Legality and Illegality in India: Black Economy, Illegal Activities and Money Laundering

Legality and Illegality in India: Black Economy, Illegal Activities and Money Laundering

Arun Kumar

CESP, SSS, JNU.

Published in German as: "Tatort Arbeitsplatz". Grenzenlos Illegal – Transnationale organisierte Kriminalität. Böll.Thema 

The black economy in India is estimated to be about 50% of GDP, in other words, it adds to the GDP about $600 billion annually. Linked to this is the annual flight of capital from the country with about 15% of the annual generation of black incomes going out of the economy, that is, approximately $90 billion. According to a recent report of Global Financial Integrity based in Washington, India has lost about $462 billion of capital since independence (1947) with most of the sum going out in the period after 1991 when the New Econo0mic Policies were launched. According to the report and others this is an under estimate of the Indian capital illegally taken out of the country. In brief, a poor country has been exporting capital on a large scale leading to an accentuation of the shortage of foreign exchange and of capital in the country, thereby setting back development in the nation.

The black economy is generated in both illegal (mafia, drug trafficking, crime and so on) and legal activities. All incomes generated in illegal activities are by definition black whether they are high profits that should pay taxes or wages that are below the taxable limit. In the case of legal activities, incomes that ought to have been declared and tax paid on them but are not declared are black incomes. However, in the legal activities in India many incomes are below the taxable level, like, of wage earners and those in the informal sectors and therefore no tax is required to be paid on them. In such cases, whether declared on not these incomes cannot be treated as black incomes. Thus, as shown in Kumar (1999), black incomes in India are factor incomes that should have been declared to direct tax authorities but are not.

In India, the black economy affects every economic activity (industry, finance, agriculture and so on) in the country and all the elite sections of population (politicians, businessmen, executive, teachers, doctors and so on) are involved in it. For the generation of black incomes, some illegality has to be committed, that is, rules have to be bent. For instance, businessmen do not show the full income from their sales in their balance sheets and pay less of the various taxes, like, VAT, income tax and corporation tax, applicable to their production. Doctors do not reveal their full income from their practice and take illegal cuts from the testing laboratories where they send patients for tests or may sell organs illegally and so on. Teachers may increase the marks of students or leak out question papers to help students for a consideration. Policemen rather than check illegality collect a weekly payment (called `hafta’) from those committing illegality so that crime proliferates. Politicians bend policies for the favoured ones so as to give an advantage to them over their rivals and charge a consideration (a bribe or a cut) for that.

In brief, during the normal task of carrying out their daily economic activity, elite sections indulge in illegality. In the scams exposed recently top judges, top military men, top politicians, top businessmen and so on have been caught misusing their powers to earn illegitimate incomes which amount to black incomes.

The dividing line between illegality and legality is indeed thin because illegality is committed in the normal legal activities of people. Those earning black incomes try to make out that they are carrying out their economic activity in the routine way by masking their illegality. So a doctor who is supposed to recommend diagnostic tests may prescribe unnecessary tests so as to get a larger kickback from the testing laboratories. However, the patient can not make out that the test is unnecessary and would not like to take the risk of not going for the test lest something go wrong. The Obstetrician may go for a C-section delivery even if the normal delivery is possible so as to make more money for herself and the clinic/hospital. The patient going through the labour pains is in no position to judge whether a normal delivery was feasible or not.

There is a large amount of black income generation in the financial sector because of the secrecy that operates in this sector. For instance, black incomes are converted to white incomes and vice versa via the book entry method in the stock markets. This is characterized as money laundering where dirty money is cleaned and put into legitimate activities. Similarly, bank accounts maybe opened and used for illegal funds transfer by circumventing the `know your customer’ (KYC) provisions of banking sector. The managers of banks connive in this because they are confident that they will not be caught given the secrecy. They have the discretionary powers to bend rules and they can do so for a consideration. Banks try to attract prized customers (big corporations and High Net Worth Individuals) from whom they can get large amount of businesses. For this they overlook the procedures and extend extra help which is often misused by businesses.

For the prized customers, the financial sector runs illegal services, like, helping them with transfer of funds to tax havens. In the recent financial collapse in 2008, failing banks were found to have hundreds of subsidiaries in tax havens. The only purpose of this could have been to help their clients to shift funds around via shell companies to escape taxation in their home countries or to launder their illegal funds. Thus, there is flight of capital from all countries, developed and developing, but perhaps the scale of such leakages is higher in the case of the developing countries and also they are net losers while the developed countries are net gainers so that the developing countries are characterized by flight of capital.

As the Financial Action Task Force Report of 1996 said, the volume of transactions in the financial system are huge so looking for the illegal transactions is looking for a needle in the haystack. In spite of the best efforts of the software experts, it has been impossible to trace the illegal transfers (a few trillion dollars) out of the hundreds of trillions of dollars of annual global transactions. This is an important aspect of the losing battle that national governments have fought against flight of capital and havala transfers.

The governments of tax haven countries are in league with the people trying to park illegal funds in the financial institutions under their jurisdiction. This is because it is a highly profitable business. Further, national governments in developing countries often connive in these activities since the top people are in league with those committing these illegalities. Why is that so?

For the black economy to be 50% of GDP in India and to be affecting all economic activities and to be prevalent amongst all the elite sections of society, it has to be systematic and systemic with laws systematically violated. It can not be ad-hoc or anecdotal, taking place some of the time and not at other times. So, in Delhi, building bye-laws are violated on a large scale and encroachment of public land has occurred on a vast scale. In this there is the connivance of the builders, politicians, bureaucrats, policemen and so on. That is, all those in charge of the law of the land are a party to it and each one of them makes an extra income by allowing the illegality to occur.

In brief, there is an underlying triad which operates to allow systematic illegality to take place. It has been suggested that the criminal has become a part of the nexus in the last three decades. Either the politician or the businessman is a criminal. Thus, a large number of politicians and elected representatives have cases against them. This has led to the spread of criminalization in society and resistance to illegality has weakened amongst the people and also the official machinery. Regulatory agencies (say, intelligence agencies, police men, inspectors and so on) have weakened due to their involvement in illegality. They are used to put a cover on the illegalities of their masters, the top businessmen, politicians and bureaucrats and so they indulge in this in the routine way and also do some small illegalities for lesser people.

Those in power are the ones indulging in illegality under the garb of acting within the law. Hence they are not interested in solving the problem of growing black economy and illegality in society. They benefit from it and encourage it. They have private information about how the black economy functions but are not interested in tackling it since that would hurt their interest. They make a pretence of solving the problem by changing rules and making new laws but all of them are subverted to find new ways of making black incomes.

In India, at least 40 Committees and Commissions have looked into the different aspects of the black economy over the last sixty years and have made thousands of suggestions and hundreds of them have been implemented but the black economy continues to proliferate. Thus, it is not that the policy maker does not know what should be done to tackle the problem but the political will is lacking amongst the elite sections because of their self interest. In this sense, the problem is a political one and one of weak democracy where those who are in power are not accountable to the people of the country. That is why the Right to Information is an important tool to fight illegality and black economy – it undermines secrecy. In India it has been implemented in a diluted way after 2005 and has produced some results and in the long run it holds hope of achieving much by narrowing the gap between legality and illegality.

arunkumar1000@hotmail.com.