Despite a slowing world economy, India’s exports are booming. After growing 38% in 2010-11, they are growing even faster this year – by 46.4% in June, 81 % in July and 44% in August. This beats even China hollow. Cynics say this is too good to be true. Earlier, crooked businessmen took black money abroad by under-invoicing exports. Could they be bringing back their black money as over-invoiced exports? Does this explain the export boom?
Very possibly, according to a new report from three researchers at Kotak Securities. They looked at export data from company reports of the BSE 500 (the top 500 companies of the Bombay Stock Exchange) and compared these with official data for 2010-11. For engineering exports, official data showed a huge increase of $30 billion, but engineering companies of the BSE 500 showed an export increase of only $1.38 billion. Who accounted for the balance of over $28 billion? Minor companies? Ghost companies? Large private companies owned by big businessmen but not listed on the stock exchanges?
The researchers found that exports of metals and metal products increased from $13 billion to $29 billion, according to official data. But the companies in the BSE 500 increased such exports by less than a billion dollars. Official data say exports of copper articles more than quadrupled to Rs 36,700 crore. The big new buyer was China, not normally a buyer of brassware handicrafts . Opposition parties are suddenly interested in the matter since one of the bestknown exporters of brassware is Robert Vadra. Possibly copper articles other than brassware are now being exported by large companies. We require a detailed export breakdown. The Kotak Securities researchers also found anomalies in inflows from foreign institutional investors. Official inflows last year were $22 billion, but the data of EPFR Global, an international authority on global flows, show inflows of only $4.5 billion, leaving a gap of $17.5 billion compared with official data.
The researchers are cautious in interpreting their findings. They do not make any categorical accusations, but mention the possibility of illicit inflows and roundtripping by Indian crooks. Part of the data gap they have uncovered may be explained by differences in methodology and data sources. In any event, we need a thorough examination by the Indian authorities.
Many people have jumped to the conclusion that the export boom represents overinvoiced exports to bring back black money. They argue that economic conditions are bleak in the US and Europe, and Indian economic prospects look better. Besides, Indians with black money abroad may feel threatened by US pressure on tax havens like Switzerland to end bank secrecy, and such Indians may be bringing back their money.
However, this theory has major weaknesses. When crooks under-invoiced exports in the past, the concealed sum was invisible to and untaxed by the government. But if crooks want to bring back this black money, it makes no sense to do so through over-invoiced exports–the inflated export value would be fully taxable.
In the old days, export profits were partly or wholly tax-free. In those days, over-invoiced exports could indeed be used as a way of bring money back to India tax-free. But not today. One simple way of bringing back black money is through the hawala market. But while hawala operators can handle large sums, they might not be able to handle thousands of crores.
The most popular way of bringing back black money has been to route it through financial institutions based in tax havens like Mauritius. This launders the black money lily-white, and remains tax-free. It has none of the hassles and risks of over-invoicing. Black money can also be brought back safely as NRI bank deposits. This again will be white money, hassle-free and tax-free. Thirty million Indians abroad send home $55 billion a year as cash remittances and tens of billions more as NRI bank deposits. Black money returnees should easily escape notice as a small part of this huge flood.
Finally, the worsening global economic situation has led foreign investors to pull billions of dollars out of India. This is not the climate in which black money operators would suddenly bring home enormous sums. Nor do we have imminent big elections requiring massive black money.
So, the export boom remains a puzzle. We need an urgent, detailed investigation of Kotak Securities’ research findings by the tax authorities, RBI and the commerce ministry. Even if they come up with a perfectly innocent explanation – which sounds a stretch – we need the details to improve our understanding of what’s driving exports.