Saturday, May 26, 2012

White Paper on Black Money: Much Ado About Nothing

White Paper on Black Money: Much Ado About Nothing.
Arun Kumar
CESP, SSS, JNU.
The Hindu, May 26, 2012.

A White Paper on a subject is issued by the government presumably to give a definitive view on it and inform the public of an important issue. The paper on Black Money does nothing of the sort. The opposition had also been demanding such a paper given the large number of scams that have been in the news. But the paper hardly deals with any of them.
The Finance Minister in his Preface admits that he is presenting `… this document now in response to an assurance given to the Parliament.’ The implication is that he is not giving anything definitive. He also says that he would have been happier if he `… could have included the conclusions of reports of three premier institutions that have been tasked to quantify the magnitude of black money.’ It is surprising that these three institutions are only looking at the magnitude rather than the gamut of issues that the black economy throws up. Thus, even after these reports are presented we may not have a better understanding. After all, knowing the quantum of black money in the country is not the same thing as analysing how to deal with the problem.
The White Paper consists of five chapters and several appendices spread over about 100 pages. The chapters are on Estimation, Institutions to deal with the problem, Framework for tackling the problem and the Way forward. This seems like a lot. The Report lifts many arguments from this author’s book on the subject and from these columns in the last year and a quarter. But it flatters to deceive.
The title itself is incorrect. What is estimated is the annual generation of black incomes in an economy and not how much black money there is in the economy. The various estimates mentioned are of black income and not black money. The definition of `black money’ given itself is erroneous with money confused for assets. Even an elementary economics or commerce text book suggests that money is only one part of the portfolio of assets that an economic agent may own. Hence referring to the whole by a part is not appropriate. The definitional confusion is made worse when it is stated that `the term black money would also include income that is concealed from public authorities’. It is like saying that what we will call a `herd of cows’ would also include `hippos’.
Be that as it may, the report does not give an estimate but simply quotes estimates from reports that were written more than 25 years back; ignoring later literature that has also brought about greater clarity in the matter. The first chapter ends with the title, `Need for more research’. Why state the obvious? The earlier reports that this Paper relies upon had pointed to how big the problem already was, so why has the government not studied it since then?
It quotes the GFI report of 2010 on how much illicit flows have taken place from India since independence. The GFI report itself mentions that their figure is a gross under estimate. It is convenient to quote from the GFI report because it gives a low figure but why has the government in the last year and a half not made the effort to remove deficiencies in the GFI methodology and used the data it has in its archives to arrive at a better estimate. The intelligence agencies and the various organizations collect a lot of data that could have been used.
The Paper does service to the public by listing the many agencies involved in dealing with the problem. So far so good, but why have these large number of agencies failed in the task they should have been performing, namely, checking the growth of the black economy? What are the problems they have faced? Why prosecution fails most of the time whether relating to the income tax department or police or the CBI? Why therefore there is contempt for law amongst the powerful and increasing number of people resort to illegality resulting in the growth of the black economy?
A large number of laws to check the black economy are mentioned but there is no analysis of why they have been ineffective in controlling the problem. A law on paper differs substantially from its practice. Much space is devoted in the Paper to the international treaties and efforts at the global level. This is convenient since the black wealth held outside is small compared to what is held in the country. Further, it is far more difficult to get at the black wealth held abroad compared to tackling it what is held in the country. Thus, it becomes convenient to discuss the former rather than the latter.
Most of the wealth held abroad illegally will not be in the names of the actual beneficiaries but in the names of shell companies and so on. Thus, most of it cannot be tracked to an Indian entity. The data on deposits in Swiss Banks given in the Paper indicates that Indians have between 0.13 and 0.29% of the deposits. This should be no surprise since the illicit funds would not be held in the names of the beneficiaries but others. There is no analysis of this problem or of how money is transferred out of the country. We could have been enlightened if information with the intelligence agencies about tax havens and the modus operandi of taking funds out of the country or of generating incomes outside India were revealed.
The interface between the judiciary and the investigative agencies is an important aspect of non-implementation of the laws of the land and the contempt they have come to be held in by the public. That is the cause of the judicial delays with 4 crore cases pending. Even routine matters that should be decided on in a few months drag on for years. This encourages illegality and the prevalence of the black economy. The functioning of the judiciary needed to be dissected.
The paper lists real estate, bullion and jewellery as some of the important activities where black money is generated. This again reflects a definitional confusion. These constitute transfers of black savings from one individual to another. So, these activities circulate black incomes but do not generate them like other activities do that are counted in GDP.
In the chapter `Way Forward’, strategies are listed but again no new ground is broken. As has been pointed out earlier in these columns, DTAA and TIEA are about declared incomes abroad and not black savings held abroad. Similarly, voluntary disclosure schemes have been discredited in the past. The CAG has said that it makes people into habitual tax offenders. It turns honest people into dishonest ones. Further, the Mauritius route was created deliberately by policy makers as an amnesty scheme and as the Paper notes, it is successfully used for round tripping. The government knew it and opposed the challenge to the Mauritius route in the Supreme Court. The White Paper fails to make an analysis of this issue.
The paper skirts the most important question, namely, why laws do not get implemented? It avoids mentioning the nexus between the politicians, the officialdom and the businessmen which drives the black economy? How the criminals have entered the nexus so that today many politicians and businessmen have a criminal background and have contempt for law. Why have the large number of steps taken in the past to control the black economy have not worked?
The answer to the many acts of omission and commission in the Paper lies in the fact that the existence and the control of the black economy are political questions. Dealing with the black economy is not a narrowly technical question that can be tackled by a few more laws or a few steps here and there or strengthening of a few provisions of law or through computerization. Whether it is the ruling party or the opposition, national or regional parties, all of them have been mired in the black economy. The question is one of political will. Should the Paper not have called a spade a spade rather than avoiding the difficult question all together?
But then a White Paper is a political document and not a technical one. It helps the government white wash its image. It must divert the attention of the public from the difficult questions. After all it cannot be an instrument of generating the political will to action - a task that only movements and the political process can accomplish.

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