Missing FM’s wise men PDF Print E-mail
Friday, 07 January 2011 00:00
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India has R400 lakh crore of black money, most of it overseas, and the government is doing precious little about it. That’s more than five times India’s current GDP of R78.8 lakh crore. Put it that way, it’s enough to make your blood boil, and that’s precisely what yoga guru Ramdev who has put out these numbers is trying to do. That there is something seriously wrong with the number is obvious when you see the quantum jump in the black money numbers. In 1985, NIPFP estimated that around 21% of the country’s GDP was black; by 1991, Arun Kumar at the Jawaharlal Nehru University reckoned this was around 35%; by 2006, Global Financial Integrity (GFI), the organisation that BJP leader LK Advani swears by, estimated India’s black economy at 50% of GDP; in 2011, yoga-guru Ramdev’s estimate is black money has grown to five times the size of the economy—that’s an annual growth of 240% if you plug in the actual numbers put in by GFI ($640 bn) in 2008 and Ramdev in 2011!


What’s surprising is that while top members of the FM’s team, including the CBDT chief, briefed Ramdev on black money, not one of them is out there telling the public just how ridiculous the numbers are. The physical amount of black money rising is one thing, but it takes a huge leap of faith to believe the proportion of the economy that is black is rising, and so fast, at a time when tax rates have fallen to near international levels; when the government has so many more sources of information to tackle tax fraud. The point here is a simple one: the GFI will have us believe the black economy was 27.4% of GDP in the pre-reforms period and this rose to 42.4% in the post-reforms period; Ramdev thinks it’s still higher. In which case, why even bother to lower tax rates from an average of 47% for imports in 1991 to 7-8% today, from 45% as the top rate for corporate tax to 32.45% today—surely the chief economic advisor must have a view on this?

Of course it’s true that, at around 17%, India’s tax-to-GDP ratio is lower than the OECD average of 35%—aha! that’s where the Ramdev numbers are coming from. But while looking at this number, keep in mind that over half the GDP (agriculture, SSI, government, the list goes on) is not even taxed—this is not tax evasion, it is mandated by law. Were Ramdev a student of economics, he’d have asked for exemptions to be removed (7.2% of GDP according to the budget) and for the tax net to be widened. Much has also been written about the Mauritius treaty and how it is routinely abused, but two issues must be kept in mind. One, if the idea is to bring back black money, and assuming all money from Mauritius is black, the treaty is helping since 40% of FDI in India comes from Mauritius. Two, given India no longer has long-term capital gains tax, the treaty only helps investors avoid short-term taxes—plugging this is a good idea, but too much is being made of it. Someone in the finance ministry needs to be out there explaining all this.

Last Updated ( Friday, 25 November 2011 07:44 )

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