Illicit financial outflows increase post-liberalisation
According to a first-of-its-kind study, the rate at which money flew out of the country nearly doubled in the post-reform period, while the black economy has steadily grown and is now half the size of India's official GDP.mumbai Updated: Nov 18, 2010 22:31 IST
If you thought opening up of the Indian economy would have helped cut black money and illicit outflow of funds from the country, think again.
According to a first-of-its-kind study, the rate at which money flew out of the country nearly doubled in the post-reform period, while the black economy has steadily grown and is now half the size of India's official GDP.
Illicit financial outflows from India grew 9.1% annually between 1948 and 1990. Between 1991 and 2008, the pace quickened to 16.4%, according to the study by Global Financial Integrity, a US-based think-tank.
Such outflows totalled $462 billion dollars (more than R20 lakh crore) between 1948 and 2008. Nearly half of this occurred after 1991.
"It seems trade liberalisation merely provided more opportunities to related and unrelated companies to under or over-invoice trade, lending support to the contention that economic reform and liberalisation need to be dovetailed with strengthened institutions and governance if governments are to curtail capital flight," wrote Dev Kar, author of the report titled "The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008".
Kar estimates the size of the underground economy in India to be around $640 billion, or 50% of India's GDP in 2008.
This huge loss of capital, if it were retained, could have liquidated all of India's external debt totaling $230.6 billion at the end of 2008, and provided another half for poverty alleviation and economic development.
"The huge outflows have set back India's development by 5% of GDP growth every year. We could have been at a per capita income of $6,000 per annum instead of the current level of around $1,000 if this was prevented," said Arun Kumar, professor of economics at Jawaharlal Nehru University and author of the book "The Black Economy in India".
High net-worth individuals and private companies are the primary drivers of illicit flows out of India's private sector, to avoid taxes and conduct illegal deals, according to the report. "The reason the black economy continues to exist and expand is the connivance of the triad comprising politicians, the business class and the executive-which includes the judiciary, police and bureaucrats," said Kumar.