banking is outlawed is not far off. But India needs more.

Richard Murphy, a chartered accountant in the UK who fights against tax havens, says that developing countries (read India) need a better model to break the secrecy than the OECD one — under which the country seeking information needs to give the name and account numbers of the suspected looter. India needs to fight for a better regime.

India must be a leader in this global crusade. But look at what it does instead. It does not welcome the OECD endeavours, it does not join the G20 efforts, nor does it ask for the Indian names hidden in the secret LGT Bank data offered by the German government.

The media claims that the officials here have advised the Indian envoy in Germany not to pester the government there for the LGT bank secrets! Worse, not long ago, India allowed the fugitive Ottavio Quottrocchi to take back the Bofors loot kept frozen by the Central Bureau of Investigation.

All this has led to a perception that India is not serious about getting its illicit wealth back. This perception, which undermines our moral character and impedes our efforts, needs to change.

But, a welcome national consensus is emerging today with the BJP, CPI(M), AIADMK, SP and BSP - but regrettably not the Congress - taking up the issue. It is primarily a global battle with national effort as a critical additive. A determined India can do it. The global situation cannot be more ideal for its efforts.          

Member of Parliament, Rajya Sabha

'The GFI has a range of $4.7-$22.7 billion but the BJP cites only the top figure. Since the data doesn't account for capital inflows, it is incomplete and has other problems as well'

That there are Indians with Swiss bank accounts is incontrovertible. There can also be no dispute on the fact that we need to try and get this money back. We have had amnesty schemes in the past - some have succeeded and some have not.

But in the six years that LK Advani's party was in power, did they take a single step to get details of Indian accounts in Swiss banks? In contrast, after the Liechtenstein bank disclosures on individuals who had accounts with it, our government has been in touch with the German authorities to get details of the Indians who have deposits there. That said, how much money there is in overseas banks? The question of how to get it back, and whether this can be done in the period Advani has in mind, all come later.

The BJP leader has cited obscure sources on the internet, none of which are really reliable. He has also used the Global Financial Integrity (GFI) report of the Washington-based Centre for International Policy. But the GFI estimates are based on modelling, they are not based on bank records of individuals. And while using this report, the BJP has deliberately suppressed vital aspects of the study. I have corresponded with the main author of the report to corroborate the points I'm making.

First, the study is academic in nature. It is not like the Liechtenstein data which has individual records.

All the capital flight from India in the period 2002-06, which the report tries to estimate, took place through under-invoicing of exports (to keep export dollars abroad) or through over-invoicing of imports (to send out more dollars than actually required).

The kind of trade policy reforms that are being carried should logically have reduced the amount that was traditionally kept abroad through such mis-pricing. More important, the GFI methodology is not as robust as you'd think.

The methodology relies on the difference in the unit price that is obtained from India's exports data and that obtained from the US import data - in the case of exports, it is India's import data and US export data.

This works well in high-value exports where the unit values are easily arrived at. But since most Indian trade is in low-value segments where the unit values are not available at sufficiently disaggregated levels, this makes the exercise somewhat dicey.

The GFI study cites a range for capital flight. As the main author of the study Dev Kar puts it, "when one is talking about the clandestine outflow of black money from a country, it is much harder to defend a number than to defend a range of possible outflow values."

The range the study gives is between $4.7 billion and $22.7 billion each year between 2002 and 2006. Advani cites only the top figure. The change in exchange rates would also affect the figures for the later years, but the BJP does not mention this.

The GFI exercise looks at gross outflows from trade mispricing. It does not account for capital inflows which also need to be taken into account since black money also comes back. When you look at India's capital account, there is a negative flow; that is, there is a possible reversal of capital flight! This knocks the bottom out of the Advani campaign.

Once you keep these factors in mind it becomes pretty clear the 'data' cited by Advani does not exist, and he is distorting the studies he's quoting.

(As told to Sunil Jain)

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