Narendra Modi should be looking for black money in India

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Like all politicians, Narendra Modi promised more than he could deliver while campaigning to become Indias
prime minister. Critics are now making him pay. Earlier this week, a furor erupted after Modi acknowledged a
setback in efforts to recover the billions in illicit, untaxed black money stashed abroad in foreign bank
accounts. After lambasting the previous Congress-led government for failing to make public a list of Indian
account holders in Liechtensteins LGT Bank, he admitted he couldnt do so either because of confidentiality
requirements in an existing agreement with Germany. While Modis promise was foolish, the black-money
campaign is more so. Not only is identifying the holders of those overseas accounts going to be harder than the
prime minister imagined. The fact remains that the real mountain of illicit cash is sitting at home in India, not in
some Swiss bank. There is no official estimate of the size of Indias parallel economy. Unofficial calculations,
such as one by the Washington-based think tank Global Financial Integrity, estimate that $460 billion has been
stashed in foreign bank accounts, equivalent to around a quarter of Indias gross domestic product (GDP). But
that is a one-time stock figure calculated over a 60-year period between 1947 and 2008. Indias annual GDP is
a flow. And by some estimates, including leaked reports of a study commissioned by the government, an
amount equal to 70% of Indias $2 trillion GDP about $1.4 trillion is hiding out in India itself. Of course, as
long as that money is spent or invested at home rather than hidden abroad, it boosts economic activity and so
doesnt represent a deadweight loss for the economy. But it does impose a cost on the government in terms of
lost tax revenues -- something the exchequer can ill afford given its persistent fiscal deficit and huge spending
needs. At Indias current tax-to-GDP ratio of just over 10%, an additional $1.4 trillion of GDP would yield taxes
worth $140 billion. That would wipe out the deficit currently around $100 billion. If he really wants to
eliminate the pool of black money, Modi could adopt three obvious policy measures without running afoul of
bank secrecy laws or foreign governments. Each would address one of the root causes of the problem:
campaign finance, real estate and tax law. First, Modi should fight to require all political parties to declare the
source of any donation more than a rupee. This might sound ludicrously low, but in India, which has neither
public financing for campaigns nor effective campaign finance laws, the need for political funds is one of the
main drivers of official corruption. Current regulations require parties to name donors for any amounts over
Rs20,000, or about $300. Curiously, most parties claim that over 80% of their donations are made in
increments less than that. Second, the government must close the gap between so-called circle rates for
property the minimum valuation set by the government and market rates. Transactions are usually listed
at the former, while the actual sale price is much higher; the difference is invisible to tax authorities. In a market
economy, theres no need for the government to set an official price for real estate at all. There should be only
one taxable market rate. Third, Modi must fulfill his promise to implement a long-overdue goods and
services tax (GST). Hes set a deadline of six months from now to roll out the measure. How the tax is finally
implemented matters greatly. Crucially, the government must ensure that no goods or services receive
exemptions and that the rate is reasonably low, cutting out avenues and incentives for evasion. Presumably,
even the black money stashed abroad has to be generated in India. Better that Modi bring it out of the shadows
here, before it has a chance to flee beyond the governments reach. Bloomberg
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