Citi: 50 Per Cent Of India's Economy Comprises Black Money or $640 Bn; Annual Illegal Outlfows $ 104 Bn

India's Underground Economy-Worth $ 640 Bn and Growing

Most of this money goes into Land deals, Bullion, greasing bureaucracy for licensing deals and ultimately depriving millions off affordable housing. The Bank-Real Estate Nexus also needs to be examined thoroughly-who knows what the Land Barons are cooking up.

Illicit Income: Back in the Limelight — The recent fracas over unaccounted money parked overseas has resulted in a renewed focus on 'black' or unaccounted money flows from India. While Germany has provided the names of 26 Indians with secret accounts in LGT Bank in Liechtenstein, the Indian government has since come under fire from both the judiciary as well as opposition parties for not taking action against the people involved. 

However, the government has said that in the absence of a bilateral treaty with Liechtenstein, India cannot seek any administrative assistance on Indian clients of the LGT Bank. Efforts are currently underway to sign a Tax Information Exchange Agreement (TIEA) with Liechtenstein which would aid disclosure, but Liechtenstein is negotiating a Double Taxation agreement (DTAA).

Gauging the Quantum: Illicit Flows are a Growing Worry — The issue of illegal flows is not new. A recent study by Global Financial Integrity (GFI) estimates the present value of total illicit flows at US$462bn, while a BJP Taskforce report in 2009 puts the quantum anywhere between US$0.5-1.4trn.

On an annual basis, GFI indicates that India lost assets at the rate of US$19bn each year. These flows are typically the result of tax evasion, corruption, bribery, kickbacks, and terrorist activities. While the cause of illicit flows is attributed to structural and governance issues, an interesting finding by GFI was that liberalization of trade and deregulation actually led to an increase in illicit flows! While this is counter intuitive, GFI attributes this to slow progress in strengthening of institutions governance, consequently resulting in misinvoicing and the presence of a large underground economy.

Macro Implications & What Is Being Done? — Curbing tax evasion and efforts to bring back illicit flows overseas would positively impact both Public Finances as well as the Balance of Payments (via the remittance route). In addition to signing a bilateral treaty with Liechtenstein, efforts are also currently underway to access Swiss Accounts. Earlier this month, the Indian government adopted a 5-fold strategy which comprises playing a proactive role in the global crusade against illicit funds and creating an appropriate legislative framework including setting up overseas tax units. India currently has DTAA with 79 countries and is working towards modifying the articles concerning exchange of banking information. In the recent past, India has implemented preventative measures for money laundering, terrorist financing, and financial activities in line with FATF standards. While government efforts are showing some results (in the last 18 months the government detected undisclosed income over Rs150bn, the Directorate of International Taxation has collected taxes of Rs346bn, and the Directorate of Transfer Pricing has detected mispricing of Rs338bn), more needs to be done to address the annual loss of assets overseas via illicit flows.