Wednesday, December 22, 2010

Of Black Money and Flight of Money




Given below are 2 articles on the status of the money flow in India. By a conservative estimation, 10 % of the GDP is black money (6 lakh crores) which goes into the economy as unorganized credit. The black money of the rich and the politicians go to tax havens which is estimated to be 280 lakh crores. In Tamilnadu, a part of it could have gone into film industry through the family of Karunanidhi.  

Kapil Sibal is calling and talking to Corporate giants. We don't know what he has talked. But going by his attitude we can say that it can not have anything to do with fairness from a common man's point of view. These corporates take more money from our money market but contribute less to our GDP, claims the article given below. The same corporates divert their money to foreign countries. and even make donations to foreign Universities while our Indian Universities languish for cash, claims another article.

As far as Tamilnadu is concerned it is people's money which goes to the local colleges and Universities. I don't know from where the money comes for the students joining medical and dental courses. Today to study Masters in Pediatric dentistry in a private college in Tamil nadu, one has to shell out 50 lakhs rupees as donation. People pay and study. I don't know from where they get this money. Certainly this can not be white money. What I can say for sure is that one of the future repercussions of black money circulating within the country is that we are going to get Doctors who have bought their degrees and are not worthy of medical practice.

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From 

The India growth story is propelled by black money

by

R Vaidyanathan                                                     
PROFESSOR OF FINANCE                                             
INDIAN INSTITUTE OF MANAGEMENT  
BANGALORE



Post-Nira Radia, many economists and experts have been wondering whether our reforms, which are supposed to be facilitating growth, are giving raise to crony capitalism. These experts look at India with western lens and cannot think beyond received wisdom from Oxford and Harvard. They do not realise that the corporate sector has a relatively small share of GDP — not more than 15%. We are a nation of the self-employed.

The service sector, which constitutes more than 60% of GDP, is the engine of our economic growth. It is predominantly driven by partnership and proprietor-owned firms engaged in construction, trade, transport, hotels, and other services provided by the likes of plumbers and painters. It is this self-employed sector that is propelling our 9% growth story even though corporate bodies and government ministers appropriate praise for the economy's performance. It is estimated that at least 10% (some suggest 30%) of our national income could be black money. It implies that out of nearly Rs60,00,000 crore of estimated GDP in the current year, more than Rs6,00,000 crore could be black money. A substantial portion is due to corruption by government employees. This money is not kept in cupboards or under the bed, though one '90s telecom minister (Sukh Ram) did stuff it inside pillows.


Money, white or black, circulates. The farther away it is from white, the faster it circulates. A big chunk of the working capital requirements of the unorganised sector is met through non-institutional funds like chits and money lenders. The retail trade has been growing at the compounded annual growth rate (CAGR) of 9.4% between 2004-05 and 2008-09 when the economy registered 8.6%. Trade includes everyone from street vendors to departmental stores. It has a 15%share of GDP, which implies that it adds value of Rs9,00,000 crore. In the case of retail trade, almost all capital is working capital. Assuming at least 60% of the value addition represents working capital needs, we get a figure of more than Rs5,00,000 crore as credit needs.  Of this, not more than 30% is provided by institutional credit, with moneylenders providing the rest. The same is the case with hotels and restaurants, transport and construction and other services, which — along with retail trade — constitute more than 50% of the economy. Almost all these are partnership/proprietorship firms.


They are classified as households in savings as well as lending data.The share of the household sector in bank credit has come down to 47% from 58% between 1990 and 2004 while the sector's share in trade, transport, construction, restaurants, and other services has been growing at more that 8% CAGR. Here, households include agricultural households and, to that extent, the fall is very significant. Put another way, the growth rate of the last decade is not related to the credit mechanisms of the banking sector. This is banking with significant structural distortions. The share of the private corporate sector in national income is around 12-15% but it takes away nearly 40% of the credit provided by the banking sector. The fastest growing non-corporate sector gets a lesser share, which suggests that the non-institutional financial sector is playing an important role in credit delivery.


We find that 43% of rural household and 25% of urban household debt relates to moneylenders . So, where does the unorganised sector get the funds? According to our absurd laws, moneylenders cannot borrow, but can only lend. The huge amount of black money generated by nearly 30% of government employees (the previous CVC, Pratyush Sinha, suggested a 30% corruption rate) is probably used in the unorganised credit market. Given the regulations pertaining to KYC (know your customer) norms, it is difficult to save with banks or mutual funds. So the entire black money is finding avenues in the unorganised market where interest rates are very attractive. The crime news in many towns is about violence between small-time moneylenders and enforcers. One can infer that policemen are entering the market both as lenders and collection agents. This has implications for our governance system since the duty of the cop is definitely not to support unorganised banking.


How do we deal with it? Since we are a relationship-based society, it is not possible to surgically remove the cancer of corruption. If we do that, our growth will suffer in the short term. The best way is to integrate the unorganised sector with the general financial architecture and enlarge the availability of credit and funding to all instead of restricting it to corporate 'thieftains'. We have to think beyond the 15% of our corporate economy to understand economic growth. Balancing the need for probity with growth of the economy is the big challenge of the coming decade. In other words, crooks do help in economic growth but society has to decide what price we are paying for this and strive to balance growth with probity and order.
The author is professor of finance and control, IIM-B. Views expressed are personal.



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From

Editorial

Worry About Indian Economy
Flight of Indian Capital is a matter of serious concern


INDIA today is witnessing a massive flight of capital. Indian corporates are finding it more attractive to invest abroad and make maximum profit than investing in the country and be part of the great India growth story. The Tatas claim that 60 per cent of their turnover is now coming from overseas. They have big investment plans abroad. Mukesh Ambani, according to a report has all his investment plans amounting to $12 billion in the next ten years for America. All the big industries, Aditya Birla, Anand Mahindra, Essar, Bharti have all declared their big investment plans overseas.

Not a day passes without reports of big deals in acquiring agricultural land, mine fields, oil and gas exploration blocs, even villas and islands by Indian private industries, PSUs and dubious politicians in little known terrains in Africa and Americas.

We are not discussing here the thousands of crores - one estimate projects it at ` 280 lakh crore - stashed away in tax havens by politicians, businessmen and bureaucrats. The Government of India is busy signing away billions of dollars in a bid to help the tattering western economies, as if there is no tomorrow. In the last one month, Manmohan Singh government entered into a $10 billion dollar deal with the US, $20 billion mirage upgradation and nuclear power equipment deal with France, another $10 billion deal on the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline through Afghanistan and Pakistan. Reports say that a mega $20 billion defence deal with the Russians is underway. Is India so flush with funds that it can shop around the world? Again some of the mega deals in civil aviation, shipping and transport have been finalised during the UPA-II term. The balance of trade with China is highly unfavourable to India despite the new trade treaty struck last week.

Two revealing interviews with captains of Industry - Ratan Tata and HDFC chairman Deepak Parekh - in The Indian Express in the past two weeks underline the growing unease in the Indian Corporate thinking. Parekh is reported as saying, "the big boys (of Indian industry) are looking outside India because it is easier to do business there. It's a straightforward business, it's no gray matter. You may pay a higher price to acquire companies, but in a year or two you make up for that". These big boys also contribute billions of dollars as donation to foreign universities in the US and UK where they studied; as goodwill gesture-or are they a PR exercise to create friendly investment climate-while Indian universities starve for funds. We have not heard of, but for very few exceptions, these big boys donating in any kind of charity in India. India, they take for granted and behave as if they have a birth right to loot and scoot.

The question is, is India rich enough to afford all this luxury? This is the country where some hundred millionaires hold assets worth over 25 per cent of the country's GDP. These millionaires find the West more hospitable. Their children are more at home in foreign universities. The industry heads investing abroad will find most of these NRI youngsters employed in their firms, thus preserving the umbilical cord with Mother India. But this is also the land where an estimated 700 million people live in poverty. And majority of them eke out a living with less than ` 20 a day. Can this India of such inequality and exploitation allow this flight of capital?

The logic of liberalisation was to attract investment into the country for India's infrastructure development, for creating jobs in India and removing poverty. Taking advantage of liberalisation Indian industrialists fattened their purses even as the rich-poor gap widened. They got heavy subsidies from tax payers' money, got large swathes of lands, mines and even rivers and mountains transferred in their name-all in the guise of growth, investment and job creation. At the time of recession two years ago, these big boys were in the forefront asking for huge bailouts from the tax payers' money. They have all made their mega millions in India. But now they behave as if creating jobs and economic recovery in America and Europe are their primary calling.

A lot of the investment these industries are taking overseas is part funded by our corrupt politicians who find it safer to invest abroad, where their children study and settle till it is time for them to return to India to reclaim their family political fiefdom.


Manmohan Singh who is credited with opening up the Indian economy is a silent, helpless spectator, if not a facilitator to this massive flight of capital from the country. He also has the dubious distinction of presiding over the most corrupt regime India has ever seen. The flourishing crony capitalism-about which we have often referred in our 'A Matter of Economics' column - is the biggest singular contribution of UPA-I and UPA-II.

The tragedy is this flight in investment is happening at a time when investments from the West to India have almost dried up. And the aspirations the India growth story and globalisation have created in the Indian psyche are real. Here is a situation where very few in the country have all the money and everything to splurge and a very large majority has almost nothing, to make the two ends meet. With education, new opportunities through reservations and vote bank politics in the next decade many more millions of Indians will start demanding better life. There will be a phenomenal burst in demand with the supply side remaining practically constant. This growing middle class population will add to the pressure on the already limited supply of food, clothing, housing, health and education. Can a stagnant economy, with its rich moving away their assets from the country meet their demands? The UPA seems to believe that it will not be there to confront this question.



 

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