'Black money' burning a hole in India's finances

WITH the value of the rupee plummeting, India is trying to shore up its finances, with the government outlining a plan to tackle the country's rampant "black money" problem.

By InvestSMART · 25 May 2012

By InvestSMART ·
25 May 2012

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WITH the value of the rupee plummeting, India is trying to shore up its finances, with the government outlining a plan to tackle the country's rampant "black money" problem.

An ill-defined but massive amount of Indian money and "illicit external assets" - believed to run into the tens of billions of dollars - is currently stashed in foreign accounts, the government believes, most of it routed through Singapore and Mauritius to secret European accounts.

The government's white paper on black money alleges much of the money hidden overseas is ill-gotten, through drug trafficking or other crime, and money that is legitimately earned but sent overseas to avoid tax.

A report by India's ministry of finance cites a Swiss National Bank statement at the end of 2010, which said that Indians held about $US1.65 billion in Swiss accounts alone, while other reports suggest Indians hold more money there than any other nationality.

An IMF study estimated the flight of capital from India at about $US88 billion between 1971 and 1997.

Beyond that, the government concedes, it has little idea of how much black money has left India and where it has gone.

The paper proposes the establishment of Lokpal (ombudsmen), at national and state level, to investigate allegations of corruption and money laundering.

The report also favours tax incentives for the use of debit and credit cards for small day-to-day transactions to curb the underground economy.

India's Finance Minister, and potentially the next president of the world's largest democracy, Pranab Mukherjee, said India's massive black economy was crippling development. He said the poor were hurt most by corruption.

Others said India's budgetary woes could be solved if only some of its hidden money could be retrieved.

"According to estimates, the total black money stashed abroad is estimated at roughly $US797 billion, which is about 50 per cent of India's gross domestic product and is nine times the size of India's fiscal deficit," the Secretary-General of the Federation of Indian Chambers of Commerce and Industry,Rajiv Kumar, said.

"Even if 10 per cent of such black money is brought back to the system, India can generate a fiscal surplus," Dr Kumar said.

The rupee yesterday fell to its lowest ever level of 56.38 to the US dollar, having lost nearly a quarter of its value since this time last year. Indian stocks have sunk with it.

Investor confidence in the India growth story has disappeared as the world turns risk averse on the back of the eurozone crisis.

The Sensex on Wednesday closed below 16,000 points, the lowest figure since January, and follows a financial year in 2011-12 where it lost 10.5 per cent.

The weakening rupee is damaging the Indian economy, and many young Indians have abandoned plans to study overseas because it has become too expensive.

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Frequently Asked Questions about this Article…

What is 'black money' in India and why should everyday investors care about it?

The article describes 'black money' as a large, ill-defined amount of Indian wealth and illicit external assets hidden overseas — some allegedly from crime or drug trafficking, some legitimately earned but sent abroad to avoid tax. Everyday investors should care because a massive underground economy can cripple development, weaken the rupee, hurt the poor, undermine investor confidence and weigh on Indian stocks and economic growth.

How much Indian black money is estimated to be hidden overseas?

Estimates vary widely in the article: a Swiss National Bank note put Indians' Swiss holdings at about US$1.65 billion at the end of 2010; an IMF study estimated US$88 billion of capital flight from India between 1971 and 1997; and one industry estimate cited by a federation official put total overseas black money at roughly US$797 billion. The government itself concedes it has little precise idea of the total or exact locations.

Where does the government believe Indian black money is stashed offshore?

The white paper cited in the article says much of the money has been routed through Singapore and Mauritius to secret European accounts, and highlights Swiss accounts as well. It alleges that funds are held in various offshore financial centres and secret accounts in Europe.

How has the black money problem affected the rupee and Indian stock market?

According to the article, the rupee fell to a record low of 56.38 to the US dollar and had lost nearly a quarter of its value year‑on‑year, while the Sensex slid below 16,000 points and lost 10.5% in the 2011–12 financial year. The piece links falling investor confidence and these market moves to broader concerns about black money, economic weakness and global risk aversion.

What policy measures has the Indian government proposed to tackle black money?

The government's white paper recommends creating Lokpal (ombudsmen) at national and state levels to investigate corruption and money laundering. It also favors tax incentives to encourage use of debit and credit cards for small day‑to‑day transactions as a way to curb the underground economy.

Could bringing back hidden offshore money fix India’s fiscal problems?

Some officials quoted in the article argue it could help. One industry leader said total black money abroad could be about 50% of GDP and nine times India's fiscal deficit, suggesting that even repatriating 10% might generate a fiscal surplus. The article notes others believe budgetary woes could be eased if hidden funds were retrieved, but also emphasizes that exact figures are uncertain.

Why has investor confidence in the India growth story weakened?

The article points to a combination of factors: the weakening rupee, falling stock markets, the scale and uncertainty around black money, and global risk aversion driven by the eurozone crisis. These forces together have dented confidence in India's growth prospects among investors.

What should everyday investors watch for as India tackles black money and corruption?

Based on the article, investors should monitor policy moves such as establishment of Lokpal bodies, any tax‑incentive programs to formalise transactions (like encouraging card use), and official disclosures about offshore holdings. Pay attention to currency (rupee) trends and major stock indices (Sensex), since those market signals reflect how reforms and confidence are evolving.