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Issue No.: 570 | December 2014

The Political-Economy of Black Money in India

Ajit Karnik
Studies have shown that possibly far greater amount of black money is lying within the country than has been stashed abroad. So, why not go after black money that is located in India without being hamstrung by the issue of confidentiality that is involved in the various double-taxation agreements?

The sparks flying over the Indian political firmament in connection with the disclosure of the names of illegal foreign bank account holders have obscured a crucial aspect of the profoundly important issue of black money in India. This aspect is only peripherally related to the question of who is likely to be included in the list of more than 600 names submitted by the Government to the Supreme Court. The crucial aspect I refer to is connected with the very dynamics of black money generation in India. Even more importantly, I believe, attention needs to be diverted away from black money stashed abroad to black money stashed within India. I believe this reorientation of attention will take the discourse beyond petty and unseemly party politics. It will also spare us the usual and predictable mud-slinging that various party spokespersons indulge in on Indian news channels.

The recent displeasure expressed by the Supreme Court in connection with the black money issue has been an embarrassment for the Government. However, I do believe that the court’s charge that the Government was providing a protective umbrella to black money holders was a bit harsh. As of now, I have no reason to doubt the government’s sincerity in pursuing those who have illegal foreign bank accounts. Arun Jaitley’s statements, in a TV interview, had a ring of honesty to it.

If the government was not interested in providing anyone with a protective umbrella, why was it keen on releasing names of foreign bank account holders in a small trickle? My conjecture is that the government wished to play out the release of these names in the manner of a long drawn out TV serial: it would release a tranche of names every time it needed to embarrass its political opponents. My reasoning for this conjecture comes from the same interview of Jaitley. He had a smile writ large on his face when he said that the Congress Party will be embarrassed when the next set of names of foreign bank account holders is revealed. It was the look of one who has seen the next episode of the TV serial and wishes to titillate the audience by dropping this nugget of information. Alas, the Supreme Court would have none of that: it had been sufficiently incensed with the UPA for its lethargy on the issue and, unfortunately, the NDA had to face the flak. The court was in no mood to wait for the drip-drip of foreign account holders’ names to be released as per a schedule determined by the government. Rather than wait for the slow crawl towards a climax, as is the wont of TV serials, the court wanted the denouement of the black money saga to be revealed in the first episode itself!

One thing is certain from the government’s run-in with the Supreme Court: The BJP has found out that being in government is more difficult than being in opposition. It should have also found out that success does not come with good intentions alone. The process of bringing back these illegal funds parked abroad is fraught with numerous onerous responsibilities on the part of the Indian government. These responsibilities may be given short shrift only at the cost of incurring the non-cooperation of the countries with which double taxation avoidance treaties have been signed. While in opposition, the BJP could afford to pour ridicule and scorn on the UPA for pointing out the stringent conditions involved when revealing the names of illegal foreign bank account holders. The boot is now on the other foot.

The Congress and other losing parties of the 2014 elections now have the luxury of hurling criticism at the current government. The NDA government, however, still has its Teflon coating intact: given its clean image, hardly any mud hurled at it tends to stick. Nonetheless, the NDA finds itself in a problem of its own making. No one had compelled the BJP to make the grand promise of getting all black money back to India within a hundred days of assuming office. That promise, unfortunately, has now come back to haunt the party, giving the Congress an opportunity to grab the moral high ground while taunting the BJP with the "we had said the same thing about the binding double taxation treaty clauses” refrain. Anyone who has read the double taxation treaty agreement with Germany would know that the UPA was right in being circumspect about revealing names in public. The UPA’s position then and the NDA’s position now are identical. 

Studies have shown that possibly far greater amount of black money is lying within the country than has been stashed abroad. So, why not go after black money that is located in India without being hamstrung by the issue of confidentiality that is involved in the various double-taxation agreements? 

Political commentators have been pointing out the importance of black money in Indian politics, especially during elections. Indian political parties are estimated to have spent Rs. 30,500 crore (1 crore = 10 million) during the 2014 general elections. Just prior to the elections, the Election Commission of India had raised the limits on expenditure by a candidate for a parliamentary constituency to a maximum of Rs. 70 lakh (1 lakh = 100,000) with the limit being lower for smaller states. Given that there were 8,251 candidates in the 2014 parliamentary elections (including candidates from unrecognized parties as well as independent candidates) and assuming all candidates in all states spent the same amount (i.e. Rs. 70 lakh each), the maximum legal expenditure for these elections should have been Rs. 5,776 crore. If the NDTV amount mentioned above is to be believed, actual expenditure was over 5 times the legal amount. More specifically, the Congress with 464 candidates should have spent a legal maximum of Rs. 325 crore and the BJP with its 428 candidates should have spent a legal maximum of Rs. 300 crore. Even the most ardent supporters of these parties will admit that these amounts are laughably low. Is it a surprise then that neither the BJP nor the Congress have submitted details of their elections expenses to the Election Commission of India as of October 2014? Where did these additional funds that were spent by the political parties come from? The major source of these funds is believed to be the real estate sector. Experts estimate that the real estate sector accounts for 10% of India’s GDP of $ 2 trillion and of this 30% of transactions of all property transactions use black money. 

Is there a way out of the black money mess that India finds herself in? There are two ways of doing this. The first is to indulge in the cops and robbers game which both the UPA and the BJP have been playing while trying to uncover illegal foreign bank accounts. The problem with this is that there may not be a neat separation between the cops and the robbers: at least some cops may be helping the robbers or, worse, maybe robbers themselves! However, if the incentives for generating black money remain intact, this cops and robbers game is a mere palliative. At best, it provides excitement to the public, talking points to loud-mouthed TV anchors and fodder to political parties to go after each other. 

The second and, unfortunately, the more complicated approach is to change the incentive structure for the generation of black money. The economic reforms introduced in 1991 brought about such a major change in this incentive structure. The amelioration of the rigours of the license-raj system and curtailing the discretionary powers of the bureaucracy and the government substantially reduced the avenues for black money generation. However, as experts have pointed out "economic liberalization has not ended the government’s discretionary powers over resource allocation in numerous domains”. As the Government of India’s ‘White Paper on Black Money’ testifies, there are sectors which are still susceptible to black money generation. These sectors are real estate, finance, bullion and jewellery, mining and other natural resources and equity trading. Since the government still holds substantial discretionary powers in these sectors, select individuals or groups are able to "buy” favours from government. This ability to buy and sell favours provides powerful incentives for the generation of black money, a large part of which is possibly diverted for financing election campaigns.

The problem at the heart of the black money problem is the nexus between those who receive discretionary favours (private business in the sectors listed above) and those who provide these favours or even those who lobby for these favours on behalf of private interests (the polity in general with a central role for the government). Unless this nexus is broken, there is little chance that the primary cause of black money generation will be nullified. But who will bell the cat? Given the enormous amount of resources that are required to fight elections, can we expect political parties to slay the goose that lays the golden egg? In the absence of a policy which reforms the electoral system (e.g. public funding of elections has been proposed as a solution), we the electorate might as well sit back and enjoy the show-biz of illegal foreign bank accounts being played out on the 24-hour news channels.

This is excerpted from Ajit Karnik’s blog. For the full text with explanatory footnotes visit 
AJIT KARNIK, Professor of Economics, Middlesex University, Dubai, UAE.
Web page:





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Federalism, Governance and Growth

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The Political-Economy of Black Money in India

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