Devangshu Datta: Black or white, anything goes

WORMS' EYE VIEW

Over the next quarter, various governments will achieve preliminary closure on the accounting for tsunami damage. It is already obvious that it will cost massive amounts for reconstruction.

For Indonesia, Thailand and Sri Lanka, the reconstruction bills will run to over 50 per cent of respective GDPs (figures of 65 per cent-plus are being quoted).

Even India, which is vastly larger than the other affected nations and suffered "only" a glancing blow, will have to find 10 to 15 per cent of GDP equivalent to fund reconstruction.

It is a socio-economic imperative that reconstruction starts immediately and concludes quickly. This is not just for humanitarian reasons but because the productivity of entire economies will be crippled if assets are not put back in place.

The sheer dimensions present a major problem, the largest since the second World War. It is almost impossible, even for nations with strong growth economies and stable financials, to recover unaided from the damage of this order.

Indonesia and Thailand are suffering a hangover from the Asian Flu of 1998, and Sri Lanka has been a war zone for two decades with all the attendant ills.

It will be difficult for these countries to absorb aid to the tune of such large chunks of the GDP. Even assuming that money of this order is raised on lenient terms, the recipients may not be capable of using it efficiently and they will certainly be stretched to repay it.

The last such effort occurred in the post WWII era, when the Marshall Plan revitalised Europe and Japan. That was a different time. It may be argued that the Marshall Plan helped reflate the global economy, which was still suffering from the after-effects of global war and depression.

It's unlikely that any transnational effort circa 2005 would raise the money this reconstruction requires and simply give it away a la Marshall.

More likely, we'll see a series of vast multilateral lending deals, structured with long repayment periods at concessional rates. Even at the best possible terms, that level of debt could turn balance-of-payment equations right around. This applies even to India, despite its burgeoning forex reserves.

In these circumstances, it is imperative that every affected country uses every available resource to try and lighten the burden. The reconstruction will need vast sums of cheap, or ideally, free money. That money will have to be found quickly.

For India at least, there may be an escape clause from the debt-trap. According to every credible estimate, official Indian GDP is understated by between 25 per cent and 50 per cent due to the thriving parallel or black economy.

Black money has high velocity and the people who control it are perforce, satisfied with extremely low returns for they cannot afford to declare it.

Can the Indian reconstruction and relief efforts tap into the black economy? It must. This is the sort of situation where money ceases to have colours. Nobody on the ground should care whether it's black, white or green. So long as it funds reconstruction.

Over the years, the Indian government has made sporadic efforts to unearth black money. Those efforts have usually consisted of VDIS (voluntary declaration of income schemes) plans of some description.

The present finance minister presided over the last, hugely successful, VDIS in 1997-98. That one involved simple declaration. Earlier plans involved the sale of instruments such as Indira Vikas Patras, which act like bearer bonds issued by the Reserve Bank of India.

It is time for the FM to apply his ingenuity to creating a new VDIS plan designed for tsunami relief and reconstruction. Perhaps he can sell a special issue of long-term, zero-interest tsunami relief bonds?

If immunity from tax probes is guaranteed, an issue of this type would raise vast sums of money and avoid the headache of juggling BoP implications and so on. It would also give one class of persistent offenders a chance to pay their debts to society.