Home > Archives (2006 on) > 2009 > May 2009 > India’s Black Wealth in Global Tax Havens: Looking Beyond Elections

Mainstream, Vol XLVII No 21, May 9, 2009

India’s Black Wealth in Global Tax Havens: Looking Beyond Elections

Wednesday 13 May 2009, by Kamal Nayan Kabra

Among the long-term outcomes of the 2009 elections to the Lok Sabha, besides the overall verdict of the electorate (likely to mark a watershed), it appears that the up-fronting of the malaise of gigantic amounts of wealth stashed away in various foreign financial institutions, by its very location illegal (save the declared amounts made possible by the recent decision to permit partial capital account convertibility of capital by Indians) is likely to be among the foremost. However, it cannot be ruled out that the way the issue has been thrown up rather simplistically, may also become its undoing. It is not unlikely that numerous technicalities, legal, financial, diplomatic and administrative, would be cited in the post-poll period to put the issue either on the backburner or even in the deep freezer. Of course, one factor that is likely to lead to such a response would remain unstated insofar as the list of the agencies that are found involved in the shenanigans is likely to read like who’s who of Indian business, politics and other celebrities. The manner in which a detected case from Pune remains unresolved shows the direction in which the wind is likely to blow. As a result, one is skeptical that like so many critical issues (such as inquiries regarding the current status and future prospects of land reforms or the one to find out the culprits who demolished the Babri mosque) an interminable, indefinite arrangement for finding out the ways and means for dealing with the stashed away wealth of the Indian nationals would not come handy to whosoever forms the next government. The short point is, the wealth tucked away in foreign bank accounts in various tax havens is a particularly unsavoury aspect of the more widespread and deep-rooted scourge of the black/illegal/extralegal economy of India and far greater amounts are involved in this primary source of the funds that find refuge in foreign banks and numerous other sources, like real estate and benami forms.

It may sound a bit too cynical but the uncomfortable fact is that we may have to live with solid prospects of the issue hanging fire but not getting clinched. The troublesome fact is that the current controversy divorces the issue of many times larger domestic black wealth residing within the country, continuous generation of black incomes and their no-holds-barred use in the domestic economic, social and political spheres. All these processes of growing black economy seem to have become stronger owing to the freedom given to the market forces to operate unhindered by any regulations whether within the country or outside while the entire accumulated black wealth was at its beck and call for finding ever more lucrative avenues of making profits but with the tainted sources of financing such activities there cannot be any question of the resulting incomes and wealth to come out in the clean and legal circuit.

It is clear the more the income in the black circuit, the greater the freedom of external economic transactions, the greater the leakage into foreign financial institutions and markets. The presently estimated size, though the figures bandied about in the course of electoral campaigns appear to be without any foundation, of the stashed away funds is but an indication, a small trailer of what would befall India when the liberalisers-globalisers realise their dream of full capital accountability! Even with partial convertibility on capital account really huge amounts are considered likely to be available in the hidden external accounts of India’s black money operators; so much so that on the basis of quick back of the envelop calculations these stocks of wealth are considered large enough to remove monetary poverty of every Indian simply by distribution of the stashed away funds among the poor in India.

Simple common sense is enough to show that the funds that leave the Indian shores for greener and safer pastures abroad are but a fraction of what all gets generated in the great black economy mill of India. After all, black economy is not just a passive store house of unaccounted and unaccountable incomes and wealth: it is an active component of the economy and both the legal and illegal or undisclosed components work together. Often it is the creative accountants and tax-avoidance/evasion experts and financial wizards who specify at the accounting level what is to go as legal and disclosed and the rest secret; and a part of it, for a variety of reasons, is salted away to distant, secret lands, often in the name of fictitious legal persons. A whole branch of activities provide such services for making externally held funds difficult to trace. Lately many factors have facilitated and indeed encouraged such outflows, not only on account of liberalised rules for capital account transactions but also owing to nearly absolute freedom to travel abroad that can be used for physically carrying the amounts abroad, setting up linkages for these operations and also for consuming these funds in various ways.


Some glaring facts on this score are rarely fed into the public policy discourse. In the year preceding the liberalisation of the Indian economy and full convertibility on current account, Indians travelling abroad spent a sum of 392 million US dollars in 1990-91. This outflow escalated to a gigantic sum of 9231 million US dollars in 2007-08 (provisional), that is around twentythree times more compared to 1990-91 and this amount is equal to nearly three times the net FDI in 2005-06 or a little more than the net FDI in 2006-07! It can well be imagined that such travel bug is encouraged by and encourages illegal flight of capital, besides starving the Indian tourism industry of a big source of revenue. That is, over these globalised years we are spending openly massive amounts that in many devious ways are grist to the illegal capital flight mill, especially facilitating physical transfer of funds to many countries where the Indian rupee is openly accepted by money changers.

The logic of enlarged Indian black money travelling abroad is simple: it provides both the amounts and the incentives for such transfers and by sheer political-administrative clout makes it easy to take the hawala route. Joint ventures abroad and unregulated imports and exports also facilitate mispricing for building up foreign exchange reserves abroad. It is clear that the origins of the funds taken abroad for safe upkeep and hidden accumulation are from the bourgeoning black economy, including its bribes and kickbacks, commissions and cutbacks and criminal components.

It is a measure of the nonchalance and ritual window-dressing or electoral rabble-rousing character of the current noise about the Swiss bank accounts that such elementary truths are bypassed. It is any day far more significant and in legal and administrative senses easier to lay hands upon the domestically circulating and stored ill-gotten moneys and other forms of wealth, notwithstanding the Chinese Wall of vested interests and symbiotic relations between the politico-administrative structures and the black economy. Even for producing magical and/or dramatic effect and for rabble-rousing that one witnesses over the massive amounts stored in various tax havens, estimates of illegal wealth, fixed or non-fixed, and income flows galore are no less mind boggling. Such apparent contradictions indicate a high probability that once the dust raised by the elections is allowed to settle down any number of tactics and devices can be found to shelve the issue and go on merrily with business as usual, maybe with some pious and holier-than-thou posturing.

Some additional reasons for such an eventuality are perhaps not far to seek. Those who are most vociferous over its unbelievably massive volume and the tremendous significance of such amounts for a poor and foreign exchange starved economy may soon retire into the cocoon of legality and technicality: they may devise tactics to show them as doing a lot of running that takes them or any-one no further from the starting point. The entire neo-liberal academic and official machinery would come to support such knick-picking to delay and derail the process. However, if even a small real distance is covered and even a part of such wealth is detected and dealt with in order to make it greatly difficult, costly and unattractive to amass more such treasures abroad (owing, among other factors, to the international resolve to deal sternly with the tax havens) there is little indication that their continuous generation at home is ipso facto going to be curbed. It is clear that a lot of incredulity on the issue is well founded on numerous relevant and operational factors that are rooted in the past experience and are quite vigorously at work presently. But if one is proved wrong it would indeed be a welcome development and a great national achievement. The reason one is making the above points is just to highlight that real action on such a complex issue requires much more than either haranguing or setting up a task force that basically rehashes a well-known international bestseller, an exercise that is equally a guidebook on how to generate and take away black incomes and wealth and save them from public gaze and legal scrutiny.


One may sum up: it is indeed a greatly exciting phenomenon that the question of tax havens and their extensive and prodigal use by the ‘elites’ cutting across national borders, awash with illegal, ill-gotten and socially most dangerous and subversive amounts of incomes, wealth and other forms of property, including financing of downright criminal syndicates and hidden informal businesses and even financing of legal businesses by various frontmen and women and other organisations, including terror funding and financing of various covert political-diplomatic operations has been brought into glaring public focus. It is not easy to recall any other occasion when the issue raised so much dust and noise. It is high time that all this is supplemented by a reasonable amount of light to illumine the dusky and dark avenues so that both the processes causing and facilitating these operations sabotaging the national economies and vital popular interests are brought out into the open along with the worthies who mask their real faces through such devices as stashing away of black wealth in numerous tax havens with many circuitous and complex operations that make legal establishment of the identity of the real culprit rather difficult. Naturally a great deal of public mobilisation and agitations would be needed and one condition critical for these efforts to show some results is to put an end to the artificial division between domestic and external generation and storage of black incomes and wealth and their nefarious uses in politics, economy, religion, public relations, philanthropy, and what have you.

It does not really matter what the political and other motivations lie behind the current surge of the issue to so much public attention and debate. After all, the issue has its own intrinsic significance that goes beyond anyone’s political-electoral or politicking calculations or manoeuvrings. The only thing needed is to pick up the thread and do not let the question of black economy in all its dangerous dimensions die a post-election, untimely death. Objectively the question has not cropped up a day too early, especially because it is a major component of international financial shenanigans and speculative irrational exuberance that have contributed immeasurably to the current financial sector meltdown and its tragic trail of disastrous real economy effects. Thus it is for the really genuine crusaders for clean and socially oriented public life and a clean and transparent economic order (something that is a precondition for a really people-centric development) to ensure that the issue is not allowed to die down.

If the heat and dust kicked off over hidden wealth accumulation in banks, whether in Switzerland or in dozens of other notorious tax havens, is any indication of the intrinsic salience of the issue, it is clear that irrespective of its putative value as an electoral vote catcher, a really festering sore resulting from the mal-development perpetrated in this country over the last few decades is going to rankle the policy-debates in India for quite some time. It would be a cause for celebration if a scourge that has been plaguing the Indian social life in every sphere and not just the economy is not easily forgotten and dumped as so many other election pledges are often routinely dumped or reduced to mere skeleton of the original promise after the electoral battle is over or other issues take hold of the sensation-mongers.

It seems there are some reasons to make one believe that this time over the issue of secret Swiss and other foreign bank accounts is poised to invite a bitter battle among various constituents of the elites. After all, it is clear that none other than some constituents of the elites are the ones who deposit and maintain these kinds of funds. In a nation of over a billion people with its vast and growing disparities it would be naïve to suppose (one may hazard a wild guess and stick one’s neck out to assert, of course with no basis other than a gut feeling and a common sense understanding of the Indian business scene) that except for a an extremely tiny minority of less than a million families the rest of the people have any access to or need for stashing such accounts in foreign banks. Of course, one has to relax the connotation of the elites to include various mafias and criminals among the elite but with large-scale criminalisation and commercialisation (inevitably degenerating politics into some sort of a family business ) and freedom of economic activities that disregards the irritant of national boundaries, it becomes extremely difficult to draw the line between various categories of elites or the sources of wealth as various kinds of power flows from the sheer size of one’s wealth irrespective of its sources or legitimacy. This becomes even more problematic as government purchases, contacts and massive defence purchases seem to have become the happy hunting grounds for cuts and kickbacks for quite some time now.


The trouble for pinning down illegal wealth stored abroad begins because of an inherent contradiction: it is a wing of the elites who are vociferous over the size and continuace of the phenomenon and it is these very segments of society who would be hit hard if really effective action is initiated against the phenomenon. Parts of the elite who on the main come to dominate the policy space in India are the same very elite who amass wealth in these tax havens. That is, the struggle over the issue would be one of intra-elite conflict unless the other popular and civic society institutions too join it in a big and sustained manner, particularly with a view to go straight to the fountain-head from which the illegal wealth flow oozes out and gets stored up in the form of illegal wealth holding in numbered accounts, often in the name of some fictitious entities to begin with as the real beneficiary names remain hidden in very laboured round-about ways enjoying near total secrecy.

Whatever its actual magnitude and even if the generally bandied about figure of the gigantic volume locked up in various tax havens turns out to be far from being a firm figure, it is clear that what has been moving out for decades cannot but be a mind-boggling amount. Also the very character of the phenomenon dictates that none but the top elites (one is not sure how to classify the criminal elements with lots of direct control over huge piles of wealth and their politico-administrative and corporate linkages, be they from drug mafia, money changers and hawala kings, arms runners, traffickers in human beings, smugglers of various contrabands, fixeras odf huge defence deals and so on), can have access to and control amounts large enough to slip away to these attractive destinations, representing a phenomenon that can be called nothing but that of a drive to accumulate hidden wealth.

The likes of Veblen , Galbraith and so on who identified and explained the leisure class or affluent society (the phenomenon of some islands of prosperity in the midst of the vast sea of penury) and who explored the psyche of the super rich perhaps did not reach that corner of the mind of these elite classes that make them build up huge hoards hidden from the public eye as also beyond the reach of the public authorities of their respective countries. What is notable is that such attitudes, behaviour and the resulting phenomena are common to the rich everywhere irrespective of the level of development, affluence, culture and other substantive issues with national and sub-national specificities of the country as a whole.

True, it cannot be ruled out that the issue can be killed off by a conspiracy of silence (as is evident from the stony silence of the present policy establishment on the question except blaming its strident up-fronting by a major political formation as a sign of its “economic bankruptcy”, though the economic pundits are not coming out with any reasoned statement on the real nature and approach to this question that on no account can be dismissed as a hallucination of some power-hungry politicians) or on account of its inherent political economy roots and implications, particularly owing to the umbilical link between this aspect of the black economy, operational mechanism of the political processes, critical dependence of current processes and agencies of economic growth on the simultaneous operation and strengthening of the underground undeclared economy of technical and diplomatic ramifications and intractability, technical and diplomatic.

A prominent economist, Dr Kabra is a former Professor (now retired), Indian Institute of Public Administration, New Delhi.

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