Parking Funds Abroad

 - Dasu Krishnamoorty

Indian economy has entered a tunnel and is likely to stay there for a long while, the economic verbiage gushing out of the North Block notwithstanding. Both tax and revenue collections are below their target and the Reserve Bank seems to rely on the monsoon to get the economy out of the tunnel. Both the Bank and the economists are in the habit of reckoning without the impact of extra-economic forces on the health of the country’s economy. For example, the unofficial flight of capital out of the country. A report in one of the leading Indian newspapers says "According to highly placed sources in the Central Bureau of Investigation, global investigation agency Interpol has found a whopping $80 million stashed away in Mumbai Bull Ketan Parikh's Swiss bank account.”

This siphoning off of illegal gains is an old but unquantified phenomenon in the country and is one of the reasons for the growing fiscal deficit. Unscrupulous Indian businessmen and industrialists abroad use such transfers of money as a tax shield by parking funds abroad and gradually bringing the funds back into the country for converting black into white money. The most popular route for capital flight is through over-invoicing of imports and under-invoicing of exports by opening sister concerns abroad or raising fictitious bills, according to an expert at the Indian Institute of Foreign Trade. He says the capital flight of massive amounts has contributed towards fiscal deficit, revenue deficit and budgetary deficit of the federal government mainly due to tax evasion and avoidance using abnormal trade pricing as a technique. The evasion covered corporate tax, excise, import and export duties.

An IMF study indicated a quantum jump in capital flight (clandestine deposits made in foreign banks) from India in 1986 and put it at Rs 1,332 crores in Swiss banks alone. There are hardly any restrictions on opening a bank account in Switzerland. No introduction is needed. Swiss banks have now begun to operate from tax haven countries like Channel Islands and Bahamas. To facilitate transfer of funds, these banks even use private satellite systems on hired time. The modus operandi for generating funds for depositing in the code and numbered accounts in these banks is mainly through import-export deals both on private and government accounts and payment of collaboration fees. In respect of import-export deals, enormous amounts of money are generated through falsely documented deals, with the main object of diverting these amounts to secret accounts in foreign banks. Added to this is the fact that Swiss authorities do not co-operate if the funds are generated through tax evasion because it is not an offence under Swiss law.

According to an expert monitoring international monetary flows, who wants to remain unidentified, the more than one billion dollars of secret Indian deposits in Swiss banks is just tip of the iceberg. He believes that Indians in banks in Hong Kong, New Jersey, Manhattan, Philadelphia and Bermuda deposit at least 15 to 20 times more money in secret accounts. Though it is well known that secret numbered accounts in the name of Indian businessmen exist, it is the first time that the IMF has quantified these accounts. According to the IMF document, Indians held nearly Rs. 1,000 crores in Swiss Banks in 1984 as against Rs. 378 crores in 1979.

A news item with Washington dateline, quoting an IMF report, says that $ 20-30 billion may have leaked out of India during 1971-86 and that evidence suggests that capital took flight even during the nineties. Three US economists from the Florida International University estimated that capital flight from India to the US ranged between $ 370 million to $ 4.4 billion in 1983. According to updated estimates, outflows to the US went upto $ 6 billion in both 1994 and 1996. N. Chandramohan, writing in the Financial Express, says, "It is believed that 5% or so of India's export earnings are not repatriated back home. Thus if exports were $ 44 billion in 2000-2001, $ 2.2 billion is the rule of thumb calculation of capital flight through export under-invoicing. Then one has to add outflows on account of inflated import invoices, if any. All of which suggests that flight of capital is apparently higher than $1 to 2 billion."

IMF statistics show that India's exports to industrial countries totalled $ 12,007 million while industrial countries imported $ 26,371 million worth of goods from India in 1993.The vast difference between India's figures and figures of industrialised countries of $ 3,364 million is due to export under-invoicing. On the imports front too, the story is the same. They have been under-invoiced from the 1970s to the 1990s. Invoicing fraud is not the only vehicle for flight of capital. There are several other ways, which are adopted, for instance, in defence deals. One example will show how money can be transferred with the help of friendly foreign countries. A is a liaison firm which manipulates trade deals for country B. A does not receive money in rupees in India. On the other hand, he exports 'Parmal' rice to B and B accepts it as 'Basmati' rice and deposits the differential in its own banks in the name of A.

The US-based economists we referred to earlier assert that there could have been a flight of capital of as much as $ 4.4 billion from India to the USA alone in 1993 purely on the basis of over-invoiced imports and under-invoiced exports. This possible shift of $ 4.4 billion from India to the USA took place through a total trade of only $ 7.3 billion that year. They simply compared the average price of products exported from India to the USA with the average price of the same product imported by the USA from other countries. Similar comparison was made for USA exports to India and USA exports to other countries.

For instance, in the case of cathode ray display units, the USA/world average import price was only $ 611 per unit in 1993 whereas the USA/India average import price was $ 2,444 per unit. Similarly, tetracycline was sold to India at an average price of $ 1.102 per gram while the average USA/world import price was $ 11.74 per gram. Again in the case of shovel attachments, the US/world average price was $ 1,736.21 per unit whereas the USA/India average import price was $ 32,917.10 per unit. One last example. Lead acid storage batteries were imported from India by the US at an average price of $ 0.65 per unit whereas the world/USA average export price was $ 37.87 per unit.

When V.P. Singh was the Finance Minister, he told the Lok Sabha that some of the topmost people in industry were siphoning out foreign exchange in what was the most serious economic crime against the country. These took the form of various malpractices such as invoice manipulations, retention of commissions earned abroad and the smuggling of Indian currency through the havala route. According to an expert, havala transactions do not allow a currency to attain the status it deserves and accordingly is an indicator of ill-health of the economy. Ethnic newspapers in countries where Indians are in sizeable numbers, specially in the USA, advertise facilities catering to not only to those who want rupees for dollars at the black rate but also to Indians who want to turn black money into white through the government’s foreign exchange remittance scheme.

Today, the atmosphere is so liberal or even permissive that Indians can receive remittances from abroad with no questions asked. The havala operators arrange to send dollar remittances to India in exchange for black money paid in India to an Indian partner. Sometime ago, there was this National Housing Bank Deposit scheme for turning black money into white. Under NHB, you lose 40% of your money in tax, for the privilege of converting it into white. The foreign money acquired this way provides incentives for reverse trade – rupees into dollars -- servicing the needs of a variety of Indians. They range from smugglers and importers wanting to under-invoice their purchases to tourists who purchase dollars in black to supplement the legally permitted amount of dollars. If the mandarins in the North Block bypass this flight of capital, their economic calculations are bound to go awry.

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