Bulk of black money in India likely to be in real estate transactions
Indian governments get half a per cent of GDP from property taxes. That is pretty low- the average is 1.2 per cent for the BRICS and 1.9 per cent for the G20.
There are few facts on black money but everyone has a view on it, the commonest being that there is a lot- too much-of it. Those who work in the media have white money. So, they are the most likely to take this view. How well founded is it?
The conventional definition of black money is income on which tax has not been paid. If it were spent on consumables, it would vanish in thin air forever. It can be traced and identified only if it financed a durable asset. Very few people who have made money are idiots; most of them would have paid partly in white so that they would have a legal title to the asset. So, most black money would involve undervaluation. Cash deals were common on stock exchanges before they went electronic. Nowadays, a cash transaction in financial assets would be too much of a trouble. Hence, the bulk of black money in India is likely to be in real estate transactions. Corporates and rich taxpayers generally prefer to pay in white even for real estate; and builders are quite ready to take payment by cheque for new property because of the expenses they have to incur in white. Most of the black money is likely to be involved in subsequent sale of property. Indian governments get half a per cent of GDP from property taxes. That is pretty low- the average is 1.2 per cent for the BRICS and 1.9 per cent for the G20. This is not because Indian property prices are low, or because Indian property taxes are high. And Indians do much trade in property-it is their favourite durable asset. Hence, undervaluation is likely to be common. In fact, we can say that property undervaluation is the commonest form of black money in India. It is so common that no one gets worked up about it.
What they do get worked up about is black money parked abroad, because it is supposed to be the privilege of the tiny minority of filthy rich. Many estimates of it have been made. The first attempt was made in the World Bank's World Development Report of 1985. Every country has a currency. So, there are as many possibilities of conversion between currencies as there are pairs of currencies. For many decades, all governments used to worry about the balance of payments, which is a summary of such transactions, and used to keep reserves of gold or foreign currencies to be able to influence it. Some industrial countries no longer do so, but they all still compile balance of payments statistics.
However, these statistics never balance. All balance of payments statistics have a residual entry called errors and omissions. The first black money enthusiasts assumed that the errors and omissions were flows of black money. The statistics are never the same for pairs of countries. For example, India's exports to Baltistan are different from Baltistan's imports from India. The second set of enthusiasts assumed that the difference (after adjusting for intercountry costs such as freight and insurance) was due to misinvoicing and hence black money. And economists are a competitive and innovative lot. Others invented new techniques of estimation. For instance, if the ratio of interest inflows into a country to its investment outflows looked too low, it was assumed that someone must be salting away interest abroad.
It would be silly of me to say that no one sends money abroad clandestinely. As long as the government charges an import duty on gold, it must be highly profitable to smuggle it in. The smuggling channels developed by Dawood Ibrahim and company in the 1980s remain available to all entrepreneurs.
But gold smuggling apart, I do not think rich Indians have any reason to resort to hawala. A rich man can avoid all taxes by keeping his wealth in unrealised capital gains, and has to pay only 10 per cent even if he realises them. There are simple, legitimate ways to take money abroad. The Reserve Bank of India allows all of us to transfer $125,000 a year abroad without any questions. It lets us invest abroad; all we have to do is tell our bank. If that is not enough, one can do whatever one likes abroad, as long as one does not spend more than 182 days in a financial year in India. If one does not like to be not ordinarily resident, any number of countries abroad would give a rich Indian residence or nationality. So, there is no need to resort to black money. But faith is free. If anyone wants to believe trillions are stashed abroad, let him choose his figure.
Ashok V. Desai is an economist and former chief consultant to the Ministry of Finance