dna edit: Broader approach

Prime Minister Narendra Modi is wasting no time in getting down to brass tacks. If his first day in office saw a spate of meetings with south Asian leaders, the second saw him move on an issue that had figured prominently in the BJP’s rhetoric over the past year. The decision to constitute a special investigative team (SIT) to probe black money in his first Cabinet meeting is a welcome change from the UPA administration’s dithering on the issue. As recently as May 16 this year, it had filed a petition asking for a recall of the 2011 Supreme Court judgment directing the setting up an SIT. The arguments made therein — pertaining to separation of power and the court encroaching on the executive’s domain — sidestepped the issue of the latter simply not having done enough in the matter. Modi has reversed that trend. But the process he has initiated must go beyond dealing with the most obvious problems and address the structural deficiencies that enable India’s shadow economy.

The primary focus of the public debate over the past few years has been black money generated within the county and stashed abroad. It makes for a clear-cut narrative and the figures are not to be sneezed at.

According to a report released last December by Global Financial Integrity, India exported about $344 billion of dirty cash in the decade ending 2011, making it the world’s fifth largest developing country exporter of black money. The amount of economic activity and public good those resources could have generated if kept within the system is massive. But a holistic approach is required to achieve that.

While former finance minister P Chidambaram had sent four letters to his Swiss counterpart warning that India may have to take action against Switzerland for failure to effectively exchange information under the double tax avoidance convention between the two countries, India had filed only 10 requests for judicial assistance with Switzerland over the past five years. Continuing to push for information pertaining to the list of Indian citizens allegedly holding HSBC bank accounts in Geneva, provided by the French government last year, is well and good — if need be, the Modi administration must use Section 94A in the Income-Tax Act to categorise Switzerland as a notified jurisdictional area as it had Cyprus last year — but equally, Indian regulators must also do more to initiate investigations within the country and furnish the required information to the Swiss, or any other government.

That is where the waters get muddier. The simple fact is that black money is unlikely to remain static. While some of it may well be retrieved from foreign accounts, the bulk is more likely to either be invested in various assets around the world or laundered via multiple avenues and routed back into India. And that points to several structural issues, among them: how to clean up the real estate sector where a substantial portion of the dirty money is generated; how to expand the abysmally small tax base and, concurrently, incorporate more of the cash-only economy into the banking system; trickiest of all, the pipelines that route black money into the political system for party funding. Switzerland and Liechtenstein may make for good headlines, but without this, the roots of the problem will remain untouched.