* India has lost more than $460bn since Independence because of companies and the rich illegally funnelling their wealth overseas, a new report says.
 | ||
|
The illegal flight of capital through tax evasion, crime and corruption had widened inequality in India, it said.
According to the report from US-based group Global Financial Integrity, the illicit outflows of money increased after economic reforms began in 1991. Many also accuse governments and politicians of corruption in India.
Shadow economy
Global Financial Integrity, which is based in Washington, studies and campaigns against the cross-border flow of illegal money around the world.
It said that the "poor state of governance" had been reflected in a growing underground economy in India since Independence in 1947.
Global Financial Integrity director Raymond Baker said the report "puts into stark terms the financial cost of tax evasion, corruption, and other illicit financial practices in India".
Some of the main findings of the report are:
· India lost a total of $462bn in illegal capital flows between 1948, a year after Independence, and 2008.
· The flows are more than twice India's external debt of $230bn.
· Total capital flight out of India represents some 16.6% of its GDP.
· Some 68% of India's capital loss has happened since the economy opened up in 1991.
· "High net-worth individuals" and private companies were found to be primary drivers of illegal capital flows.
· The share of money Indian companies moved from developed country banks to "offshore financial centres" (OFCs) increased from 36.4% in 1995 to 54.2% in 2009.
·
The report's author, Dev Kar, a former International Monetary Fund economist, said that almost three quarters of the illegal money that comprises India's underground economy ends up outside the country.
India's underground economy has been estimated to account for 50% of the country's GDP - $640bn at the end of 2008.
'Under-estimate'
Mr Kar used a World Bank model to calculate India's missing billions. He compared India's recorded sources of funds, such as foreign direct investment and borrowing, and its recorded use of funds, like foreign currency reserves and deficit financing.
Illegal outflows are considered to exist when funds recorded exceed those used. India's exports and imports over the past six decades were also taken into account.
Adjusted for inflation, that all added up to $213bn missing since 1948. Taking estimated investment returns into account, Mr Kar calculated that was worth $462bn in today's money.
The figure could be much more, he warned, as it did not include smuggling and cash transfers outside the financial system.
@ BBC News
[The report also found that from 1995 to 2009 the Indian private sector shifted away from bank deposits to deposits in overseas financial sectors. As the share of OFC deposits increased from 36.4% of total deposits in 1995 to 54.2% in 2009, and deposits in banks fell commensurately to 45.8% in the last year. OFCs are subject to even less oversight than banks and typically hold a larger share of illicit funds. The source of that increase was no doubt India’s burgeoning underground economy, the report states.]
By Megha Bharee
Between 1948 and 2008, at least $213 billion has been lost from the Indian economy in bribes, tax evasion and trade mispricing, estimatesGlobal Financial Integrity, a non profit organization in Washington, D.C., in a new report. Add lost interest to that and the figure more than doubles to $462 billion.
The report says this is a conservative estimate as it doesn’t include smuggling, certain forms of trade mispricing and missing data. Factor those in, and the country has lost at least half a trillion dollars.
The flight of capital from the legal system accelerated once the Indian government eased its tight control with economic reforms that started in 1991, the report says. Part of the problem was that Indian’s economic liberalization wasn’t accompanied by better governance or more accountability in the system. So while this period started liberalization of trade, lowering of trade barriers, less control and less oversight, it also led to an increase in bribes (to get your goods out of customs more quickly, for instance) and higher tax evasion.
India’s underground economy has been estimated at 50% of the GDP, making it about $650 billion at the end of 2008. Of this, 72% is held abroad, estimates Dev Kar, the author of the report and a former senior economist at the International Monetary Fund. “All countries need investment and get the capital from domestic savings and foreign savings,” says Kar. You can make up some of the gap of this lost capital with domestic savings, but the rest has to be borrowed at a price. “The cost to the country [of this loss of capital] is real,” he says.
Without a doubt economic reform post 1991 has fostered a faster pace of economic growth. However, analysis shows that more rapid economic growth in the post-reform period has actually led to deterioration in income distribution. A more skewed distribution of income implies that there are many more high net-worth individuals in India now than ever before and it’s this group, along with private companies that are the primary drivers of illicit flows from the private sector in India (rather than the common man).
The report also found that from 1995 to 2009 the Indian private sector shifted away from bank deposits to deposits in overseas financial sectors. As the share of OFC deposits increased from 36.4% of total deposits in 1995 to 54.2% in 2009, and deposits in banks fell commensurately to 45.8% in the last year. OFCs are subject to even less oversight than banks and typically hold a larger share of illicit funds. The source of that increase was no doubt India’s burgeoning underground economy, the report states.
Since tax evasion is a major driver of the underground economy, efforts to expand the tax base and improve tax collection can help curtail illicit flows, says Kar. He also recommends redistributive policy measures to ensure that growth remains inclusive or generate many of the rich who drive illicit flows. Here Kar is not suggesting a socialist strategy but rather stepping up to deliver the basics to the masses. “In India vast swathes of the population have no access to clean water, to education, to healthcare, their children are malnourished, and they don’t see any of the benefits of faster rates of growth,” he explains. “India needs to pay more attention to the Millennium Development Goals [and meet some of these needs.] There’s a whole host of things you can do with $460 billion.”
To curtail illicit flows he suggests the government should: (i) ensure that the rule of law is applied fairly and swiftly, (ii) strengthen regulatory and legal institutions (iii) adopt policy measures to improve both public and corporate governance such as improving tax compliance and collection. These domestic measures need to be complemented by tighter regulatory oversight of banks and OFCs by developed countries in order to ensure that financial institutions do not facilitate the absorption of illicit capital, he says.
