Rise in hawala transactions feared after note ban in India

Indian ingenuity is finding loopholes to turn black or illegal money into legal currency abroad and hawala traders are asking for high premiums after the ban on Rs500 and Rs1,000 notes.
"I don't deal in the hawala trade, but many people have called me and asked for help. My brother is taking (black) money in India and asked me to give dirhams here to some parties. He will deal with the Indian currency on his own," a man involved in the trade told Khaleej Times on the condition of anonymity. He is among the many small dealers who have turned opportunists. Such channels are reported to have transferred about Rs125 crore ($18 million) to Rs150 crore ($21.8 million).
Hawala traders, on the other hand, are willing to trade Indian currency for British pounds, UAE dirhams, US dollars, and more at a premium of as high as 30 to 40 per cent. The money is hand-delivered at an offshore location within 48 hours. In the initial days of announcement, a hawala trader in Mumbai, India's commercial capital, helped hoarders siphon off about Rs1,000-Rs1,200 crore ($145 million to $175 million) to destinations like the UAE, and London. "A lot of people called in a state of panic and wanted to salvage whatever they could, but requests have come down now. People are now trying to convert their stashed cash in India. We might see a spike in (hawala) requests again in the last weeks of December, when all other options are exhausted at home," a hawala trader in Mumbai said on the condition of anonymity. He also added that as the December deadline approaches, the premium rates might rise to as high as even 50 to 60 per cent. Incidentally, he is just one of the many professional hawala traders operating in India.
According to Indian observers, funds transferred through the billion-dollar hawala market are between 30 to 40 per cent of the formal market. Some calculations suggest the hawala market could be worth $13 billion to $17 billion.
Tax evasion and corruption are the major components of India's underground economy, which in turn is a primary driver of India's illicit outflows. In 2010, the total illegal capital flows out of India were estimated to be $24.8 million, says Anupam Manur, a Policy Analyst at the Takshashila Institution, Bangalore. "Since hawala transactions are 'invisible' to the authorities, it has been a vehicle for the financing of terrorist activities and money laundering.
The total hawala market for foreign exchange transactions amounts to $6 billion. It has been steadily increasing over the years: around $2.2 billion in 2005; $1.1 billion 2000; and about $100-200 million in the 1980s. Though the absolute number has been increasing, the share of hawala in total private transactions has reduced from 0.3 per cent in 1991 to 0.1 per cent in 2010," he adds.
India has a massive underground economy, and there is no uniform consensus on the amount of black money. "One way of looking at black money is to consider unaccounted income to be the incomes on which due taxes have not been paid and is not reflected in any other statistics on economic activity within the country. Thus, it is equivalent to income that is unreported in GDP.
In 2010, estimates suggested that the size of unaccounted income is as high as 50 per cent of India's GDP in 2000; and decreased to 41.7 per cent of the total GDP by 2010," says Manur.
The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, a report released in November 2010 by Global Financial Integrity (GFI), estimates that tax evasion, crime, and corruption have removed gross illicit assets from India worth $462 billion. It also finds that the faster rates of economic growth since economic reform started in 1991 led to a deterioration of income distribution, which led to more illicit flows from the country.
"In India we just have 400,000 people who pay tax above Rs500,000. However, 40 lakh (4 million) people own a car averaging Rs500,000. It clearly points at the massive tax evasion happening in the country," says Nilesh Shah, CEO and Managing Director, Kotak Mahindra Asset Management Company. There is a lot of black money in the system, and eventually because of this move we expect around 35 to 40 per cent to be wiped off, he adds.
Whether the Indian government's move to junk 22 billion currency notes has really affected the black economy or not is a moot point for now. Industry experts point that a lot of money is actively moving out of the country through import and export firms too. But the true extent would only be visible when the import-export receipts data is out by December end.
suneeti@khaleejtimes.com