BLACK MONEY, ILLICIT FINANCIAL FLOWS & CORRUPTION
with Ranganathan V., Tax Consultant and Business Advisor
Black money, illicit financial flows & corruption are hotly debated topics in India in recent times. They have caught the attention of people from all walks of life. Black money is a bane our country has had to live with. Who benefits from generation of black money? What are the factors at play that sustain this social evil? In this guest interaction with Mr. Ranganathan V., Partner in one of the big four audit firms and a taxation expert, tejas@iimb quizzes him on the drivers of black money, illicit financial flows and corruption and ways to control these social maladies.
Corruption and Black Money: Looking through the Social Prism
Historical accounts suggest that corruption in public office has been prevalent in India since ancient times. In Arthashastra, Kautilya observes “Just as it is impossible to know when a fish moving in water is drinking it, so it is impossible to find out when government servants in charge of undertakings misappropriate money”.1 What are the systemic factors which have been aiding corruption in public institutions in India?
The systemic factors, as much in modern times as in ancient times, are the discretions vested in the government authorities for a private individual to engage in any kind of vocation. The interface with the government and the public system for anything and everything is a causal factor. Repeatedly, various studies have demonstrated that liberalization and releasing the common man & private players from the clutches of the government will reduce the incidence of corruption.
Do you think the recent protests against corruption & black money will last the course? Many times we have seen critical issues fading out of collective memories of the public with passage of time. Bhopal gas tragedy and terrorist attack on parliament are cases in point. Given this legacy what could be done to sustain this groundswell and channel it to bring about a positive change?
The sustenance of these protests and groundswell depends on the people who are at the forefront of this campaign. If they are completely driven by societal good then the chances of sustenance are higher. A case in point is the freedom movement in India. The people involved in freedom movement had no personal agenda. Unfortunately, no other social movement in our country has been devoid of vested interests. In every other case where somebody professes to support a social cause, the movement loses steam as soon as their personal agenda is met. One has to wait and see if the people involved in this campaign are really driven by an urge to contribute to the society.
Role of Institutional Reform and Civil Society
The notion that the high and the mighty can always get away with manipulation of the system has been ingrained in public minds. Is judicial activism by Supreme Court of India the way forward for erasing these bitter memories and injecting legitimacy into the fight against black money?
“The proof of the pudding is in the eating”. We will have to wait for this whole issue to run its course. If finally the culprits are convicted, the ill-gotten wealth is coughed up and benefits accrue to India then I would say that the judiciary has achieved its goal. However, if the cases drag on for another 20 years, as is common, we would not have gained anything from this exercise.
Transparency International’s Asia-Pacific regional strategy (2008-12) aims at creation of Advocacy & Legal Advice Centers (ALACs) for educating citizens and empowering them in fight against corruption.2 Which section of citizens should be the potential advocacy targets and which aspect of corruption should be dwelt at length for having a greater impact in such a set-up?
I don’t think any one section of the society has a bigger role as compared to another section in the fight against corruption. I think the people who indulge in corrupt practices need to be spoken to first. The common man becomes a victim of corruption when he is harassed to bribe officials for getting things done primarily because of his own anxiety and urgency. And he resorts to this, not because he likes it but he does not have any other means. I think the logic that the giver is as guilty as the receiver is perverse. Talking to the corrupt and making them understand that this is not a sustainable model makes more sense. Simultaneously, punishing the perpetrators and plugging the loop holes in the system needs to be done. In the larger case of collusion among officials & businesses, addressing the lack of transparency in governance is the way forward.
Impact of Government Policies in Curtailing Illicit Fund Flows
Post liberalisation of Indian Economy in 1991 there has been a spurt in illicit flows from India.3 The results lend support to the contention that economic reform and liberalization need to be combined with strengthened institutions and governance if governments are to curtail capital flight. What are your thoughts on this?
We have to really see it in the context of the size of the economy that we are comparing. Pre-liberalization, the size of our economy perhaps was a fraction of what it is today.
The opportunity for corruption hasn’t diminished despite so called liberalization. Also, I don’t think we have liberalized as much as we publicize. If there were actual liberalization, we wouldn’t be auctioning spectrum. Corruption is rampant in land acquisition and the situation has not improved post liberalization. This shows that corruption has a lot to do with the kind of activities the government is involved in rather than liberalization policies. This could certainly be addressed with strengthened institutions and right kind of scrutiny of businesses as well as public servants. The incidence of corruption has reduced in countries like Indonesia (which were thought to be more corrupt than India) through good oversight mechanisms. India seems to be lacking in these monitoring mechanisms and punitive actions.
Chief Economic Advisor to Government of India, Dr. Kaushik Basu, in his recent working paper has suggested legitimizing the act of giving bribes (though only in the case of “harassment bribes”) without legalizing bribe taking.4 He argues that such an alteration in law will reduce the incidence of bribery. What, according to you, are the pros and cons of this proposal?
If a person is forced to bribe the officials for getting very legitimate things done then I don’t see his role as contributing to corruption. The line of thought that one should give up his/her legitimate rights and fight for it rather than give a bribe is a lofty approach and impracticable.
Estimates show that Rs.8000 Crores was spent by political parties in the 2009 Lok Sabha elections. Management Guru C K Prahalad in an article points to how politicians, like venture capitalists, would expect approximately a ten-fold return on expenditure incurred in elections as they are risky investments.5 Black money used to win elections eventually grows in volume once such politicians come to power. How can this vicious cycle of black money generation be curtailed?
Even if the elections are funded by the government, still the corrupt politicians will try to make use of the loopholes in the system to make money. The prudent thing for the politicians would be to legitimately earn the money which they invest in elections by engaging themselves in business or other legal activities. Corruption should be addressed by institutional or structural reforms, which creates transparency in the administration. The most important thing is that the politicians who are caught in these scams and scandals are brought to the books. In fact, in countries like Japan, we have seen instances of even prime ministers demitting their office, once they have been charged in corruption cases. But nothing like that sort has happened in our country even though we have had a long history of such scams.
Systemic Changes Required to Stymie Illicit Fund Flows
The tax compliance rate in India is between 50 and 60%. We are aiming at a compliance rate of 80% like the developed countries. Will Goods and Services Tax & Direct Taxes Code help achieve this objective by broad basing tax incidence & incentivizing tax payment? What impact will this have on generation and flow of illicit funds?
There is no evidence that the existing tax system is responsible for generation of black money and that if the tax rates are brought down, the excess money would be accounted. The contribution of tax systems to the quantum of black money generated is not very significant.
It is estimated that only 30% of retail trade financing is catered to by banking institutions. The remaining money comes from moneylenders, most of whom possess considerable black money.6 How can government curb illicit money flows generated through the retail route in general and through the moneylenders in particular?
The corruption that happens at the retail level is much smaller in proportion to what happens at higher levels. Although they are also a menace and should be curbed, the corrective action should begin at the higher echelons rather than here.
An RBI report on total money circulation says that of the total currency in circulation in our country in March 2010, Rs. 500 and Rs.1,000 notes constituted 76.5 per cent (increased from 69.5 per cent in March 2008).7 A large part of this high value notes is believed to be used to lubricate the well-oiled black money machine. Is demonetization of these high denomination notes a plausible solution to curb black money?
There is no reason to believe that black money is generated through only high-value notes. In the past, the ten thousand rupees were demonetized too. But there is a big question mark whether it led to a fall in the proliferation of black money.
According to Mr.V.Ranganathan, tax evasion & retail corruption (through moneylenders etc.) play a minor role whereas the lion’s share of corruption stems from public & business’ interface with the government. In the course of this interview he also comes up with several ways to tackle the menace of corruption & black money. Significant among them are addressing the lack of transparency in governance, greater thrust on liberalization, strengthened institutions and scrutiny of businesses as well as public servants.
Ranganathan V. is currently a Partner in one of the big four audit firms & a taxation expert. He is based in Chennai. He is a Chartered Accountant and a Company Secretary. He holds a Bachelor of Commerce degree from the University of Madras. Mr. Ranganathan has got Functional Expertise in Corporate taxation including advice on inbound investments and cross border transactions, Corporate restructuring, mergers and acquisitions, Managing wealth of large business families, VAT / sales tax & Service tax. Over the past 25 years, Ranganathan has provided tax consulting and business advisory services to public and private limited companies. His background includes services to a variety of clients in industries such as manufacturing, automotive, networking and software.
- http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4548, India Knowledge @Wharton, Capital Plight: What Drives Corruption in India, Last accessed on 21st November 2011
- http://www.transparency.org/regional_pages/asia_pacific/tiap_regional_strategy_2012, Transparency International Asia Pacific (TIAP) Regional Strategy 2012, Last accessed on 21st November 2011
- http://india.gfip.org/, Global Financial Integrity: The Drivers and Dynamics of Illicit Financial Flows from India from 1948-2008-A November 2010 Report, Last accessed on 21st November 2011
- http://finmin.nic.in/WorkingPaper/Act_Giving_Bribe_Legal.pdf, Kaushik Basu, Why for a class of bribes, the act of giving a bribe should be treated as legal, Working papers of Economic division of Department of Economic Affairs, Ministry of Finance, Government of India, March 2011
- http://business.rediff.com/report/2010/jan/15/corruption-costs-india-rs-2-5-lakh-crore.htm, Rediff Business, Cost of corruption for India? Rs 2.5 lakh crore, Last accessed on 21st November 2011
- http://www.firstpost.com/politics/a-dummy%E2%80%99s-guide-to-tax-havens-and-black-money-42574.html, R Vaidyanathan,A Dummy’s Guide to tax havens and black money, Last accessed on 21st November 2011
- http://www.thehindubusinessline.com/opinion/article2313854.ece, R Viswanathan, Ways to tackle black money, Last accessed on 21st November 2011