Illicit funds

India's land, and not Switzerland, is where the hunt for black money should begin

In popular perception, India's black money lies locked up in bank vaults in Switzerland. But experts studying the illegal economy say there is reason to believe that more unaccounted wealth remains within the country – literally parked on Indian land.

On his first day as the prime minister of India, Narendra Modi announced the formation of a high-powered Special Investigative Team to investigate black money that has been sent abroad by tax evaders.

The decision lent an aura of purposefulness to the new government.

Black money had featured prominently in the public discourse in the run-up to elections. As part of its election campaign, the Bharatiya Janata Party had promised to bring back black money stashed away abroad.

But experts say that shorn of its popular appeal, the singular focus on foreign-held funds is misplaced. These funds represent only a part of the illegal economy of India. But how large or small are they relative to the rest of the economy?

The trouble estimating the size of the foreign-held funds
There are no available official estimates for the size of the illegal economy in India. In 2011, the government had asked three institutions – National Institute of Public Finance and Policy, National Council of Applied Economic Research and National Institute of Financial Management – to study unaccounted income and wealth in India. At least one of the three institutes has submitted its final report but the ministry has not made it public.

In the absence of an official estimate, the media in India usually falls back on this report published in 2010 by a Washington-based think-tank, Global Financial Integrity.

It estimated that between 1947 and 2008, Indians had transferred $213.2 billion of illicit money abroad. If returns at the rate of short-term United States treasury bills were added, the value of the cross-border illicit transfers rose to $462 billion.

"This is a huge loss of capital which, if it were retained, could have liquidated all of India’s external debt totalling $230.6 billion at the end of 2008 and provided another half for poverty alleviation and economic development," writes Dev Kar, the economist who authored the GFI report.

Extrapolating from a study done in 1982, Kar says, "The size of India’s underground economy should be at least 50% of GDP or about $640 billion based on a GDP of $1.28 trillion in 2008. This means roughly 72.2% of the illicit assets comprising the underground economy is held abroad while illicit assets held domestically account for only 27.8% of the underground economy."

This is misleading, says Arun Kumar of the Centre for Economic Studies and Planning at Jawaharlal Nehru University. In this article in the Economic and Political Weekly, Kumar points out that Kar has compared the stock at the end of a period (illicit assets transferred over six decades) to an annual flow (the annual gross domestic product for one year). "It would have been better to present the annual flow of savings going out of India as a ratio of the annual GDP," he writes.

Taking illicit transfers as a ratio of GDP, Kar estimated that black money sent abroad on an average amounted to about 1.5%-2.2% of India’s annual GDP.

His latest report, published in December 2013, based on a different methodology, however, revises upwards the estimates of illicit outflows from India. Based on the revised estimates, the black money sent abroad comes to more than 4% of India’s GDP.

Why Mauritius is more important than Switzerland
But black money sent abroad is not the same as black money held abroad. Funds are moved out of India not to be stashed away in Swiss banks but to be brought back as foreign investment, said an official with an investigative agency who did not wish to be named. This is called "round-tripping".

In the case of India, this mostly happens through sham corporations registered in Mauritius. While the money comes back as investments, the earnings on such investments are not taxed in India because India and Mauritius have a double tax-avoidance treaty.

The primacy of the small island to the subcontinent is apparent from this statistic: Between 2000-2012, 38% of the foreign direct investment in India came from Mauritius, while only 6% came from the US. Mauritius accounted for $8,059 million of $18,286 million of FDI in India in 2012-'13.

If the government were serious about tackling the black economy in India, it would achieve more by closing the loopholes in the Mauritius route than by investigating Swiss bank accounts, said a government official on the condition of anonymity.

Real Estate is the big storehouse of black money
Where do the foreign funds that come into India go? A major destination is the real estate and construction sector. Between 2005 and 2010, FDI in India's real estate and housing market jumped 80 times. In 2010, nearly $5,700 million of foreign funds were invested in the sector.

The legal real estate sector accounted for nearly 11% of India’s GDP in 2011. But economists studying the black economy say the illegal real estate sector could be nearly as large, if not larger.

It is common knowledge that the sector generates black money when buyers and sellers of land keep the value of their transaction hidden from authorities to evade stamp duty. But as this ‘White Paper’ prepared by the Central Board for Direct Taxes in 2012 states, investment in property is also “a common means of parking unaccounted money".

Economists believe the infusion of black money has contributed to the sharp and sustained rise in land prices, which is making housing unaffordable for an overwhelming majority of Indians.

Urban land prices have risen five fold in the decade 2001-'11, writes Sanjoy Chakravorty, professor at Temple University. A citizen with an average national income would need to work for 62-67 years to buy property at the highest end of the market in Hong Kong, London, Tokyo and Paris. In contrast, it would take her 580 years to buy property at the highest end in Mumbai and 100 years to buy a modest 800 square feet flat at the metropolis-wide average rate.

In villages too, the prices of farmland have been showing puzzling spikes, as this report in the Economic Times said. It found that even villages far away from cities, highways and industrial projects were seeing inexplicably high land prices.

A CBDT report prepared in 2012 said, “Land and real estate are possibly the most important class of assets used for investment of black money.” Of the undisclosed incomes that the IT department detected in 2011-'12, the largest chunk – amounting to 40% – came from the real estate sector, PTI reported.

A private consultancy firm, Liases Foras, estimated that 30% of transactions in the property market in the first six months of 2012 went unaccounted. Speaking on the condition of anonymity, government officials said they believe the ratio is much higher – which means a larger portion of India’s GDP could be parked undisclosed in real estate deals within India than in secret bank vaults abroad.

There is another reason why cleaning up the real estate sector in India could be more fruitful than trying to bring back black money from abroad: despite signing hundreds of bilateral treaties to compel tax havens to share information on secret bank accounts, even the powerful G20 countries have failed to do so.

The second part of this series will look at the international debate on tax evasion.

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“My body instantly craves chai and samosa”

German expats talk about adapting to India, and the surprising similarities between the two cultures.

The cultural similarities between Germany and India are well known, especially with regards to the language. Linguists believe that Sanskrit and German share the same Indo-Germanic heritage of languages. A quick comparison indeed holds up theory - ratha in Sanskrit (chariot) is rad in German, aksha (axle) in Sanskrit is achse in German and so on. Germans have long held a fascination for Indology and Sanskrit. While Max Müller is still admired for his translation of ancient Indian scriptures, other German intellectuals such as Goethe, Herder and Schlegel were deeply influenced by Kalidasa. His poetry is said to have informed Goethe’s plays, and inspired Schlegel to eventually introduce formal Indology in Germany. Beyond the arts and academia, Indian influences even found their way into German fast food! Indians would recognise the famous German curry powder as a modification of the Indian masala mix. It’s most popular application is the currywurst - fried sausage covered in curried ketchup.

It is no wonder then that German travellers in India find a quite a lot in common between the two cultures, even today. Some, especially those who’ve settled here, even confess to Indian culture growing on them with time. Isabelle, like most travellers, first came to India to explore the country’s rich heritage. She returned the following year as an exchange student, and a couple of years later found herself working for an Indian consultancy firm. When asked what prompted her to stay on, Isabelle said, “I love the market dynamics here, working here is so much fun. Anywhere else would seem boring compared to India.” Having cofounded a company, she eventually realised her entrepreneurial dream here and now resides in Goa with her husband.

Isabelle says there are several aspects of life in India that remind her of home. “How we interact with our everyday life is similar in both Germany and India. Separate house slippers to wear at home, the celebration of food and festivals, the importance of friendship…” She feels Germany and India share the same spirit especially in terms of festivities. “We love food and we love celebrating food. There is an entire countdown to Christmas. Every day there is some dinner or get-together,” much like how Indians excitedly countdown to Navratri or Diwali. Franziska, who was born in India to German parents, adds that both the countries exhibit the same kind of passion for their favourite sport. “In India, they support cricket like anything while in Germany it would be football.”

Having lived in India for almost a decade, Isabelle has also noticed some broad similarities in the way children are brought up in the two countries. “We have a saying in South Germany ‘Schaffe Schaffe Hausle baue’ that loosely translates to ‘work, work, work and build a house’. I found that parents here have a similar outlook…to teach their children to work hard. They feel that they’ve fulfilled their duty only once the children have moved out or gotten married. Also, my mother never let me leave the house without a big breakfast. It’s the same here.” The importance given to the care of the family is one similarity that came up again and again in conversations with all German expats.

While most people wouldn’t draw parallels between German and Indian discipline (or lack thereof), Germans married to Indians have found a way to bridge the gap. Take for example, Ilka, who thinks that the famed differences of discipline between the two cultures actually works to her marital advantage. She sees the difference as Germans being highly planning-oriented; while Indians are more flexible in their approach. Ilka and her husband balance each other out in several ways. She says, like most Germans, she too tends to get stressed when her plans don’t work out, but her husband calms her down.

Consequently, Ilka feels India is “so full of life. The social life here is more happening; people smile at you, bond over food and are much more relaxed.” Isabelle, too, can attest to Indians’ friendliness. When asked about an Indian characteristic that makes her feel most at home, she quickly answers “humour.” “Whether it’s a taxi driver or someone I’m meeting professionally, I’ve learnt that it’s easy to lighten the mood here by just cracking a few jokes. Indians love to laugh,” she adds.

Indeed, these Germans-who-never-left as just diehard Indophiles are more Indian than you’d guess at first, having even developed some classic Indian skills with time. Ilka assures us that her husband can’t bargain as well as she does, and that she can even drape a saree on her own.

Isabelle, meanwhile, feels some amount of Indianness has seeped into her because “whenever its raining, my body instantly craves chai and samosa”.

Like the long-settled German expats in India, the German airline, Lufthansa, too has incorporated some quintessential aspects of Indian culture in its service. Recognising the centuries-old cultural affinity between the two countries, Lufthansa now provides a rich experience of Indian hospitality to all flyers on board its flights to and from India. You can expect a greeting of Namaste by an all-Indian crew, Indian food, and popular Indian in-flight entertainment options. And as the video shows, India’s culture and hospitality have been internalized by Lufthansa to the extent that they are More Indian Than You Think. To experience Lufthansa’s hospitality on your next trip abroad, click here.


This article was produced by the Scroll marketing team on behalf of Lufthansa as part of their More Indian Than You Think initiative and not by the Scroll editorial team.