Is RBI aiding creation of black money in India?

NEW DELHI Due to deficiencies in its monitoring mechanism for exports, India's central bank might be inadvertently abetting the creation of black money outside the country. These Reserve Bank of India (RBI) deficiencies were first pointed out in July by the Karnataka anti-graft agency's report on illegal iron-ore mining in the state, but had gone unreported. A follow up by ET with various parts of the banking sector and the export transaction chain not only confirms the same, but also suggests similar shortcomings could exist in other sectors of India's $252-billion goods exports.

In order to establish a money trail, every transaction involving the export of goods is broken into two parts. One, when goods leave India, the customs department at ports and airports record it, and send the information to the RBI. Two, when the payment comes into India, the receiving banks record it, and send the information to the RBI. By matching the two databases, the RBI can find out which payments have not come in during the designated time of 180 days (extendable by 180 days).

The Karnataka Lokayukta, while following the trail of iron-ore exports from the southern state, found bank records with the RBI for only 20% of the 5,000 iron-ore export bills scrutinised by the anti-corruption body between 2006 and 2010. For the remaining 80%, the RBI could not confirm whether export proceeds had come into India within the stipulated period or not. "The RBI is supposed to collate and compare the two databases, and monitor whether the realisation of export proceeds is as per law," says the Lokayukta report. "This is not happening effectively."

The RBI, in an email reply to ET, says its software can match the two databases. However, it adds: "The matching procedure is often fraught with throwing of mismatched/erroneous entries due to the involvement of multiple agencies handling the documents." It further says the daily volume of transaction reports coming from the customs department made the matching exercise "cumbersome and time consuming". The RBI did not disclose the quantum of the mismatch.

In 2010-11, according to Directorate General of Commercial Intelligence and Statistics (DGCIS) data, India's exports stood at $448 billion, of which $252 billion is related to goods. Service exports accounted for most of the rest; service transactions, however, do not face this issue because, being a service, they don't have a customs leg.

PV Raghunathan, a foreign exchange expert and a consultant to ITC and Ashok Leyland, says 90% of export remittances are remitted to India within 180 days. He says the RBI could be doing more. "Even when the two databases do not match, a random checking of transactions is possible," he says. "But the RBI, in general, lacks supervisory skills because a majority of its workforce does not have a commercial background and their training is entirely academic."

The numbers from Karnataka provide a worst-case illustration of illegal business and transactions thriving in a deficient system. According to the Lokayukta, 126 million tonnes of iron ore was exported from Bellary, Karnataka, between 2006 and 2010. Of this, it says, 30 million tonnes, valued at Rs 12,228 crore, was illegal. Extrapolating this to all iron-ore exports from the region yields a value figure of Rs 51,702 crore. If 80% of this was unaccounted for in the banking system, then the unexplained amount could be as high as Rs 41,360 crore (about $8 billion).

Source: EconomicTimes