The Global Financial Institute (GFI) estimated in a widely quoted 2010 report that between 1948 and 2008 India lost, in current money value, $462 billion due to capital flight. Within this period, given that bad laws and rules generate a part of the black money and given that economic reforms happened in 1991, did capital flight go down in volume after reforms? No. GFI estimates between 2002 and 2006, $16 billion went out annually. Capital flight has increased post-reforms. What's happening?
4) Natural Resources & Democracy
Post-reforms, policy-created shortages have become rare, tax rates are reasonable, exchange rates are realistic. All this acts against creation of black money. But large amounts of discretion remain in the hands of government, especially over allocating natural resources and election campaigns have become more expensive.
Politicians need huge amounts of money to finance campaigns and they use discretionary powers of resource allocation to get that money from the favoured. This is big-ticket corruption. And reforms haven't killed big-ticket corruption. Since corruption means money ill-gotten, it flows out of the country. So, black money generation in recent times is in a large part thanks to political corruption.
5) Post-Reform Reform
To get at the source of black money, we must therefore reform our electoral system. Politicians need to feel less compelled about feeding the poll beasts. Alongside, of course, discretion over resource allocation must go down. But if the first doesn't happen, and given that a completely non-discretionary and transparent government allotment system is pretty much impossible, black money will get generated.
6) Concentrate on the Future
On black money generated in the past, GoI didn't act much for a long time and now has to do more via bilateral treaties to get information out. Swiss and Liechtenstein banks are now more amenable to sharing information thanks to pressure from the US and Germany. India can step up the pressure, too, provided there's political will. But GoI should concentrate more on preventing future generation of black money. That's what the debate should be about.
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