In a country where corruption is commonplace, quantifying it in terms of numbers is anybody's guess. There can be many indicators; one ofthem being the illegal outflow of capital. A US-based organisation has just done that. Tax evasion, crime, and corruption, it says, removed gross illicit assets from India worth US $462 billion between 1948 and 2002.
The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008 report released Wednesday by nonprofit Global Financial Integrity (GFI) says that the faster rates of economic growth since economic reform started in 1991 led to a deterioration of income distribution which led to more illicit flows from the country.
That's not all. The poor state of governance is reflected in a growing underground economy which in turn has fueled more transfers of illicit capital from India. This analysis is cast in terms of a pre- and a post-reform period spanning a total of 61 years since independence.
“This report puts into stark terms the financial cost of tax evasion, corruption, and other illicit financial practices in India,” GFI director Raymond Baker said in a statement. “It also shows that these illicit outflows contribute to stagnating levels of poverty and an ever widening gap between India’s rich and poor.”
More numbers:
- From 1948 through 2008, India lost a total of US $213 billion in illicit financial flows (or illegal capital flight). These illicit financial flows were generally the product of: tax evasion, corruption, bribery and kickbacks, and criminal activities.
- Adjusted Estimates: The present value of India’s total illicit financial flows (IFFs) is at least US $462 billion. This is based on the short-term U.S. Treasury bill rate as a proxy for the rate of return on assets.
- India’s aggregate illicit flows are more than twice the current external debt of US $230 billion.
- Based on the last five years of the study, 2004-2008, India lost assets at a rate of US $19 billion per year.
- Total capital flight out of India represents approximately 16.6 percent of India’s GDP as of year-end 2008. In present value terms, India lost an equivalent of about 36 percent of its 2008 GDP which represents a staggering loss of capital.
- Some 68 percent of India’s aggregate illicit capital loss occurred after India’s economic reforms in 1991, indicating that deregulation and trade liberalisation actually contributed to/accelerated the transfer of illicit money abroad.
- IFF Drivers: 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.
- IFF Trends: From 1948 through 2008 the Indian private sector shifted away from deposits into developed country banks and moved more of its money into offshore financial centers (OFCs). The share of OFC deposits increased from 36.4 percent in 1995 to 54.2 percent in 2009.
“In this report we clearly demonstrate how India’s underground economy is closely tied to illicit financial outflows,” said GFI lead economist and report author, Dev Kar. “The total present value of India’s illicit assets held abroad accounts 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 US $640 billion at the end of 2008)—ends up outside of the country. We also find that there is a statistical correlation between larger volumes of illicit flows and deteriorating income distribution.”
India’s underground economy is closely tied to illicit financial outflows. The total present value of India’s illicit assets held abroad ($462 billion) accounts 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.
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 liberalisation accelerated the outflow of illicit money from the Indian economy. 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.
