In the past few months, two revelations have exposed how Indian banks facilitate the laundering of black money, and wash it to make it white. First, Arvind Kejriwal claimed that banks have middlemen, who circulate illegitimate cash into the legitimate banking system. Later, a sting by CobraPost showed that even bank executives do the same. This begged several questions: does the government know about this and, if yes, why hasn’t the RBI clamped down on such practices?
The answer to these queries is that it is in the government’s interest to aid the conversion of black money into white. Thus, despite knowing about laundering, it deliberately does not interfere with it. Now, why would a government that regularly claims it wishes to root out corruption, and which is placed on the mat almost every day by critics for being corrupt, wish to be in this situation? Why would it encourage the generation and cleaning up of ill-gotten wealth?
Let’s now look at some facts in a bid to seek answers. Fact No. 1 is that this government, and others before it, is convinced that it cannot curb or control the black money. Whatever steps it takes in terms of Money Laundering Act, ‘Know Your Customer’ norms, PAN card, and cheque transactions, black money will continue to change hands. All these measures are only aimed to prevent existing tax payers and honest people from becoming corrupt. That’s it.
No wonder, the size of the black economy has increased, contrary to expectations, in the post reforms (post 1991) period. Reports indicate that the latest study by NIPFP (National Institute of Public Finance and Policy) found that the size of the black economy is 10% of GDP or half of the 20% figure in the early 1980s. However, in terms of the quantum of money, it translates into almost $200 billion, or over five-and-a-half times the size of the illegal economy ($36 billion at the exchange rate) in 1984.
Global Financial Integrity (GFI) concluded that deregulation provided “an added incentive for those seeking to transfer illicit capital abroad,” and reforms have put more money in the hands of the rich individuals and cash-rich companies that are the “primary drivers of illicit flows….” The boom in sectors such as real estate and construction, which are the biggest generators of black money, and government’s endeavor to allocate scarce natural resources at cheap rates to the private sector have emerged as the main factors to boost the black economy in the past two decades.
Fact No. 2 is that most of the illegal money is stashed abroad. According to GFI, of the $640 billion black money earned between 1948 and 2008, $462 billion was stashed abroad in foreign banks in tax havens like Switzerland. Fact No. 3 is that until the 1990s, this money remained parked in the banks or found its way to buy assets (real estate) in the US, east Asia and Europe. However, in the recent past, this money has come back into India, where the returns on any asset categories are much higher. In fact, the net outflows, i.e. black money that went out minus what came in, was a mere $25 billion.
In such a scenario, the government may want to aid both the processes of ill-gotten money going out as well as that coming in. Why, you will ask? The reason: if the government cannot stop the black economy, but helps the corrupt to bring it back through legitimate means, it adds to the economy. Presto, the policy makers can show higher growth rates, higher consumption patterns, and also higher inflows of foreign money, which adds to the economic aura of any nation.
Since 1991, there have been several official schemes to enable black money to come back. These include the value-based licensing scheme of the early 1990s, the voluntary disclosure of income one in the late 1990s, and RBI’s public admission that it does not monitor the sources of billions of dollars that come in every year as foreign direct investment. As long as the money is back through legitimate banking channels, even if through tax havens like Mauritius, the government is comfortable.
This is why a former Commerce Minister, when quizzed about black money entering India in the form of over-inflated exports, remarked that “I don’t care as long as it bolsters our foreign exchange earnings and pushes up the annual GDP growth figure.”