Black Economy in India, its Global Dimensions and Impact on Policies: Some Critical Issues
Friday 8 August 2014
MAINSTREAM, VOL LII, NO 33, August 9, 2014
by Arun Kumar, Saumen Chattopadhyay, A. Sunil Dharan and Pawan Kumar
On assuming office, the NDA Government has set up a Special Investigation Team (SIT) as per the directive of the Supreme Court to tackle the menace of illegalities and to look into the possibility of bringing back funds stashed abroad. With the issue of corruption dominating the political discourse lately, a three-day seminar on the “Black Economy in India, its Global Dimensions and Impact on Policies” was organised at the JNU by the Centre for Economic Studies and Planning (CESP) during December 9-11, 2013. We present below glimpses of the rich discussions at the seminar.
The subject has been in public discourse since time immemorial and continues to draw attention of both academic and non-academic experts, said Prof. S.K. Sopory, Vice Chancellor, Jawaharlal Nehru University.
Arun Kumar of the JNU highlighted the growing importance of corruption as an important political and economic issue. He stated that definitional clarity is essential for anaytical work and this has to be based on the institutional practices in the economy. He pointed out that corruption is a sub-set of the black economy and the concepts of black money and black economy refer to stocks and flows, and so are different things. Further, while the size of the black economy has grown from four to five per cent of the GDP in 1955-56 to over 50 per cent at present, it has hardly been incorporated in analytical studies on the Indian economy. This leads to a flawed understanding of the working of the Indian economy and hence to the design of inappropriate policies.
I. Impact on the Institutions
I.1 Black Economy, Democracy and Financing of Elections
The most debilitating impact of illegalities is the failure of the institutions of democracy in India leading to the weakening of democracy. Jagdeep Chhokkar, Retired Professor, IIM, argued that election financing becomes important because the politicians are supposedly accountable to the people as they are elected by the people; but are not. He argued that those who become MLAs and MPs are mostly rich and the value of their assets goes up significantly in the range of 200 per cent to 1000 per cent once they are elected. Further, as per the documents made public by the five major political parties, 75 per cent of their funding comes from ‘unknown sources’ and this is true of others also. People vote only for those who get tickets from their respective parties. There is a strong nexus between the political parties and corporate sector which fuels the black economy, as was argued by E. Sridharan, formerly of the University of Pennsylvania, Institute for the Advanced Study of India. The root cause of all these, in his view, is the lack of internal democracy in the political parties.
K. Subramanian, retired IG, Police, while highlighting the menace of white-collar crime, urged for reform in the Indian Penal Code (IPC) as there is little emphasis in the IPC on detection of crime. Such crime includes tax evasion, money laundering, narcotic drug trafficking, and financial fraud. He pointed out that the thrust of the IPC is on maintenance of security of state, maintenance of public order and collection of intelligence and not white-collar crime. The fear of law is not a deterrent to the crooked due to the pendency of cases which is nearly 40 million at present.
Subramanian contended that the government has never really wanted the CVC to become a strong and efficient institution. The CBI, the central agency for investigation, does not have a clear legal status as the recent court cases point out since possibly the government wants the CBI to remain a caged parrot.
I.2 Tax Evasion and Tax Administration
Tax administration is crucial in dealing with the problem of tax evasion and black income generation. It was argued by the tax experts that the Income Tax Department has been trying to collect and utilise information of high value transactions to check tax evasion. However, the major problem is that the Department is under-staffed. Also, the PAN database is inadequate to deal with the problem of non-filers and tax evasion. It was pointed out that only 0.5 per cent of the taxpayers are assessed. Also, though information is available about tax violation within the country and outside, it is difficult to convert the same into evidence.
Biswajit Bhattacharya, the former Additional Solicitor General, argued that the Income Tax Department is the biggest source of corruption in India. Closed-door meetings are held between the Income Tax officers and the assessees to whom tax notices have been sent in which deals are struck, depriving the exchequer of tax revenue.
Highlighting the failure of some of the tax policy initiatives, Prafulla Prusty, Commissioner, Income Tax, said that the Double Tax Avoidance Agreements (DTAAs) help FIIs to avoid paying any tax since they are often domiciled in a tax haven with which India has a DTAA. Sukumar Mukhopadhyay, a retired Member of the CBEC, pointed out that value added tax (VAT) is highly amenable to evasion, contrary to what is claimed. Input tax credit can be claimed by using false vouchers. There have been cases of clandestine removal of goods from the factory and sale in the market without showing that in the books.
II. Illegalities across Sectors
II.1 Land and other Natural resources
Land transactions contribute to corruption in a variety of ways, argued Ram Singh, Univer-sity of Delhi. Discretionary land use regulations, such as the provision of CLU (Change in Land Use) or benami transactions have emerged as a major cause of black income generation in the real estate sector. Ownership of agricultural land helps people to convert their black income to white income due to tax exemptions in agriculture and allied activities and non-applicability of the capital gains tax. Bribes can be as high as 30 per cent of the total project cost in many cases. In most property transactions property, prices are under-reported to evade stamp duty. Circle rates hardly help since they are usually much lower than the market prices.
Reiterating the misuse of CLU, Ashok Khemka, the IAS officer who exposed many irregularities in land deals in Haryana, argued that allocations are made following opaque procedures keeping in view the political interests. He presented intsances of abuse of CLU by rentier capitalists.
Paranjoy Guha Thakurta, journalist, pointed to the rampant corruption in the allocation of natural resources in India in the past decade and how this has led to socio-economic and political problems. Liberalisation has resulted in the entry of private players in coal, offshore gas and 2G. Instead of promoting efficiency in resource use, there has been plundering of national wealth. Absence of any regulator has been fully exploited resulting in the loot of natural resources and loss to the exchequer. Illegal mining in Goa had an adverse impact on the environment, argued Pranab Mukhopadhyay, University of Goa. Goa’s highest per capita income in the country gets reduced when adjusted for the reduction in the stock of natural resources because of illegal mining.
Pullat Suri, ex-Merchant Navy, spoke on the rampant corruption in the shipping industry in the country. The industry, which has one of the most open market structures (in terms of trade), faces high degree of revenue fluctuations that is exploited by the corrupt.
II.2 Social Sectors
The crucial social sectors, education and health, are affected by a variety of malpractices which impact the quality of human capital formation. Ashok Mittal, Aligarh Muslim University, highlighted the health hazards due to illegalities like food adulteration. The lower strata of the society suffers more because of the greater food aduteration in items of food consumed by them. Though the Prevention of Food Adulteration Act 1954 exists, studies have found gross violation of the Act.
Ashok of JNU pointed to a variety of malpractices in higher education, for instance, fake degrees, misuse of quotas to violate merit norms, ghost teachers on the rolls, teacher absenteeism and so on. Even though profit- making is not allowed in educational institutions, the private sector uses corruption to do so.
Illegalities of various hues have led to the wastage of resources in society as pointed out by Shyam Sunder, Lecturer, BITS, Hyderabad. As a result, potential growth of the GDP in various sectors (like in health and education) suffers and leads to a low level equilibrium trap with high rates of unemployment and inflation.
III. Macro Dimension
Dr Pronab Sen, Chairperson, Statistical Commission, felt that the black economy is mostly captured in the NAS since the methods of measurement are robust. But, Arun Kumar noted that by its very nature black income generation is based on suppression of output and inflation of costs and that makes the data base unreliable. This is especially true for the services sector.
Arun Kumar emphasised that black economy affects all the major macro-economic variables and causes policy failure (both at micro and macro level). In the financial sector, it affects money supply, velocity of circulation and so on. In effect, the circular flow of income changes and it reduces the effectiveness of monetary policy. C.H. Venkatachalam, General Secretary, AIBEA, suggested that the growing non-performing assets (NPA) of banks are a result of crony capitalism. Over the years, bad loans in the public sector banks have grown from Rs 39,000 crores in 2008 to Rs 1,64,000 crores in 2013 and the situation is not much better in the private sector banks.
Sarat Malik, SEBI, explained the SEBI’s attempts at controlling the black incomes generated in the stock markets via controlling malpractices, like P-Notes, through anti-Money Laundering Standard.
IV. Black Economy and its Global Dimensions
With globalisation, the nature and size of the black economy have been undergoing changes. Mobility of capital, porous international borders, incoherence and loopholes in the international regulations, particularly in the field of taxation, have impacted the mechanisms of black income generation.
Nazia Jamal, University of Lucknow, analysed the relationship between illicit capital flows and black economy and how they pose a major policy challenge to macro-economic stability. Kamal Nayan Kabra, retired Professor, IIPA, argued that businesses and high net worth individuals (HNWI) move money in and out of country via money laundering, flight of capital etc. He suggested that the scale of such operations has gone up as the policies of the government became more liberal.
Ms Mythily Bhusnurmath, Economic Times, spoke on the Base Erosion and Profit Shifting (BEPS). An MNC with operations in several countries does not have to pay tax in any country under the present tax laws because they pre-date the digital age. MNCs centralise their intangible assets—brands, trademarks etc. in low-tax countries. Corporates hold governments hostage by making them compete against each other. Due to BEPS, governments lose revenue and smaller companies suffer because they are unable to resort to this practice. Eurozone is estimated to lose one trillion euros due to these practices. The mechanism adopted by these companies to dodge taxes are hybrid pricing (dual residence), Special Purpose Vehicles and transfer pricing.
Saumen Chattopadhyayof the JNU, in a paper co-authored with Arun Kumar, presented an alternative and holistic scenario of balance of payments. The true balance of payment comprises the official part and the unrecorded part. An analytical definition of capital flight was presented so that it could be measured. The errors in the often used World Bank method of estimating capital flight due to the illegal channels, like hawala, were mentioned.
Prof Sunanda Sen, retired Professor, JNU, discussed the channels of evasion in market economies and how the neoliberal system has encouraged it. She defined evasion as bypassing of state regulations. She argued that efficiency via competition in open markets has also instilled uncertainty leading to global speculation in stocks, currency etc.. She pointed to ten channels of evasion with differing impact. She explained why the stock market cannot be relied upon to deal with these malpractices because of its inherent instability.
V. Remedies and Policy Reforms
Much of the discussions in the various sessions culminated in policy suggestions to tackle illegalities. Vivekananda Mukherjee, Jadavpur University, argued referring to the conventional view that there may be an inverse relation between controls (or regulations) and rent-seeking. In India, economic liberalisation was, therefore, expected to bring down rent-seeking but the result has been the opposite. This is also true of China. Using a theoretical model of trade, he argued that this is because politicians still have control over policy variables, like, tariffs rates on imports. So, the local firms bribe the politicians to maintain high tariffs while the foreign firms bribe them to lower the tariffs.
Kavita Rao, NIPFP, felt that incentives need to be designed to curb malpractices by the business community to curb evasion. Prof Mahesh C. Purohit, Director, Foundation of Public Economics and Policy Research, laid stress on ‘interaction and coordination of tax departments’. Computerisation (or use of technology) has largely failed to curb the growing black economy.
Aseem Chawla, tax consultant and lawyer, argued that the GAAR empowers Indian Revenue authorities to declare any arrangement as an impermissible avoidance arrangement, whose main purpose or one of the main purposes is to obtain tax benefit. The GAAR applies to “tax arrangements” which are “abusive”. He highlighted how the GAAR would help tackle tax evasion in the context of double taxation agreements and tax information exchange agreements. But he cautioned that the GAAR, in its present form, is not properly drafted, and it would open floodgates of litigation if implemented in this manner. He concluded that the GAAR will facilitate the game-plan of powerful external economic and financial entities from across the globe.
Biswajit Bhattacharya argued that even though a large amount of Indian money is stashed in tax havens, it would be nearly impossible to bring that back under the present set of rules. According to him, India had stringent exchange control regulations during 1947-2000 and the money illegally held abroad could have been brought back then. But after 2000 the changes made in the laws have introduced enough loopholes which virtually make it impossible to bring the money back.
Though it came out very sharply that to design remedies, there is a need to understand the factors responsible for the pervasive illegalities in various spheres of the economy. Arun Kumar argued that the black economy is ‘systematic and systemic’ and which is only possible because of the operation of the ‘Triad‘ consisting of corrupt politicians, businessmen and the executive. The corrupt executive consists of corrupt bureaucrats, the police and judiciary. Laws have been framed but hardly implemented due to the functioning of the triad. While regulation is conventionally blamed for
fostering malpractices, absence of regulation is no guarantee of reduced black income generation.
In conclusion, the seminar brought together a diverse set of people who learnt a lot from each other and promised to incorporate the black economy more centrally in their analysis—the real purpose of the exercise.
Arun Kumar is the Sukhamoy Chakravarty Chair Professor, School of Social Sciences, Jawaharlal Nehru University, New Delhi and Saumen Chattopadhyay also belongs to the School of Social Sciences, Jawaharlal Nehru University, New Delhi. while A. Sunil Dharan teaches at Ramlal Anand College, University of Delhi and Pawan Kumar at Ramjas College, University of Delhi.