The game of underinvoicing and overinvoicing resulted in a total capital flight of $11.3 billion in 1994 and 1995, according to a study conducted by three economists of the Florida International University of the US. The study, which has been published in the latest issue of Finance India, a quarterly journal of the Delhi-based Institute of Finance, indicates that the extent of capital flight to US was $5.8 billion in 1994 and $5.5 billion in 1995.
The study indicates that the extent of income shifts due to overpricing of imports in 25 product categories was 32 per cent in 1994 and 23 per cent in 1995. In exports, underpricing resulted in an income shift of 58 per cent in 1994 and 39 per cent in 1995 across 25 product categories.
Clearly, abnormal pricing is leading to a heavy outgo of resources while at the same time there is a significant drop in the extent of capital flights.
The study recommends that India should adopt a transaction based audit and inspection programme to control and determine both the level of physical inspection and the means of inspection. The idea should be to achieve a cost-effective system of monitoring international trade while at the same time detecting capital flight.
The study compared the average price of products imported to India from the US with the average price of products with identical characteristics purchased from US by the rest of the world during 1994 and 1995.
The study has also analysed the transaction prices assuming different degree of commodity hoterogeneity.
It also considered the dollar value of price deviation from average US/world prices for India-US import and export transaction prices for all products.
A comparison between import prices indicated by Indian importers and those obtained by purchasers elsewhere in the world revealed that overinvoicing was between $481.7 million and $660.8 million in 1994 while the range was between $587 million and $840.4 million in 1995.
Detection of capital flight will not only provide additional resources for investment, it will also help check income tax evasion and import fraud.
