Singapore and Mauritius FDI, govt says, isn't kosher
With the rupee crossing 55 to the dollar, the current account deficit at record highs and both FDI and FII inflows looking iffy, the government is unlikely to do anything to disturb the status quo, but it’s interesting that its white paper on black money says both Singapore and Mauritius which account for half the FDI into India are likely conduits of black money. “Mauritius and Singapore with their small economies”, the white paper says, “cannot be the sources of such huge investments … investments are routed … for avoidance of taxes and/or for concealing the identities from the revenue authorities.” A similar sentiment is expressed in connection with Participatory Note investment through FIIs: “the ultimate beneficiaries … can be Indians and the source of their investment may be black money generated by them.”
The interesting part of the report which does not actually give the latest government estimates of black money—these will have to wait for the study of three research organisations by the end of the year—is that it debunks many estimates of black money. To begin with, it points out there is no such organisation as the Swiss Banking Association whose ‘report’ many cite and instead quotes a report by the Swiss National Bank which says the total deposits by Indians in Swiss banks stand at R9,295 crore and account for just 0.13% of all Swiss deposits. As for the Global Financial Integrity (GFI) report which says India’s black economy equals half the total economy, the white paper says “it accepted … the back-of-the-envelope method method … was flawed.” Indeed, the wide discrepancy between GFI and IMF/World Bank estimates suggest the same thing. While it’s a good idea to wait for the new research studies on black money, it does seem difficult to get anywhere near the huge numbers based on the GFI report being cited by people ranging from LK Advani to Baba Ramdev today. Even if you go by the estimates of the black money component in real estate, this doesn’t give you a figure of more than 5% of GDP; if you assume all gold consumption is black money, that doesn’t give you more than 2% of GDP as black; if all FDI equity inflows through Mauritius (42%) and Singapore (9%) are considered to be black, that’s still a very small number at an average of $10bn a year from the year 2000 till now …
Thankfully the white paper seems to come out against more amnesty schemes including one of gold bonds that is being talked of today, arguing that this creates a greater incentive to avoid taxes. It plumps for greater transparency in allocation of natural resources (R1.76 lakh crore loss on telecom and R10.7 lakh crore on coal, going by CAG figures) and greater effort by the taxman—to cite one figure in the paper, while 11 crore entities have PAN numbers, just 3.5 crore file taxes. Indeed, as a recent CAG report points out, tax buoyancy has fallen dramatically from 2.5 in 2006-07 to 0.7 in 2010-11. India’s most successful amnesty, VDIS-97, unearthed R33,697 crore of black money, around 2.2% of that year’s GDP. Raising the tax-to-GDP rates by just 0.5% will get that much today, and a lot more each year, given how GDP is growing.