Businessworld
ANJULI BHARGAVA AND JEHANGIR S. POCHA
In the quiet, high-ceiled rooms of North Block in New Delhi, which houses the finance ministry, officials seem unperturbed. Despite the huge dislocation black money causes, the issue is rarely mentioned in Parliament, speeches or policy meetings. It is, says one official, the proverbial elephant in the room everyone has learned to ignore.
Mention of black money usually generates silence or toothless statements underlined by knowing, conspiratorial smirks. Most officials even protest ignorance about the size of the black economy. “The best we have are ancient estimates,” says a finance ministry official, pointing out that the last time the government released an estimate was in 1983-1984, when the parallel economy was said to be Rs 31,000 crore-37,000 crore big, about a fifth of the official economy then.
But the truth is that every six months, Reserve Bank creates a report on the state of the parallel economy. It is kept private, immune from access even under the new Right to Information Act. No other major country, except China, is so cagey. That’s because in India there is too much too many have to lose, says Kishore Lal, ex-member of Parliament from Delhi. “Those in power have much interest in protecting the black economy as they depend on it for funds during elections.”
Consider the Rs 600-crore hawala case in Chennai involving the previously unknown Surendra Kumar. “We suspect this case had political backing as Kumar doesn’t have the wherewithal to deal in such large sums,” says a tax enforcement official in New Delhi. “But the number of layers in between makes it difficult to trace who is behind him.”
Officials who pursue their cases too zealously are also often transferred, says Lal, who filed a public interest litigation on the Rs 60-crore Jain hawala case that broke in 1991. “Cases involving high profile personalities and politicians are often buried,” he says. For example, Lal says, at least “two narcotics cases involving powerful groups, VAM Organics and Dainik Bhaskar, have not reached any conclusion”. Lal has home ministry orders — he showed these to BW — to prove this, and he says he is convinced that the government is simply “not interested” in pursuing such cases. The Hassan Ali investigation will face the same fate, he insists.
Indian political parties also “routinely” transfer money overseas and bring it back during elections, says Ravi Singhal, a New Delhi-based chartered accountant. Two years ago, Singhal says, he and several chartered accountants in Delhi were approached by middlemen to help bring in about Rs 400 crore for a major political party through tax-free donations made to non-governmental organisations (NGOs), one of the most common ways to launder money.
JNU’s Kumar says such a nexus between politicians, bureaucrats and businessmen will ensure that the black economy thrives. His view is echoed by many investigating agency heads BW met for this story. “The real crooks simply can’t be caught,” one of them said candidly. “We are always chasing the smaller fish who don’t have any political clout.”
Still, the unspoken burden of the ‘black’ economy has pushed some honest bureaucrats and officials into asking for a tougher crackdown. Over 40 committees and commissions have come out with hundreds of recommendations on ways to curb the black economy. But they’ve got nowhere. “There is no political will to tackle this issue and no single agency responsible for it, so it’s easy to sidestep it,” says a senior bureaucrat in the finance ministry.
Enforcement agencies are also hobbled by the huge volumes of information they have to deal with, but which they are not equipped to handle. The Financial Intelligence Unit, set up in November 2004 to build a network of financial intelligence and combat laundering, has received close to 2.1 million cash transaction reports, of which it identified 800 as suspicious. It forwarded about 350 of these to investigation agencies, such as the Enforcement Directorate, various income tax departments, the Central Bureau of Investigation and the Intelligence Bureau. But officials say none of them are equipped to follow up on even half of these suspicious leads.
In fact, too many agencies create another serious problem. There are no clear guidelines for when one agency’s work begins and another’s ends. Often, a case begins with one agency and even before the officers can get their teeth into it, it is moved to another agency. “There’s little coordination between agencies, with one often working against the other,” explains a senior official with the Enforcement Directorate. This also makes it impossible to make anyone accountable for failure to make headway with a case.
Lastly, the discomforting fact is that governments typically tend to focus on issues like black money and look at amnesty schemes in times of recession. With revenue collections flowing in, there’s very little incentive to try and mop up black income. The report of an expert committee set up by the finance ministry in November 2004 to unearth black income is gathering dust. Finance ministry sources told BW that it’s clear from the lack of action that the issue is not on anyone’s mind.
In the absence of any real enforcement, some officials are toying with the idea of amnesty schemes, which would allow black money holders to declare their unofficial wealth without fear of punishment. Understandable, but unwise, says Arvind Virmani, director of the Indian Council for Research on International Economic Relations (ICRIER), in New Delhi. Tax amnesties have been popular worldwide and used extensively by countries such as Germany and Italy (it brought in $35 billion — Rs 1,68,000 crore then — in 2001), which suffered as much as India because of countries such as Switzerland, Austria and little Liechtenstein that turn themselves into havens for crooked businessmen and politicians, and even criminals. Amnesty schemes that have been tried in India in the past — India Development Bonds 1991 and Foreign Exchange Immunities Scheme 1991 — when the economy has been in trouble have met with limited success.
Such schemes have attracted a lot of criticism as they “legalise the illegality” and are perceived as unfair to those who actually paid taxes. It is also impossible to determine whether the money declared is from crime or corruption or merely tax evasion. But a study done by Virmani shows that while amnesties may increase revenues the year they are implemented, they could reduce overall compliance later. That’s because if an amnesty scheme is launched when tax rates are falling, it would encourage people to come clean and use the opportunity to invest easily in the official economy. But at a time when tax rates are rising, people would fear additional increases and keep their money in ‘black’.
The Supreme Court has also questioned the validity of amnesties. Implementing them would also enrage legitimate tax payers. “Honest taxpayers will shudder at the thought of amnesty schemes such as zero interest bonds or ‘no questions asked’ investments,” T. Ramanujam, a former chief commissioner of income tax, recently wrote in an op-ed, adding “There is a need for changing the outlook with regard to black money.”
One would not be advised to hold one’s breath on that. “The government has no effective instruments to mop up black money,” says Bhide. In fact, the free run enjoyed by underground titans is allowing them to grow their empires faster than many corporate houses.
This is becoming a key factor in the rising anger towards official apathy in curbing the black economy. There is something inherently unfair about an individual having to pay more for the loans he needs to buy a house when illicit businesses are seeing their profits zoom. “We pay the price for less scrupulous businessmen getting richer,” says JNU’s Kumar.
The nation bears the morally cumbersome burden of learning to live with the fact that no real attempts are being made to curb black money. “In the long run, the only solution is to check the generation of black money and move gradually away from a cash economy,” says NCAER’s Bhide. Till that happens, the rest — investigation and detection— is unlikely to make any significant dent in what is a big, black and booming economy.
If you have Rs 100 crore in cash to spare and want to transfer it out of the country without the authorities knowing, the person you want to meet is a hawaldar (hawala operator). Operating as they do in the shadows, these hawaldars are the epitome of efficiency and honesty. And their modus operandi is simple and clear: The money will be picked up from your house and, within a matter of hours, delivered to any part of the world through an elaborate dealer network operating on a system of pre-arranged codes. That there are close to 4,000 hawala operators in India — 20 per cent of who work their businesses out of Delhi and Mumbai — is testimony to the fact that the system works and is thriving. One hawala operator confirms this and adds, “Almost all licenced money changers are involved, overtly or covertly. You can simply approach a money changer and be certain that he’ll point you to a way if he can’t offer it himself.” Thus, the business of international hawala thrives.
However, just like domestic hawala (see ‘Meet Me At Churchgate...’ on page 44), the entire system operates on trust and contacts. Money usually moves through one or two countries before reaching its final destination. “If I need to make a payment in the US, I will ask my counterpart in Hong Kong or Singapore and he, in turn, will contact an operator there. This is usually settled through compensatory trades,” he explains.
“Money going to tax havens and countries like Switzerland usually goes only through one or two big operators and is usually backed by either large business houses or politicians,” he says. For instance, in Kolkata, Pradeep Kumar Sarogi, a large hawala operator with several Fera and Fema cases against him, remains one of the biggest dealers in the region. The North is mainly controlled by Ravinder N. Sharma with a local accomplice in Jalandhar, Punjab. Sharma recently shifted his operations to Canada after his accounts were closed in the US in 2005. Officials say that in very large deals, money often never comes into India and is transferred directly through a series of banking transactions into accounts held overseas. “A complex web of transactions is created in order to disguise the audit trail, often electronically,” says one official.
A crucial omission from this story, which focuses entirely on the economic aspect of the parallel economy, is the huge security cost that India pays. The same network used by politicians to finance their election campaigns is used by drug smugglers and gangsters to run their illegal businesses. And what is far, far worse...terrorism over the last two decades has been financed heavily through this same parallel economy! It is criminal neglect on the part of the UPA government to not even think of tackling this menace.
