ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Measuring Illegal Outflows: A Rejoinder

In a rejoinder to Arun Kumar ("Measuring Illegal Outflows from the Indian Economy: Some Methodological Issues", EPW, 29 September 2012), who felt that the paper "An Empirical Study on the Transfer of Black Money from India: 1948-2008" (EPW, 9 April 2011) suffered from definitional and methodological fl aws, the author clarifies some basic issues related to the methods used to estimate illegal capital fl ight or illicit fi nancial flows.

An Empirical Study on the Transfer of Black Money from India: 1948-2008

This paper provides an in-depth analysis of the drivers and dynamics of black money transfers (illicit financial flows) from India since the first full year after independence until 2008. It is estimated that a total of $213.2 billion was shifted out of India between 1948 and 2008, or about 17.7% of India's GDP at end-2008. Applying rates of return on these assets based on the short-term US Treasury bill rate, the total gross transfers of illicit assets by Indian residents amount to $462 billion at the end of 2008. Over this period, illicit flows grew at a compound nominal rate of 11.5% per annum while in real terms they grew by 6.4% per annum. An important finding is that illicit flows from India are more likely to have been driven by a complex interplay of structural factors and governance issues than they are by poor macroeconomic policies. There are reasons to believe that the cumulative loss of capital is significantly understated because economic models can neither capture all sources for the generation of illicit funds nor the various means for their transfer.

No Cause for Comfort

Since the global financial crisis unfolded, policymakers and politicians in India have claimed that prudential government regulation and oversight spared Indian banks the calamity that befell their western counterparts (Y V Reddy, “Financial Sector Regulation in India”, EPW, 3 April 2010). Academics...
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