Why Modi Govt’s Latest Spin on Black Money Doesn’t Make Much Sense


Late last week it was reported that the amount of money held by Indians in Swiss Banks has come down. After the news came out, it was said that this reflects the success of the Narendra Modi government’s policy on black money.

As The Economic Times reported: “India’s drive against black money seems to have yielded some results with the latest Swiss National Bank (SNB) data showing a sharp decline in Indian deposits in 2015, the year New Delhi enacted a tough law.”  The Press Trust of India, reported the Revenue Secretary Hasmukh Adhia as saying that the “the data indicated the government’s steps to recover black money were in the right direction.”

Sambit Patra, the national spokesperson of the Bhartiya Janata Party claimed the same on Twitter, when he tweeted: “What #ModiGovt has done against Black Money!!-India slides to 75th slot on Swiss bank money list.”

But as we shall see, this is nothing more than marketing spin.

For a tax haven, Switzerland is very open about the total amount of money that has come from different countries and is with Swiss Banks. The Swiss National Bank has been declaring this data for a long time. Take a look at the following table. This shows the total money that Indians have in Swiss banks.


YearIndian money in Swiss banks (in Swiss francs)
Source: Swiss National Bank 


So Indian money in Swiss banks in 2015 stood at around 1.207 billion Swiss francs. This is the lowest in 20 years. So doesn’t that make it an achievement for the Modi government? Doesn’t it mean that the Modi government’s crackdown on black money has been successful? Not really.

The advantage of looking at data across a very long period of time is that it doesn’t bluff. As we can see from the above table, Indian money in Swiss banks peaked in 2006, when it was at around 4.99 billion Swiss francs. The trend has been largely downward since then. In fact, the biggest fall in absolute terms came between 2006 and 2007. In 2007, Indian money in Swiss banks fell to 2.92 billion Swiss francs.

Back then Narendra Modi was the chief minister of Gujarat and Manmohan Singh was the prime minister of India. So does that mean Manmohan Singh did better than Narendra Modi? The answer again is no. In fact, the Indian money in Swiss banks fell dramatically between 2007 and 2008, and even between 2011 and 2012. All these times, Manmohan Singh was the prime minister.

The total amount of Indian money in Swiss banks coming down doesn’t indicate the success of India’s politicians in tackling black money. Black money is essentially money which has been earned but on which tax has not been paid. Firstly, not all Indian money in Swiss banks is necessarily black money. Individuals are allowed out to take some money out of the country, every year.

Take a look at the data carefully. The total amount of Indian money in Swiss banks started to fall in 2006. Since then, the amount has largely had a downward trend and is now at a 20-year low. In fact, 2005-2006 was the time when the Indian economy was really taking off. The stock market as well as the real estate market were both doing well.

What the initial fall clearly indicates is that a lot of black money that had left India simply came back to India. In fact, the Finance Ministry’s White Paper on black money published in 2012, makes this point: “The two topmost sources of the cumulative inflows from April 2000 to March 2011 are Mauritius (41.80 per cent) and Singapore (9.17 per cent). Mauritius and Singapore with their small economies cannot be the sources of such huge investments and it is apparent that the investments are routed through these jurisdictions for avoidance of taxes and/or for concealing the identities from the revenue authorities of the ultimate investors, many of whom could actually be Indian residents, who have invested in their own companies, though a process known as round-tripping.”

A similar sort of round-tripping also happens in the stock market through an instrument known as participatory notes (PNs). As the White Paper points out: “Investment in the Indian Stock Market through PNs is another way in which the black money generated by Indians is re-invested in India. PNs or overseas derivative instruments (ODIs) are issued by FIIs [foreign institutional investors] against underlying Indian securities, which can be equity, debt, derivatives, or even indices. The investor in PNs does not hold the Indian securities in her/his own name. These are legally held by the FIIs, but s/he derives economic benefits from fluctuation in prices of the Indian securities, as also dividends and capital gains, through specifically designed contracts.”

Hence, the fall in Indian money held in Swiss bank accounts simply indicates that a significant part of this money has come back to India. Further, between 2005 and 2011, the real estate market was going great guns. Hence, it is safe to say that a lot of black money which would have otherwise left the country, continued to stay in India and found its way into real estate. This is now reflected in the lakhs of home which have been bought and lie locked all across the country.

It also needs to be pointed out here that since 2008, after the start of the financial crisis, the fixed income returns in Western financial markets have been very low. That is another explanation of why a lot of black money may not have left India.

Further, there is this huge misconception that people have, that all the black money in the world goes to the Swiss banks. While this was correct until a few decades back, this isn’t true anymore. The world now is full of tax havens. There are around 70 tax havens all over the world and the black money that has left the shores of India can be almost anywhere in the world. It need not necessarily be in Switzerland.

While Switzerland was the original tax haven where people who did not want to pay tax in their home countries, took their money to, things have changed since the 1980s. New tax havens like Singapore, the Bahamas, Luxembourg, Hong Kong etc., have emerged over the years.

As Gabriel Zucman writes in The Hidden Wealth of Nations—The Scourge of Tax Havens: “In all these tax havens, private bankers do the same things as in Geneva: they hold stock and bond portfolios for their foreign customers, collect dividends and interest, provide investment advice as well as other services, such as the possibility of having a current account that earns little or nothing. And, thanks to the limited forms of cooperation with foreign tax authorities, they all offer the same service that is in high demand: the possibility of not paying any taxes on dividends, interest, capital gains, wealth, or inheritances.”

Further, many tax havens are not open about their data, as Switzerland has been over the years. In fact, it is safe to say that the focus of the Indian government on black money over the last few years, may have made people move their money from Switzerland into other tax havens.

Hence, the point is that Indian money in Swiss banks falling, doesn’t really mean that the Modi government’s black money policy is working. If it was the success it is being made out to be then many more people would have declared the black money they have overseas, during the compliance window offered between June and September, last year.

Taking advantage of the compliance window 638 declarants declared assets and income of Rs 4,147 crore in total. This meant that the government was able to collect around Rs 2,488 crore (60% of Rs 4,147 crore) as tax revenues. This obviously is an extremely low amount.

The column was originally published in Vivek Kaul’s Diary on July 7, 2016