There are serious economic and financial implications for India Economy due to the estimated capital flight of 15.8 billion US Dollars (Rs. 57,000 crores) in the last three year i.e. 1993, 1994 and 1995 from India to USA at US/World average prices, said Dr. J.D. Agarwal, Director, Indian Institute of Finance, in a seminar delivered at Indian Institute of Finance today, 31st January 1997 . His analysis is based upon a research article published in the latest issue of FINANCE INDIA ,the quarterly journal of Indian Institute of Finance. The study has been conducted by three economists of Florida Inernational University. According to Dr. Agarwal, Captial Flight through abnormal trade pricing has affected the foriegn exchange reserves of India adversely, and is responsible for the trade deficit of US $ 13.15 billion, in last three year. If this captial flight had not taken place, there were have a positive balance of trade and the foriegn exchange reserves positions have been far stronger.Dr.Agarwal feels our foreign exchange reserves would not have been around US$ 40 bn. instead of the current US$ 25 bn. If this captial flight would not have taken place, our external debt position were have aslo eased supposing if this this money were have used to repay back external debt. Our external debt at the end of 1995-96 were have been at US$ 83.5 bn. Instead of US $ 99 bn. Keeping money abroad using abnormal trade pricing and bringing part of it back adopting this of route of converting black money into white, sends wrong signals to the NRIs interested to invest in India. MNCs and also FIIs. Despite the best effort of the Govt., We have been able to attract a megre amount of foreign direct investment, which is less than the total of the capital flight of US$ 15.8 bn.

The capital flight of such a massive amount has contributed towards the fiscal deficit, revenue deficit and budgetary deficit of Central Govt. because of the massive tax evasion and avoidance using abnormal trade pricing as a technique. The firms involved in this malpractice have avoided and evaded massive amount of corporate tax, excise duties, inport and export duites commented Dr.Agarwal .

According to Dr. Agarwal, a part of the money kept abroad, generated through abnormal trade pricing is brought back to the country through Hawala route.This bring about distortion in exchange rate and despite the Govt. introduce the convertibility of current account and trade account, it has left a gap betwen the official rate and unofficial rate in the exchange value of India rupee.Hawala transaction do not allow a currency to attain the status it of back money as it exists today also affects the money supply position ,and does not allow the quantitative and selective control used by Reserve Bank of India to be effective to control inflation.

Prevalence of high interst rate in he India economy is primarily because of exisence of massive black money in economy. Liquidity crunch is often faced in such situations.

While speaking this topic, Prof. Agarwal stated that there are various reasons which are responsible for such massive flight. Outlining the reasons he said political uncertainty, craze for foreign exchange, excessive control and delays in releasing foreign exchange, instinct to avoid and evade taxes, reaping fruits of Hawala Transaction, use of foreign exchange as a hedge for business transaction as well as other transaction such as pleasure, shopping travel, medical and study etc. adn use capital flight as the best route to convert black money into white money.

Dr. Agarwal said in the reply to a pointed question that the captial flight is taking place through over invoices of imports and under invoice of exports by opening sister concerns abroad or raising fictitious bills.

According to Dr. Agarwal, the Govt. can take several steps to regulate and control captial flight. The foremost of them is identifying the above stated reasons for captial flight and taking steps to seek solution to some of the motivating factors. Secondly, it should introduce transaction based audit by published in FINANCE INDIA.Thirdly, it should monitor exports and imports more carefully, Fourthly, the Govt. should organise special investigation of accounts of firm dealing in products mentioned in the article and lastly the Govt. should consider withdrawing exemptions of export and duties and/ or taxing export incomes.