People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 19

May 17, 2009


Illicit outflows to Swiss and other foreign banks are only one part of the black money generated in the system. Much of it remains in the country. Such domestically retained illicit wealth can be more easily identified and taxed and the generation of new illicit wealth (that may or may not go abroad) more easily plugged

India’s Swiss Connection
C P Chandrasekhar

WITH the final phase of elections over and the complex process of government formation under way, it is inevitable that many issues that surfaced during the campaign would not receive much public attention. One such is the debate over the large volumes of money that have allegedly been taken out of the country and put away in banks in Switzerland and other locations where secrecy regarding those accounts is assured. Money of that kind is tainted; it is a drain of wealth from the country; and the sums involved are large. Not surprisingly, the issue of monies stashed away by India’s rich and powerful in numbered accounts in Swiss and similar banks is periodically raised, provokes controversy and then enters a period of hibernation. This periodic revival is understandable for a number of reasons. Most often the transfer of money to Swiss bank accounts involves a violation of tax, foreign exchange and/or other laws of the country, and therefore is illegal and morally repugnant. To boot, the sums involved are not small. Finally, these reflect surpluses that can be used to finance much needed development initiatives in the country, but are now being kept idle abroad to facilitate illegal accumulation. Their existence is symbolic of an elite that places self before nation. This is even truer in the case of alleged payoffs for award of defence contracts. The moral and nationalistic indignation this generates leads to the correct demands that the violations of law that permit the accumulation of such wealth abroad need to be investigated, the offenders must be prosecuted and the money brought back and directed towards pushing growth and improving welfare. Morality aside, equity demands that the rule of law should prevail for all.


Currently, three factors have combined to revive the controversy in India. First, early this year, in a major breakthrough, prosecutors from the Internal Revenue Service investigating violations of tax laws by American citizens, managed to force UBS – Switzerland’s largest bank – to reveal the names of 250 nationals who were suspected of evading payment of about $300 million in taxes by using offshore accounts. The bank also agreed to pay the US government a sum of $780 million to settle the issue.

These sums are indeed small. But this decision on the part of a banking system that thrives because of the country’s secrecy laws was a huge concession with major ramifications. Even in the case of the US, the 250 names involved were a small proportion of the 19,000 accounts that are allegedly held by Americans in Swiss banks. The sums held by these 250 would only be a small fraction of the $20 billion that the IRS suspects was illegally ferreted away between 2002 and 2007. Pressure on the Swiss banking industry to reveal more was bound to increase. That pressure is yielding results and threatens to have implications beyond a spat between the IRS and the Swiss banks. If secrecy laws were being relaxed to accommodate the US because it is an important economic player, it would become difficult for the system to resist pressures to reveal the names and details of account holders from other countries, including developing countries like India, which need the money to raise low per capita incomes and reduce poverty. On the other side, the pressure on governments to demand, obtain and act on similar information increases. Thus, the possibility that the sums involved could be tracked and investigated was bound to revive the issue in India.


The second factor leading to a revival of the debate was the release of estimates of how much money could be illicitly flowing to accounts abroad from developing countries in general and India in particular. Provided by Global Financial Integrity, a programme of think-tank Centre for International Policy, these estimates based on accepted methodologies suggest that illicit flows from developing countries amounted to between $858.6 billion and $1.06 trillion in 2006. India ranked fifth among developing countries with illicit outflows of around $22 billion to $27 billion a year during 2002-2006, following Russia ($32- $38 billion), Mexico ($41-$46 billion), Saudi Arabia ($54-$55 billion) and China ($233-$289 billion). At current exchange rates the figure at the lower end of the range amounts to more than Rs 1,10,000 crore a year. If a quarter of that could be recovered as tax it could go a long way to finance the National Rural Employment Guarantee Scheme each year. And if the whole amount is spent within the country it would amount to a demand stimulus of close to three and a half per cent of GDP, which could help reverse the current slowdown in growth. If there is so much money that could be kept back at home the issue is bound to be controversial, even if the figure is just an estimate.

Finally, all this occurred when India was in election mode. With an issue at hand which can provoke moral indignation and fuel nationalistic sentiment, it would be too much to expect the opposition to let it be –– never mind the fact that flows of this kind were occurring even when the principal opposition party, the BJP, was in power at the centre.

Whatever the combination of circumstances that have brought the issue to the fore once again, the case for exploiting the opportunity is strong. Domestically, tax and foreign exchange laws must be implemented more stringently. And internationally, the government must exert itself to obtain the information that could reduce, even if not put an end to, this menace. One route to take would be to use the opportunity afforded by the hole in the Swiss banking wall created by the recent limited success of US law makers to suck out information on Indian offenders as well. The other is to work towards a better global environment for obtaining information that can help reduce this form of accumulation of black money. With increasing concern the world over regarding the role of tax havens in promoting tax evasion and money laundering, there is an opportunity now.


All this having been said, however, a few words of caution are in order. First, the concern with illicit outflows should not divert attention from the larger issue of tax evasion and avoidance which plague developing countries like India. Illicit outflows to Swiss and other foreign banks are only one part of the black money generated in the system. Much of it remains in the country. Such domestically retained illicit wealth can be more easily identified and taxed and the generation of new illicit wealth (that may or may not go abroad) more easily plugged. And estimates on the size of the black economy, the volume of tax evasion, and the amount of disputed and unresolved claims on Indians by the tax department are all as mind-boggling as the figures on illicit outflows of wealth. Moreover, the issue is not just of tax evasion but of tax avoidance facilitated by the loopholes present in and concessions afforded by the tax laws. Examining the revenues foregone because of tax concessions is a first simple lesson on what can be done to find the money to do a lot that remains undone for “want of resources”.

Second, concern with illicit outflows should not divert attention from the licit flows that are on the rise because of financial liberalisation. Till the early 1990s Swiss accounts allegedly held by Indians were seen not just as the result of ill-gotten wealth. They, it was argued, were the result of regulation of foreign exchange use that placed limits on accessing foreign exchange. What the more recent estimates show is that even after the substantial liberalisation of rules relating to accessing and using foreign exchange, monies are being transferred and held abroad. Through a variety of illicit and licit means, funds are being transferred abroad to acquire assets and hold balances.
The point to note is that this transfer of foreign exchange abroad is not linked to the earning of such foreign exchange. Nor is it accompanied by an increase in the ability of India to earn a positive surplus of foreign exchange through trade in goods and services and incomes generated from investment abroad. India records a deficit in its current account, so that the any excess foreign exchange it possesses has not been “earned” but has been “borrowed”. It is a part of that borrowed foreign exchange that is being transferred abroad with no likelihood of return. It could happen that there could be occasions where demands to fulfil commitments on past debt substantially exceed current earnings and inflows, leading to instability and crises of a kind that are now common in the developing world. At that point of time, the burden of adjustment falls on all, not just on those who have ferreted away foreign currency in the past. This too is unacceptable.

Preventing such an outcome requires restricting unnecessary and restrictive inflows and unwarranted outflows in countries where a historically determined subordinate position in global trade and investment flows makes foreign exchange a valuable resource. This should not be forgotten either by parties or individual politicians when they vent their moral outrage at illicit outflows. Unfortunately that is what many of them tend to do.