There is now good reason to believe that 2010-11's export miracle and FII flows were not all for real. Some of it was money returning from tax havens

If it looks like a duck, walks like a duck and quacks like a duck, it is probably a duck.

So, if something looks like an export scam, feels like an export scam and is more or less proven to be one, why is it not an export scam?

A report in The Economic Times on Monday knocks another gigantic hole in the export numbers of 2010-11, enough to sink the Titanic of official delusion. Of which, more later.

Ever since three intrepid number-crunchers at Kotak Securities brought out a report in October raising questions about India's export numbers and foreign investor (FIIs) inflows, there has been a guilty silence all around, and mainstream economists have been in denial.

Among other things, the Kotak analysts - Sanjeev Prasad, Sunita Baldawa and Amit Kumar - said that export figures in several engineering goods were simply too fantasic to be believed. They raised the suspicion that some of the high-growth areas in exports could simply be the result of overinvoicing - an effort to bring back black money parked abroad to India as tax havens lose their charm.

"Our study of exports data of major engineering companies (including automobiles and metals) shows that the increase in their exports does not reconcile with the steep increase in official exports data. In fact, the gap is quite substantial," the report said.

As Firstpost reported in October, the official export data showed a 79 percent year-on-year export growth in 2010-11. Exports by engineering companies in the BSE 500 (the biggest companies in India) showed just 11 percent growth. The engineering export jump accounted for $30 billionn (up from $38 billion to $68 billion). The figures for the BSE 500 showed a jump of just Rs 61 billion (rupees, not dollars). Converted at the rate of $ 1= Rs 44, this is just $1.38 billion.

Where did the rest of the $28-and-odd billion come from?

The Kotak trio also raised the possibility that much of this could be overinvoicing of exports. They said: "Some reports have alleged that some individuals may have been compelled to bring back funds through the official route by simply overinvoicing exports or even resorting to fraudulent exports thanks to (1) increased international scrutiny of unaccounted funds in bank accounts in Switzerland and other financial centres, and (2) heightened debate in India about action against unaccounted overseas wealth."

Both suspicions are increasingly coming true - despite valiant efforts by the government to put a gloss over it.

Three weeks ago, Commerce Secretary Rahul Khullar tried to explain it all away by claiming that the export data had been faulty due to a computer crash and wrong data entry. Hence, there was no scam.

Among other things, Khullar said that export figures for April-November 2011 had been adjusted downwards by $9.4 billion following a recalculation which showed a $15 billion over-reporting of engineering exports, and a $12 billion underestimation in the case of petroleum and gems and jewellery.

He tried to put a lid on the controversy by saying: "Mistakes take place. Every number for the last seven months was revised. This notion that the government is deliberately cooking up (data) and telling you lies has got to stop,"

Nice try, but for two things. One, the export overinvoicing mentioned by the Kotak report related to the previous year. Khullar corrected figures for 2011-12. And two, The Economic Times has now dug up damning evidence that the government's numbers hide the truth.

The newspaper set out to investigate one specific area - copper exports - and found such gaping holes in the story that it saw no reason to justify the 350 percent increase in exports - from $1.8 billion to $8 billion in 2010-11 (a jump of $6.3 billion) - as real. The investigation found that no explanation - rising copper prices, increasing import of copper scrap for re-export to China after value addition - fitted the bill. It charitably described the scam as a $6.3 billion "unending exports mystery."

When the newspaper approached Suranjan Gupta of the Engineering Export Promotion Council for an explanation, he claimed it was because of a boom in exports to China based on rising imports of scrap metal. Gupta is quoted as saying: "We should be celebrating the role of our exporters rather than blaming them for overinvoicing," but the newspaper punctures his boast with commerce ministry data.

Says The Economic Times: "The ministry of commerce trade data for that period (2010-11) does not support Gupta's assertion. That data shows a 77 percent increase in imports of copper waste and scrap - to $625 million, from $352 million. Even at a minimum of 15 percent value addition...$8 billion of exports seems far out."

Moreover, the big boys of the industry like Sterlite actually reported a drop in sales during the year.

Firstpost called it Scam 2.0 in October, and the evidence so far - despite the commerce ministry efforts to put a blanket over it - indicates that it remains a scam.

But that's not the end of the story. The Kotak report also indicated that a lot of the so-called FII inflows might be the result of Indian money coming back as foreign investment.

The report pointed out that the $22 billion of reported inflows in 2010-11 did not match their "bottom-up observations." According to Kotak, "listed exchange traded funds (ETFs) and non-ETFs invested about $4.5 billion in the Indian market..."

How much of the remaining $17.5 billion was funny money brought in by Indians?

That this is happening is undeniable. A Financial Times report last week said that the UK regulator, the Financial Services Authority, found that companies associated with Anil Ambani had invested in a Mauritius-based fund called Pluri Cell E, and some of the money of this fund was invested in Reliance group stocks.

The FT report also noted: "So far, only Mr Ambani's group has been publicly identified as using this structure. But one Indian investor with knowledge of the vehicle claimed that as many as 25 Indian businessmen had used similar funds."

The Reliance investments relate to the 2006-08 period, but given the huge gap reported by Kotak between officially noted FII inflows in India in 2010-11 ($22 billion) and the actual figures available from credible sources abroad, who can bet that all of it was genuine FII money?

Firstpost believes that Scam 2.0 is for real, and only a full investigation of all the money trails by all investigative agencies and the Comptroller and Auditor General of India can bring out the truth.