Any discussion on the parallel economy will be incomplete until it accounts for the nexus that drives it

A White Paper on a subject is issued by the government presumably to give a definitive view on it and inform the public of an important issue. The White Paper on black money does nothing of the sort. The Opposition had made a demand for it given the large number of scams that have been in the news. But the paper hardly deals with any of them.

The Finance Minister in his preface admits that he is presenting “… this document now in response to an assurance given to the Parliament.” The implication is that he is not giving anything definitive. He also says that he would have been happier if he “… could have included the conclusions of reports of three premier institutions that have been tasked to quantify the magnitude of black money.” It is surprising that these three institutions are only looking at the magnitude rather than the gamut of issues surrounding the black economy. Thus, even after these reports are presented, we may not have a better understanding of the problem. After all, knowing the quantum of black money in the country is not the same thing as analysing how to deal with the problem.

Quotes old data

The White Paper consists of five chapters and several appendices spread over about 100 pages. This seems like a lot. It lifts many arguments from this author's book on the subject and from these columns in the last year and a quarter. But it flatters to deceive.

The title itself is incorrect. What is estimated is the annual generation of black incomes in an economy and not how much black money there is in the economy. The various estimates mentioned are of black income and not black money. The definition of “black money” given is itself erroneous, with money confused for assets. Even an elementary economics or commerce textbook suggests that money is only one part of the portfolio of assets that an economic agent may own. Hence referring to the whole by a part is not appropriate. The definitional confusion is made worse when it is stated that “the term black money would also include income that is concealed from public authorities.”

Even then, the report does not give an estimate but simply quotes estimates from reports that were written more than 25 years ago, ignoring later literature that has also brought about greater clarity in the matter. The first chapter ends with the title, “Need for more research.” Why state the obvious? The earlier reports that this Paper relies upon had pointed to how big the problem already was. So why has the government not studied it since then?

It quotes the Global Financial Integrity (GFI) report of 2010 on how much illicit flow has taken place from India since independence. That report mentions that its figure is a gross underestimate. It is convenient to quote from the GFI report because it gives a low figure but why has the government not made the effort in the last year-and-a-half to remove deficiencies in the GFI methodology and use the data collected by its intelligence agencies and other departments to arrive at a better estimate?

One service the Paper does is to list the many agencies involved in dealing with the problem. So far so good, but why have these agencies failed in the task they should have been performing, namely, checking the growth of the black economy? What are the problems they have faced? Why does prosecution fail most of the time whether it relates to the income tax department, or the police or the Central Bureau of Investigation (CBI)? Is that the reason why the powerful have treated the law with contempt, and for the increase in the number of people resorting to illegality resulting in the growth of the black economy?

Functioning of judiciary

A large number of laws to check the black economy are mentioned but there is no analysis of why they have been ineffective in controlling the problem. A law on paper differs substantially from its practice. Much space is devoted in the Paper to international treaties and efforts at the global level. This is convenient since the black wealth held outside is small compared to what is held in the country. Further, it is far more difficult to get at the black wealth held abroad compared to tackling what is held in the country. Thus, it becomes convenient to discuss the former rather than the latter.

Most of the wealth held abroad illegally would not be in the names of the actual beneficiaries but in the names of shell companies, and most of it cannot be tracked to an Indian entity.

No wonder the data on deposits in Swiss Banks given in the Paper indicates that Indians have only between 0.13 and 0.29 per cent of the deposits. There is no analysis of this problem or of how money is transferred out of the country. We could have been enlightened if information with the intelligence agencies about tax havens and the modus operandi of taking funds out of the country or of generating incomes outside India were revealed.

Vulnerable sectors

The interface between the judiciary and the investigative agencies is an important aspect of non-implementation of the laws of the land and the contempt they have come to be held in by the public. That is the cause of the judicial delays with four crore cases pending. Even routine matters that should be decided in a few months drag on for years. This encourages perpetrators of the black economy. The functioning of the judiciary needed to be dissected.

The paper lists the real estate, bullion and jewellery sectors as vulnerable to black money generation. This again reflects a definitional confusion. Activities in these sectors constitute transfers of black savings from one individual to another, and as such circulate black incomes but do not generate them.

In the chapter “Way Forward,” strategies are listed but again no new ground is broken. As has been pointed out earlier in these columns, the Double Taxation Avoidance Agreement (DTAA) and the Tax Information Exchange Agreement (TIEA) are about declared incomes abroad and not black savings held abroad. Similarly, voluntary disclosure schemes have been discredited in the past. The Comptroller and Auditor General (CAG) of India has said the scheme turns people into habitual tax offenders.

Nexus and political questions

The paper skirts the most important question, namely, why laws do not get implemented. It avoids mentioning the nexus between politicians, officials and businessmen that drives the black economy, and how criminals have entered this nexus. Why have steps taken in the past to control the black economy not worked?

The answer to why there are so many omissions in the Paper lies in the fact that the existence and the control of the black economy are political questions. Dealing with the black economy is not a narrow technical question that can be tackled by a few more laws or a few steps here and there, or strengthening of a few provisions of the law or through computerisation. Whether it is the ruling party or the opposition, national or regional parties, all of them have been mired in the black economy. The question is one of political will. Should the Paper not have called a spade a spade rather than avoiding the difficult question all together?

But then a White Paper is a political document and not a technical one. It helps the government whitewash its image and diverts attention from the difficult questions. It is not an instrument that can generate the political will to action — a task that only movements and the political process can accomplish.

(The author is with the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University. He can be reached at arunkumar1000@hotmail.com )