Scam 2.0: $40bn of black money may have come back to India
On Tuesday, Bihar Chief Minister Nitish Kumar flagged off Lal Krishna Advani's Jan Chetna Yatra, one of whose aims to is pressure the government to act against corruption and bring back the black money stashed abroad.
Here's a thought: Maybe Advani can take a break and chat up some smart cookies in Mumbai during his yatra. It seems some of the black money has already come back and is nesting in our own backyard. It is sloshing about in the stock markets and bank accounts.
Here's the stunner: The amounts involved could be as large as USD 40-45 billion and this is money that came back just in one year, 2010-11.
Three analysts from Kotak Securites have probably struck paydirt in unearthing a scam that will be bigger than the 2G, Commonwealth and multiple illegal mining scams put together.
Howzatt?
Well, the trio—Sanjeev Prasad, Sunita Baldawa and Amit Kumar—have been poring over our export numbers and foreign investor inflows and have proved that it just does not add up. And if it does, maybe all the fuss kicked up about Swiss banks and illegal funds abroad has sent black money scurrying back to home base.
India, it seems, is the ultimate safe haven for Indians' black wealth.
Of course, Messrs Prasad, Baldawa and Kumar do not put it quite that way. This is what they say in a research report dated 10 October:
"Our study of exports data of major engineering companies (including automobiles and metals) shows that the increase in their exports does not reconcile with the steep increase in official exports data. In fact, the gap is quite substantial."
How substantial? The official export data shows 79% year-on-year export growth in 2010-11. Exports by engineering companies in the BSE 500 (the cream of India Inc) show just 11% growth. If you want to know the difference in dollars, the engineering export jump accounts for USD 30 bn (up from USD 38 billion to USd 68 billion). The figures for the BSE 500 show a jump of just Rs 61 billion (rupees, not dollars). Converted at the rate of USD 1= Rs 44, this is just USD 1.38 billion.
Where did the rest of the $28-and-odd billion come from?
From itsy-bitsy small engineering companies that are not in the BSE 500? Or was so much of illegal ore mined and sent by the Reddy brothers and their ilk in Goa, Odisha, Karnataka, and Jharkhand?
Or, as the Kotak trio suggest, could be it all be overinvoiced exports? The report says:
"Some reports have alleged that some individuals may have been compelled to bring back funds through the official route by simply overinvoicing exports or even resorting to fraudulent exports thanks to (1) increased international scrutiny of unaccounted funds in bank accounts in Switzerland and other financial centres, and (2) heightened debate in India about action against unaccounted overseas wealth."
The Kotak report offers two "egregious" examples as exhibits A and B in its effort to show that something's clearly wrong. In 2010-11, exports of metals and metal products soared from $13 bn to $ 29 bn. But figures for 22 such companies in the BSE 500 show a growth of just Rs 37 bn (yes, rupees again, not dollars). This growth is less than $1 bn. So how did overall exports of metal and metal products rise $16 bn?
Egregious example B relates to "copper articles" whose exports grew by a whopping four times or more from Rs 8,500 crore to Rs 36,700 crore. How did this miracle happen in a metal India is not known to export normally? China apparently bought a whole lot of it.
So there is a strong possibility of there being a China angle to the skulduggery as well. Are the Chinese in cahoots with Indian black money vendors? Is China an alternative safe haven for Indian crooks?
The second route used by the black moneymongers is possibly the foreign institutional investment (FII) route. The Three Kotak Musketeers have smelt a rat here, too.
According to them, 2010-11 foreign investor flows added up to $22 billion, according to official figures. But a cross-check with international sources like exchange-traded funds and EPFR Global (which tracks $ 15 trillion in global investment flows) shows that not more than $4.5 billion came to India. Though it is obvious that EPFR data is not 100 percent foolproof, since its sometimes excludes sovereign and private equity funds, the gap of $17.5 billion is simple too huge to be explained by normal data omissions.
Drawing a cautious conclusion, the Kotak trio calls for better disclosures by FIIs in view of the implications for India's foreign exchange reserves and balance-of-payments. "More extensive disclosures could well counter any potential concerns that flows could be camouflaging (1) hot money/illicit, unaccounted or black money from overseas accounts of resident Indians, and (2) high levels of proprietary positions of global investment banks, and (3) round-tripped money from Indian companies."
Put another way, there is a strong possibility that hot money has flowed back into India as things have gotten hotter abroad. In recent months, the Swiss authorities have signed deals with UK and Germany to levy a tax on accounts held by UK and German nationals. In India, the finance ministry has been waffling about double-tax treaties and ruling out amnesty schemes when they could have done the same deal with the Swiss banks. At worst, we would at least have got some additional revenues.
Firstpost has reported on how there is the growing possibility of international whistleblowers publishing lists of Indans with accounts in Swiss banks, which could unmask many politicians, film stars, and even cricketers.
Firstpost has also published several reports on black money, and reported on how the Indian economy had suddenly become an export tiger by showing huge leaps in exports to China, Hong Kong and the Middle East, among other places. In 2011-12, we have seen 53 percent growth in exports (April-August), with July alone showing a spectacular 81 percent.
The unreality of these figures has been clear for some time now, and Commerce Secretary Rahul Khullar has been predicting a slowdown for a few months now. In August, he said he expected a slowing of exports "with almost immediate effect" and that India "would be lucky" to achieve 20 percent export growth in 2011-12, The Financial Express reported.
Far from scripting a huge export success story, the government is working on policies to assist exporters.
Quite clearly, officials know something about the export boom that the official figures do not tell.
Looks like the Kotak Trio have done what the finance ministry could not: find out where the money is. It is here – at least a huge chunk of it.
A probe has been sought into changes in the contract for import of LNG from Qatar by a firm headed by the Petroleum Secretary, which resulted in gas prices jumping four-fold and entails an additional outgo of USD 55.5 billion (Rs 2.5 lakh crore) for users.
Petronet shares had plunged in excess of 2% today.
Member of Parliament from Gujarat Mukesh B Gadhvi has written to Prime Minister Manmohan Singh seeking a probe into how Petronet LNG (PLL) agreed to a USD 12.66 per million British thermal units price for 7.5 million tonnes of liquefied natural gas (LNG) imported from RasGas of Qatar, instead of the previously agreed USD 3.04 per mmBtu.
Stating that the additional expenditure of Rs 2.5 lakh crore involved in the hike was more than the figure floating in the case of the 2G scam, Gadhvi said this happened when the Petroleum Secretary was the Chairman of PLL and the chairman/directors of four leading oil PSUs were members of the company board.
"Instead of protecting the country's interests, these authorities have played role in benefiting RasGas," he added.
In 1999, in response to a tender, RasGas had offered to sell LNG to PLL at USD 2.53 per mmBtu at a crude oil price of USD 20 per barrel.
The LNG price was to rise or fall by 2 cents per mmBtu in tandem with every dollar movement in oil price. At a USD 100 a barrel oil rate, the LNG price was to be USD 4.13 per mmBtu.
But strangely, an unsolicited offer from RasGas pricing LNG in a band of USD 16-24 per barrel oil price (USD 2.01 per mmBtu to USD 3.04 per mmBtu gas price) was accepted by PLL.
Further, in 2003, Petronet renegotiated the price and agreed to having a fixed price at USD 20 per barrel of oil (USD 2.53 per mmBtu) for five years from 2004-2009 and indexation with actual crude prices thereafter, he wrote.
This led to the price going up by USD 1 per year for five years from 2009, and from January, 2014, it would be USD 12.66 per mmBtu at an oil price of USD 100 per barrel.
Had Petronet not changed the contract, the price of LNG from Qatar would have been USD 3.04 per mmBtu for 25 years.
But now, users will have to pay USD 12.66 per mmBtu for 15 years, beginning 2014.
The extra amount to be paid will be USD 3.7 billion a year and USD 55.5 billion (about Rs 2.5 lakh crore) over 15 years.
Gadhvi, a Member of the Parliamentary Standing Committee on Petroleum and Natural Gas, had previously demanded that joint ventures run by public sector firms like Petronet should be brought under the audit purview of the CAG.
"The public is entitled to expect a very high standard from the government," he wrote, seeking an enquiry, possibly by the CBI, into the whole issue.
News Highlights - Week of 3 - 7 October 2011
Consumer price inflation in Indonesia eased to 4.6% year-on-year (y-o-y) in September as food prices declined. In the Republic of Korea, inflation eased to 4.3% y-o-y in September from 5.3% in August. Consumer price inflation in Thailand also fell in September to 4.0% y-o-y from 4.3% in the previous month due to a slowdown in rising energy prices and transport costs. Meanwhile, inflation in the Philippines inched up to 4.8% y-o-y in September from 4.7% in August.
*The People's Republic of China's (PRC) purchasing managers' index (PMI) for services rebounded to 59.3 in September from 57.3 in August, indicating a recovery in the services sector. In contrast, Singapore's manufacturing activity contracted for the third straight month in September, with the PMI at 48.3 in September.
*Indonesia's export growth eased to 37.1% y-o-y in August for total exports of USD18.8 billion after posting revised 39.5% annual growth in July. Indonesia's imports rose 23.7% y-o-y to USD15.1 billion in August, following revised 28.4% growth in the previous month. The trade surplus in August was USD3.8 billion. Malaysia's merchandise exports posted 10.9% growth in August, higher than the 7.1% export growth rate for July. Meanwhile, imports grew 6.9% y-o-y in August.
*Bank Indonesia (BI) issued new regulations governing export proceeds and foreign debt withdrawals. Under the new policy, exporters will be required to transfer their proceeds from offshore banks into domestic banks within 3 months of the date posted on the Export Declaration Form. Another new BI regulation requires debtors to conduct their foreign borrowing through domestic banks.
*Net foreign investment outflows from the Republic of Korea's LCY bond market were KRW2.5 billion in September. Net inflows in August totaled KRW134.0 billion. The largest net bond investment inflows in September came from Thailand (KRW726.5 billion), the US (KRW619.3 billion), Malaysia (KRW603.8 billion), and the PRC (KRW 400.3 billion).
*Thailand plans to begin targeting headline inflation instead of core inflation to attain greater flexibility in conducting monetary policy.
*The State Bank of Viet Nam raised its refinancing rate, one of its three policy rates, by 100 basis points to 15% effective today. The move is the fifth increase in the refinancing rate for the year.
*In Hong Kong, China, Sinotrans Shipping Inc. priced 3-year CNH bonds with a coupon of 3.3%. In Malaysia, Midciti Resources, which co-owns the Petronas Towers, sold MYR880 million worth of Islamic medium-term notes. The multi-tranche issuance include MYR280 million worth of 3-year notes with a 3.533% annual return, MYR270 million of 5-year notes at 3.919%, MYR240 million of 7-year notes at 4.07%, and MYR90 million of 10-year notes at 4.25%.
*Government bond yields fell last week for all tenors in the Republic of Korea and Thailand; and for most tenors in Hong Kong, China; and Malaysia, while yields rose for most tenors in Indonesia, the Philippines, Singapore and Viet Nam. The PRC market was closed due to the national holiday. Yield spread between 2- and 10- maturities widened only in Malaysia, while spreads narrowed in other emerging East Asian markets except for the PRC.
