Dev Kar
NEW YORK: Mind-boggling statistics revealed by a Washington DC-based Global Financial Integrity report released Nov 17, put illicit financial outflows from India at a staggering $462 billion accounting for approximately 72 percent of India’s underground economy.
This means that almost three-quarters of the illicit assets comprising India’s underground economy – which has been estimated to account for 50 percent of India’s GDP (approximately $640 billion at the end of 2008) – ends up outside of the country.
From 1948 through 2008 India lost a total of $213 billion in illicit financial flows (or illegal capital flight), the report states. These illicit financial flows were generally the product of: corruption, bribery and kickbacks, criminal activities, and efforts to shelter wealth from a country’s tax authorities, it points out.
The report, ‘The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008′ analyzes that the finding that only 27.8 percent of India’s illicit assets are held domestically support arguments that the desire to amass wealth illegally without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital.
“In the post-reform period of 1991-2008, deregulation and trade liberalization accelerated the outflow of illicit money from the Indian economy,” says the report. “Opportunities for trade mispricing grew and expansion of the global shadow financial system -particularly island tax havens – accommodated the increased outflow of India’s illicit capital flight.”
There is a statistical correlation between larger volumes of illicit flows and deteriorating income distribution, the report adds.
Total capital flight represents approximately 16.6 percent of India’s GDP as of year-end 2008; illicit financial flows out of India grew at a rate of 11.5 percent per year while in real terms they grew by 6.4 percent per year; and India lost $16 billion per year from 2002-2006.
The report notes that High Net-Worth Individuals (HNWIs) and private companies were found to be the primary drivers of illicit flows out of India’s private sector. India’s underground economy is also a significant driver of illicit financial flows.
Trends showed that from 1948 through 2008 the Indian private sector shifted away from deposits into developed country banks and towards increased deposits in offshore financial centers (OFCs). The share of OFC deposits increased from 36.4 percent in 1995 to 54.2 percent in 2009.
Tax evasion is a major component of the underground economy, which in turn is a primary driver of India’s illicit outflows and expanding India’s tax base and improving tax collection has high potential to curtail illicit flows, the report recommends.
Illicit financial flows cannot be curtailed without the collaborative effort of both developing and developed countries, it adds.
The report has been authored by Dev Kar, formerly a Senior Economist at the International Monetary Fund (IMF), and currently Lead Economist at Global Financial Integrity (GFI) at the Center for International Policy.
For methodology, Kar utilized the World Bank Residual Model (CED) and a trade Mispricing Model based on IMF Direction of Trade statistics.
India Post News Service
