$462 bn illegally taken out of India since 1948

$462 bn illegally taken out of India since 1948

Politicians, analysts and journalists have long i claimed that large amounts of money have been illegally taken out of India every year, and now a think tank has put a number to this.

In 60 years ended 2008, some $462 billion (about Rs.20.8 trillion now), by conservative estimates, was illegally siphoned out of India primarily to evade tax, said US-based Global Financial Integrity.

The cumulative illegal outflow was a little over one-third of the size of the economy in 2008 and twice the size of the country's external debt that year. Illegal outflows make up 72% of India's estimated underground economy, the think tank said.

The pace at which money was siphoned out grew faster after India opened up and liberalized its economy after 1991, said a report released on Wednesday by the think tank.

The increase in illegal outflows is a counter-intuitive finding as generally liberalization in the backdrop of macroeconomic stability should reverse the trend, added the report titled The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008.

"It seems trade liberalization merely provided more opportunities to related and unrelated companies to mis-invoice trade, lending support to the contention that economic reform and liberalization need to be dovetailed with strengthened institutions and governance if governments are to curtail capital flight," wrote Dev Kar, the report's author.

Kar was earlier senior economist at International Monetary Fund.

"Directionally they may be right, but quantum-wise the range is wide between different studies," said D.K. Joshi, principal economist at Crisil Ltd. Joshi had not read the report.

The government needs to combat the problem by reforming institutions and governance, the report said. Some measures in that direction could be to strengthen the rule of law and regulatory institutions and tweak policy to enhance public and corporate governance, it added.

The implication of illegal financial flows out of India are not just economic, but has a security dimension to it.

The report observed that Paris-based Financial Action Task Force (FATF) said the main sources of money laundering in India are drug and human trafficking, corruption, fraud and currency counterfeiting.

India was admitted to FATF in June.

On an average, the annual illegal outflows from India between 1948 and 2008 amounted to 1.5% of gross domestic product. The amount of outflows grew every year by 6.4%, after adjusting for inflation.

The report said the actual amount of money siphoned out of India was $213 billion. After assuming the money siphoned out would have earned returns based on short-term US treasury bills, the report concluded that the cumulative outflow would be closer to $462 billion.

Kar said private firms and rich individuals are the primary drivers of illegal outflows from India. Various studies showed income inequality in India had increased in the wake of liberalization, which in turn fuelled illegal outflows from private companies and wealthy individuals, he wrote.