We complain about black money. For most of us, black money is money in suitcases, printed notes of currency. We imagine that there are huge stashes of currency in politicians' houses, that industrialists are, quite literally, rolling in the stuff. Our new-age yoga enhanced civil society members even demand that we should stop the use of Rs. 500 and Rs. 1000 notes because they help corruption.
And I say that at a macro level, we should be more worried about white money.
Because RBI's statistics — they release this every week — say that the total amount of rupees in notes printed is about Rs. 10 lakh crores. Our GDP is about 80 lakh crores. Even if 30% of the total money printed was being hoarded as black money, it's about 4% of GDP. This is not small; but I argue that this is not big enough. I mean there is much more illegal money out there than 4% of GDP. And that also means the black money is being laundered into white money quite easily.
From doctors to lawyers to small hotels to vegetable vendors, there is a large amount of cash exchanged. Some of these merchants keep the money in cash, and refuse to declare them, thus creating black money. Many buy property, transferring money to the uber-rich, who can now launder the money.
At the really big money level, laundering money isn't very difficult. First, the cash generated is sent out of the country through hawala, which involves calling someone who says give cash to person X and we'll deliver dollars to person Y. Once it's offshore, it's brought back in, in various ways. Since Switzerland, till recently, didn't ask too many questions, a lot of money went into Swiss banks (and banks in Dubai and other not-so-cooperative countries).
Then some of it was channeled back to India as "FII" —a foreign institutional investor - money, back into the Indian equity markets. There are then numerous ways to use that money to pump up the stock price or otherwise distribute the money in the "white" channel. In 2007, when SEBI and the RBI expressed their desire to curb such investments by demanding more details of the eventual source, the markets tanked 10% and hit the lower circuit the next day. SEBI clarified that the restrictions would apply only after 18 months and everything went back on track.
Why does equity investing become attractive? Equity investing is tax free if you hold the money for over a year. Also, for short term money, FIIs also use the Mauritius route to come into India, and because of a Double Taxation Avoidance Treaty, India doesn't tax such entities — and it turns out that Mauritius doesn't either. No tax means a great opportunity to launder money; the only problem with black money is that no tax is paid on it.
(If a minister is paid the highest ever rental for any commercial property at the time, that seems to be ok. Because he'll pay tax on it. Or so it seems.)
Special Economic Zones (SEZs) for instance, pay no tax. So all one has to do is set up an SEZ in India, and then send money in from abroad against an invoice. When software exports were tax-free, money was laundered there. Now with the Minimum Alternate Tax (MAT) reaching 20%, this avenue is less useful.
