Global Financial Integrity

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The Rut in India’s Economic Highway

Raymond Baker

This article was originally published by The Huffington Post.

Writing about India’s booming economic performance and growth potential has become its own cottage industry over the last several years. Indeed, a report out this week predicts that India will become the world’s fastest growing economy by 2012 and, by 2030, will likely be the globe’s third largest economy behind China and the United States. From its educated work force to its embrace of technology and the likelihood it will be among the leaders in developing “green” businesses, it appears that India – other than the Commonwealth Games – can do no wrong. But the rosy picture has a dark underside that must be addressed if India’s stagnant income inequality levels are to be overcome.

A new study of the magnitude of illicit capital outflows shows that close to one half trillion dollars have been siphoned out of the Indian economy since independence in 1948. This shocking figure is coupled with an equally alarming estimated annual growth rate of 16.4 percent. In the most recent years examined, India lost an average of $16 billion per year (2002 – 2006).

The report, “The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008,” by Global Financial Integrity a Washington, DC-based research and advocacy group, also notes that as the economy has improved, the amount of illicit money shifted to offshore financial centers has increased as well. Wealthy individuals and private companies “were the primary drivers” of illicit capital flight, the study finds. Moreover, those private companies, and no doubt some publicly-held firms too, mispriced goods in order to funnel money out of the country. In the last five years for which data are available (2004 – 2008) approximately US $89 billion in trade was mispriced.

A key driver of these illicit flows was that government oversight did not keep pace with deregulation of the market. “Trade liberalization,” the report notes “merely provided more opportunities [for] companies to misinvoice trade, lending support to the contention that economic reform and liberalization need to be dovetailed with strengthened institutions and governance if governments are to curtail capital flight.”

The simple truth is that a rising tide does not lift all boats. Despite India’s tremendous economic growth, this has not translated into an equal amount of poverty alleviation. While there has been progress in its Human Development Index score – which is an examination of health, education, and income levels conducted annually by the UN Development Program – over the last 30 years, the country still ranks 119 out of 169 nations. The rich in India, as the saying goes, get richer and many of the rest just muddle along. This is a pity given the country’s vast potential to help more people out of poverty.

The remedy is not technically difficult, but it requires political will which, sometimes, is a difficult commodity to find. A closer examination of trade pricing by the government would curtail a tremendous amount of money from leaving the country, but there is little indication the authorities acknowledge the problem. India has signed the UN Convention Against Corruption but has not ratified it, nor, as the most recent G20 communiqué urges of its members, “effectively implemented” its provisions.

There is a global component to the solution as well. The G20 must push for tax evasion to be just cause for charging someone with money laundering, which would cause many individuals and companies to think twice about avoiding the tax. Further, an international standard requiring that beneficial ownership of companies, charities and trusts be known by government authorities would create another hurdle for those wishing to hide money in shady places behind a veil of secrecy.

What must not happen is for the Indian government to rest on the notion of asset recovery as its first line of defense. This is a noble effort but, as history has shown, one which is has not been met with a great amount of success. Once money leaves an economy, it rarely returns. The poor deserve a better answer to the question “when will our turn come?” than the current government response of, “we’ll catch up to your money after it’s gone.”

Raymond Baker is the Director of Global Financial Integrity, a research and advocacy organization promoting increased transparency in the international financial system.