$770-bn black money entered India in 10 yrs, $101 bn of that in 2014 alone

The period also coincides with a sharp rise in consumer inflation

A report by Global Financial Integrity (GFI) documenting illicit financial flows across the world has pegged the total illicit inflows in India between 2005 to 2014 at $770 billion. The yearly report titled ‘Illicit Financial Flows from Developing Countries’ also pegs the illicit money inflows in 2014 at $101 billion in the report. 

On the other hand, illicit outflows from India was pegged at $165 billion between 2005 and 2014. In 2014, the illicit money flowing outside India stood at $21 billion – a fifth of the outflows during the year. The report notes that most of the illicit inflows and outflows in India happened due to misinvoicing of exports and imports. 

But the sheer dominance of illicit outflows over inflows seems to suggest massive under-voicing by importers and over-voicing by exporters. The figures also indicate that India’s customs, Directorate of Revenue Intelligence (DRI) and Enforcement Directorate (ED) personnel have been unable to monitor and curb such practices which lead to massive losses in tax revenues for India. Import under-invoicing involves presenting fake bills which underestimate the value of imports which reduces the duty burden on the importer. Exporters resort to over-invoicing by presenting inflated bills to customs officials with the same motive. In either case, the country is deprived of taxes that should otherwise be flowing to its treasury. 

While it may seem that more money flowing into the country than leaving it should be good, the truth remains that much of it remains undetected.  The GFI had noted in its last year’s report, “The focus on outflows reflects the premise that illicit inflows do not make up for the capital lost due to illicit outflows, as they generally cannot be taxed or used to drive growth in the official private sector. On the contrary, illicit inflows tend to drive illicit outflows in a vicious circle. Illicit inflows often reflect activities that deprive developing countries of customs duties (particularly in the case of import under-invoicing), facilitate crime and corruption, and flow into the underground economy.”

The difficulty of detecting such frauds is also borne by the detection figures of the DRI, the lead agency tasked with detecting such frauds after which the ED takes over to probe instances of money laundering or foreign exchange violations. The DRI reportedly detected fraud to the tune of Rs 3100 crore or roughly around $483 million at current exchange rates in 2013-14. The GFI report for the period shows $83 billion in outflows from India. Clearly, Indian agencies seem to be struggling to detect even a fraction of these illegal money flows from and into the country. 

India’s exporters and importers are given a ten-digit Importer Exporter Code number (IEC) which is linked to their Personal Account Number (PAN). The DRI has maintained that this code is prone to manipulation as they can be obtained by fudging identity details and even genuine ones can be used by third parties without detection. 

The GFI’s latest report suggesting massive illicit inflows into India also coincides with a spike in inflation rates during the period. While these inflows may have been continuing for a long time, consumer inflation in India almost doubled between 2005 to 2013 when such huge amounts of money flowed into India’s underground economy undetected.   In 2005, consumer inflation in India stood at 4.2%. In 2010, consumer inflation touched 11.7% before settling at 9.13% in 2013. While this correlation mostly relates to the period when the Manmohan Singh led UPA government was in power, it would be interesting to see how things have unfolded since the Modi government took over in 2014. Consumer inflation seems to have come down to 5.86% in 2014 while it stood at 2.23% in 2016. So does this imply that illicit money inflows into India also declined with the Modi government coming to power? The next two editions of the GFI’s ‘Illicit Financial Flows from Developing Nations’ report could well answer that question.

The black spots of the World

Illicit Inflows (2005-2014)	In US $
China	$5.5 trillion
Russia	$1.7 trillion
India	$770 billion
Brazil	$378 billion
Source: Global Financial Integrity