Authored by - Prabha Rao, former special secretary, Cabinet Secretariat, New Delhi and executive director, South Asian Institute for Strategic Affairs.
In today’s age, national security is closely linked with economic security. It is hence pertinent to keep a close watch on the various threats that can punch holes in the economy. Smuggling or illicit trade is an ever-present and growing element that poses a significant threat to the Indian economy and, by extension, the nation’s security. The key to stemming the tide of illicit trade requires a deep understanding of its impacts. Only then will the prescriptions work.
Retail inflation refers to the gradual rise in the price of goods and services in an economy. (Representational Image/Pixabay)
While military options for national security remain prevalent, it is economic interests that have become critical to a nation’s security. Even a strong military response requires robust economic underpinnings. So, it has become doubly important to understand the threats to the economy and enhance abilities to protect the economic interests and block potential threats.
First, let’s understand the enormity of the problem. In September 2024, a well-researched report valued the illicit market in five key Indian industries at a massive nearly ₹8 lakh crore in 2022-23. The report by FICCI’s Committee Against Smuggling and Counterfeiting Activities Destroying the Economy (CASCADE) identified FMCG (packaged goods), FMGC (personal and household care), alcohol, tobacco, and textiles and apparel as the five most affected industries. Textiles and apparel with an illicit market size of ₹4,03,915 crore in 2022-23 accounted for over 50% of the total illicit market.
An interesting phenomenon that the report highlighted is that the illicit market in these five industries expanded faster in rural India, especially among the growing classes of middle- and lower-income groups. The menace of counterfeiting and illicit trade seems to have encroached on new grounds beyond urban areas where it was prevalent earlier. In short, it is now fast becoming a national issue affecting the populace across the breadth of the country.
So why is the illicit market expanding in India? Primarily because of the issue of tax arbitrage – products carrying high tax rates give the opportunity to illicit traders the leverage to smuggle such goods and sell below the market price. It follows that such leverage is far more profound in the case of industries that have historically been exposed to a higher tax regime, such as alcohol and tobacco. A fast-growing economy and the changing spending patterns of Indians in urban as well as rural areas provide fertile ground for illegal players. Also, the tax arbitrage by illicit traders will further come into play with future increases in taxation for these goods. For instance, the recent recommendations by the Group of Ministers on Goods and Services Tax (GST) rate rationalisation to increase tax rates from 28% to 35% for certain products like aerated beverages and cigarettes will give an unintended boost to smuggling.
Money laundering is integral to such illicit operations. According to a recent October 2024 United Nations Office on Drugs and Crime (UNODC) report, the transnational organised crime threat landscape in Southeast Asia is evolving faster than at any previous point in history and driven by highly sophisticated syndicates and complex networks of money launderers, human traffickers, and a growing number of other service providers and facilitators. India has not been immune to such activities. The impact of money laundering in India has reached epic proportions, with its value reaching $159 billion in 2021, highlighting the impact of illicit markets.
Tax loss to the government hurting our economy is another associated and pressing issue. According to another FICCI CASCADE report, the tax loss incurred by the Indian central government due to smuggling surged by an alarming 163 percent over a period of 10 years, from ₹22,230 crore in 2010 to reach a mammoth ₹58,521 crore in 2020. Furthermore, an MDPI article estimates that up to a quarter of all the gold entering India is smuggled, contributing to at least USD 20 million in lost tax revenue to the government.
The government has taken the right tone to curb illicit trade. In July of this year, the Union home minister called for ‘ruthless action’ against drug smuggling syndicates. The government’s enforcement agencies have made consistent strides in tackling the menace of illicit trade. Their systematic and vigilant approach has led to the successful seizure of large quantities of illegal goods. But much more remains to be done.
What one needs to understand is that globalisation, while bringing many benefits, has also spawned some nefarious elements that have built capabilities to leverage the cyberworld for illicit trade using sophisticated means. To counter these new incursions, it is not enough to react and curtail them. It is essential to proactively create new regulatory mechanisms as well as establish continuous monitoring of illicit financial flows.
Next, enhancing collaboration between various government agencies is critical in this endeavour. There is an urgent need for a framework for establishing seamless communication and coordination between central agencies and state enforcement entities. International partnerships can be activated to ensure that national efforts are regularly fed with relevant information from global agencies to enhance the effectiveness of anti-illicit trade measures.
Another critical step to stem illicit trade is nurturing the growth of a civil society movement. The elements of such a movement can include raising social awareness about illicit trade, contributing to the development and enforcement of regulatory frameworks, and even monitoring and reporting supply chains to eliminate illicit trade. By building these various layers of collaboration—between government agencies, international partners, and an informed and active civil society—we can create a formidable defence against illicit trade. And ensure that the country’s economic security remains intact, as does its standing as a rising global power.
This article is authored by Prabha Rao, former special secretary, Cabinet Secretariat, New Delhi and executive director, South Asian Institute for Strategic Affairs.
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