The breast beating about the state of Indian Economy is getting louder. The lament now is (even) Pakistan has attracted more money. (see
Not too many months back, all our great leaders and economic think tanks were gung ho about Indian Economy’s great march (e.g. Pranab’s budget 2011-12) towards becoming third largest economy by 20xx, an economic superpower and blah blah.
Then the corruption scandals started hitting head lines. Some of these people were joined by industry leaders to say that all this corruption talk negatively affects India’s image with investors (read FIIs).
It must be truly galling for our great leaders, think tanks, economists, and ‘experts’ in media that Pakistan, which most Indian’s think to be a basket case or that it is not even worthy of being called a state any more, attracts more money than India this year.
What does one make of the FIIs of whom we are so enamoured? Should we conclude that FIIs are not really bothered about corruption or even ‘governance’?
Let us look at what these FIIs are. These FIIs take the first mouse click away with their money the moment there is any talk of doing away with the participatory notes (popularly known as PNs) or there is any talk of renegotiating the tax treaties with Mauritius and other tax havens.
The PNs allow investors abroad (mostly NRIs) to keep their identity secret from the Indian regulators. You and me with our little silly sums have to not only prove our identity but we also have provide a lot of details when we invest in mutual funds, open demat accounts or for now opening the bank accounts.
But the FIIs with billions of dollars of money to invest can keep the identity of investors ho open the account with them completely under wraps. The NRIs operate through FIIs because they can hide their identity. No KYC (know your customer norms for them (you must be getting inane KYC letters and SEBI memos from time to time). Neat.
If you consider that significant amount money has been kept by Indians in swiss banks and other such havens then you can guess why FIIs get nervous whenever there is a talk KYC norms being applied to their customers or when there is proposal to do away with exemptions to tax havens.
Why would anyone like to keep his or her identity cloaked? No, they are not scared of house breaks. It is obvious that they have something to hide.
And why should money coming via Mauritius be taxed differently as compared to money coming directly from say USA or Germany?
FII (NRI) money is (mostly) black money and black money is hot money. That’s why India gets little FDI (direct equity investment in setting up companies) and a lot of FII money. FDI is subjected to lots and lots of checks.
Our politicians use black money to fight elections. Our businessmen use black money to influence the politicians and bureaucrats. A great proportion of our land deals are done using black money. Some part of cross border transactions are funded through havala money flows. There is a whole thriving economy there that runs on black money. And money constantly changes colour. Our laws (e.g. tax havens are legal, granting and taking away exemptions at the stroke of a pen are legal, rich farmers not paying any tax is legal), lack of enforcement, totally opaque land records, glacial justice systems, complete protection from prosecution for bureaucrats and ministers and so many facets of our ‘system’ seem only to be designed to perpetuate the thriving black economy.
Why would anyone who is somebody (that means in India somebody with a lot of money or influence) do anything to disturb this heaven for black money?
There are some who say that a lot of black money has already come in India and that it has already become ‘white’. I agree. One has to investigate trails of major inflows over a sizeable period if one has get at the bottom of corruption and prevent it.
But if you are one those NRIs, fret not. You are in really august company. Nothing will come out all this fasts unless there is a revolution in the way Indians think and behave. But we have no stomach for any revolution, we got our freedom through peaceful ways.
India is not America to punish it’s (mighty) people. India is India.