This could be the mother of all scams in India

Fri, 14 Oct Pre-Open

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Indians seem to have taken a fancy to scams the same way that Somalians have to piracy. Almost every other breaking news on TV channels talks about some money making racket or the other. The latest scam to be unearthed may however be bigger than all the previous scam put together. And its ramifications may be even more lethal.

Under the double-tax treaty signed with the Swiss government, the Swiss will now have to provide details to the Indian government on transactions involving Indians. It's thus no big surprise that black money is quickly exiting the Swiss Alps. But then where are these illegal piles of cash going? Well, it may be coming right back to India and sitting peacefully in our own backyard. And the amount involved could be as hefty as US$ 40-45 bn. But, this is just the figure for one year, 2010-11. The actual amount of black money entering the country could be a lot more.

Do you ever look at the latest export numbers, FII data, etc. and believe that these numbers are works of fiction or a figment of someone's imagination? Well, the latest black money scam may be just that. According to three analysts from Kotak Securites, who have been studying various data points, the numbers just don't add up. Here are a couple of examples:

Official export data shows a 79% year-on-year (YoY) growth in engineering exports in 2010-11. However, exports by engineering companies in the BSE-500 index show just a 11% growth. In dollars terms, the difference is even starker. There appears to be a US$ 28 bn shortfall in exports. Now, the probability that this amount has come in through over-invoicing or fictitious exports is higher than that it came from tiny engineering companies which are not part of the BSE 500 index.

Copper exports have also quadrupled from Rs 85 bn to Rs 367 bn. But, how is this possible in India, a country which does not as a practice export this mineral. China apparently bought the whole lot. So is the dragon nation also part of this public hoodwinking?

Also, in 2010-11 foreign investor flows added up to US$ 22 bn, according to official data. The Kotak analysts did a cross-check with international sources like exchange-traded funds and EPFR Global. Their analysis shows that not more than US$ 4.5 bn came in to India. So, where did the other US$ 17.5 come from?

Well, India really needs to clean up its act. Else even the legitimate flows of capital into the country may dry up. Greater disclosures, a strong clampdown on corruption and a complete shakedown of government frauds need to take place. Anna Hazare's movement and his 12-day fast should not go in vain. And neither should India's reputation as an investment destination.