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The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008

A November 2010 Report from Global Financial Integrity

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Primary Findings

From 1948 through 2008 India lost a total of $213 billion in illicit financial flows (or illegal capital flight). These illicit financial flows were generally the product of: corruption, bribery and kickbacks, criminal activities, and efforts to shelter wealth from a country's tax authorities. (51)


Adjusted Estimates: The present value of India's total illicit financial flows (IFFs) is at least $462 billion. This is based on the short-term U.S. Treasury bill rate as a proxy for the rate of return on assets. (51)


IFF Breakdowns:


  • Total capital flight represents approximately 16.6 percent of India's GDP as of year-end 2008; (51)
  • Illicit financial flows out of India grew at a rate of 11.5 percent per year while in real terms they grew by 6.4 percent per year; ( 51)
  • India lost $16 billion per year from 2002-2006. (1)


IFF Drivers: High Net-Worth Individuals (HNWIs) and private companies were found to be the primary drivers of illicit flows out of India's private sector. (ix). India's underground economy is also a significant driver of illicit financial flows. (53)


IFF Trends: From 1948 through 2008 the Indian private sector shifted away from deposits into developed country banks and towards increased deposits in offshore financial centers (OFCs). The share of OFC deposits increased from 36.4 percent in 1995 to 54.2 percent in 2009. (x).


About the Author

Dev Kar, formerly a Senior Economist at the International Monetary Fund (IMF), is Lead Economist at Global Financial Integrity (GFI) at the Center for International Policy. The author would like to thank Karly Curcio, Junior Economist at GFI, for excellent research assistance and for guiding staff interns on data sources and collection. He would also like to thank Raymond Baker and other staff at GFI for helpful comments. Finally, thanks are due to the staff of the IMF's Statistics Department, the Reserve Bank of India, and Mr. Swapan Pradhan of the Bank for International Settlements for their assistance with data. Any errors that remain are the author's responsibility. The views expressed are those of the author and do not necessarily reflect those of GFI or the Center for International Policy.


Read more about Dr. Kar...


India's underground economy is closely tied to illicit financial outflows. The total present value of India's illicit assets held abroad ($462 billion) accounts for approximately 72 percent of India's underground economy. This means that almost three-quarters of the illicit assets comprising India's underground economy—which has been estimated to account for 50 percent of India's GDP (approximately $640 billion at the end of 2008)—ends up outside of the country. (vii, 19)


The finding that only 27.8 percent of India's illicit assets are held domestically support arguments that the desire to amass wealth illegally without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital. (vii, 19)


In the post-reform period of 1991-2008, deregulation and trade liberalization accelerated the outflow of illicit money from the Indian economy. Opportunities for trade mispricing grew and expansion of the global shadow financial system—particularly island tax havens—accommodated the increased outflow of India's illicit capital flight. (Introduction)


There is a statistical correlation between larger volumes of illicit flows and deteriorating income distribution. (35)



Tax evasion is a major component of the underground economy, which in turn is a primary driver of India's illicit outflows. Expanding India's tax base and improving tax collection has high potential to curtail illicit flows.


Illicit financial flows cannot be curtailed without the collaborative effort of both developing and developed countries. Economic reforms key to stemming the outflow of illicit money from India and the developing world in general include:




Dev Kar, the author of the report, utilized the World Bank Residual Model (CED) and a trade Mispricing Model based on IMF Direction of Trade statistics.


The World Bank Residual Model tracks illicit outflows by measuring differences in a country's recorded source of funds relative to its use of funds. According to this method, illicit outflows exist when a country's recorded source of funds exceeds its recorded use of funds.


The Trade Mispricing Model compares a country's recorded imports to what the world says it exported to that country; similarly, the country's recorded exports are compared against world imports from that country. Import values are adjusted for the cost of freight and insurance before they are compared to exports. GFI's estimates of trade mispricing are based on the gross excluding reversals (GER) method which tracks illicit outflows as a result of export under-invoicing and import over-invoicing.


The author identified the drivers of illicit flows from India using a block-recursive dynamic simulation model which incorporated macroeconomic factors (government deficits, inflation, and inflationary expectations) structural factors (increasing trade openness, faster rates of economic growth and impact of these on income distribution), and overall governance as captured by a measure of the underground economy. (14)



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