Illicit trade ﬂows estimated at 20% of total trade in India between 2009 and 2018.
India’s rapid progress to emerging as an economic powerhouse finding its place on the high table of global financial and business discourses and deals has its cons as well. This appears perturbingly the case as per a UN estimate that when the Indian economy surpassed the USD 3 trillion mark in 2021, the quantum of money laundering in India can be estimated at USD 159 billion, about 5 per cent of the GDP. India’s rising economic prospects, suggests an industry report, puts the world’s fifth largest economy in a precarious position, with an impending surge in trade activities that could inadvertently foster the proliferation of illicit ﬁnancial ﬂows (IFFs). These illicit trade ﬂows are estimated to account for approximately 20 per cent of the total trade in the country as per Global Financial Integrity (GFI) between 2009 to 2018, finds a research by the Thought Arbitrage Research Institute (TARI) for FICCI Committee Against Smuggling and Counterfeiting Activities Destroying the Economy (CASCADE).
Rising illicit ﬁnancial ﬂows, stemming from a clandestine network of illegal activities intertwined with organised crime, pose a dual threat to economic progress and global security. To put this in perspective, in the wake of the Covid-19 pandemic, international trade emerged as an unwavering pillar of resilience and growth despite geopolitical tensions to take the global merchandise trade to a record peak value in 2022 of USD 25.3 trillion. However, within the complexities of global trade, the clandestine ﬂow of money and goods, referred to as IFFs continues to flourish, notwithstanding endeavours of governments, law enforcement and multilateral agencies and is recognised by G20 and the UN as a grave threat. It has found resonance in Prime Minister Narendra Modi’s emphasis on the need to eliminate the root cause for terror funding. Addressing FICCI last week, Anurag Thakur, Minister for Information & Broadcasting agreed that the surge in illicit trade casts a shadow on India’s progress toward achieving a 5 trillion-dollar economy. “Given the intricate and alarming expansion of illicit trade, it underscores the need for enhanced intergovernmental collaborations and public-private partnerships to formulate a comprehensive strategy,” Thakur noted.
A serious form of these flows is trade-based money laundering (TBML) which acts as a source for trade-related IFFs. As per the findings, terrorism is more prevalent in nations with high levels of TBML. India’s growing global trade prominence raises the risk of trade-based illicit ﬁnancial ﬂows, potentially affecting economic progress and supporting terrorism and criminal activities, the report cautions, amidst a World Trade Organization estimate that illicit trade, primarily through trade misinvoicing, accounted for 2.8 per cent of global merchandise trade, worth USD 772 billion in 2022.
The Global Financial Integrity (GFI) of 2021 report examined the phenomenon of trade misinvoicing across 134 developing countries and their trading partners for the period between 2009 and 2018. This finds that over 80 per cent of IFFs are accompanied by commercial misinvoicing, and estimates the total value of trade discrepancy resulting from trade misinvoicing over a span of 10 years for these 134 developing countries aggregating to a substantial amount of USD13.8 trillion. For a perspective, trade discrepancy is the difference, or “value gap,” between what any two countries had reported on their trade with one another. The GFI 2021 report data highlights that the mean percentage of trade value discrepancies (trade-based money laundering, which is a part of overall money laundering from 2009 to 2018 was 19.8 per cent, with the total aggregate value gap of misinvoicing for these 10 years amounting to over US$ 674.9 billion.
Recent data provided by India’s Directorate of Revenue Intelligence (DRI) vividly illustrates India’s substantial trade gap and highlights growing illicit trade. As India strives to transform its economy into a USD 5 trillion-dollar powerhouse in the coming years, the current trade composition at 30 per cent would make the trade value at USD1.5 trillion. Currently the illicit trade gap as estimated by GFI is 20 per cent, which translates into nearly USD 300 billion when we reach the 5 trillion-dollar economy. A report on India’s potential revenue losses associated with trade mis-invoicing’ by GFI presents a comprehensive analysis of the prevailing patterns of mis-invoicing in India throughout the year 2016. India has documented an approximate total potential revenue loss of USD 13 billion, encompassing both mis-invoiced imports and exports.
The situation was worsened by a ﬁnancial loss of USD 9 billion resulting from the practices of import mis-invoicing. The uncollected value-added tax (VAT) amounted to a total of USD 3.4 billion. The projected amount for customs charges is approximately USD 2 billion, while the anticipated sum for corporate income tax is forecast to be USD 3.6 billion. The data provided by(DRI vividly emphasises not only the magnitude of these gaps but also the susceptibility of India’s economy to tax evasion. Such evidence is of utmost importance because it provides a compelling demonstration of the alarming increase in trade-based money laundering and the methods used to facilitate it.
Another challenge is counterfeiting/trade in illicit goods which, as per the report, is often overlooked and underestimated, but serves as a signiﬁcant source of proﬁts and revenue for illicit and terror activities. India’s informal economy increases the likelihood of counterfeit goods production and trade, raising concerns about terrorist activities. This index does not include smuggling and other illicit trade practices, which when taken together will enhance the country’s risk of terrorism. The OECD/EUIPO 2021 report, which assesses countries using the GTRIC-e score – a measure of the propensity to export counterfeit products — ranks India at 24th place with a moderate score of 0.447 for the period of 2017-19. The illegal economy in India has an overall score of 6.3 (average score of 5 for 122 countries), indicating that various criminal markets have a signiﬁcant impact on the overall economic structure of India.
The report warns that counterfeiting and illicit goods in India pose signiﬁcant risks, including ﬁnancial implications, public health threats, and intellectual property issues. It is estimated that nearly 80 per cent of such containment costs relate to security and as the economy grows (along with it the illegal economy) , India’s cost of addressing terror and crime will be signiﬁcant.
To counter these risks, India should adopt a comprehensive approach addressing illegal markets, terrorism, and organised crime, tailored to its unique circumstances and challenges. The report recommends adopting 6 Cs as a policy playbook to negate the threats. This involves cognisance of terrorism and organised crime under regulatory framework, continuous and critical evaluation of illicit financial flows, central nodal agency for greater coordination, creating awareness and changing consumer preferences, combating trade based money laundering and cooperation and coordination at international level.