Mohan Guruswamy | Panama Papers: Nothing done; no questions asked

The Panama Papers had been briefly back in the news in India after the Enforcement Directorate (ED) questioned Bollywood actress Aishwarya Rai Bachchan in December 2021. Among the rich and famous Indians named in the Panama Papers so far are DLF billionaire property baron Kushal Pal Singh, billionaire Gautam Adani’s brother Vinod Adani, and billionaire real estate magnate Sameer Gehlaut. The list also includes Gujarat’s brand ambassador, Amitabh Bachchan. According to a report, over 500 Indians are associated with the “Mossack Fonseca” firm, and the ED has seized over 230 Indian passports that were deposited as part of the company’s formalities.

The ways of India’s rich and famous are increasingly becoming public knowledge. The disclosure that as many as 500 prominent Indians, including Incredible India’s latest brand ambassador Amitabh Bachchan, owned offshore companies in Panama is just the latest of the unravelling. All that one can say is that he is in the good company of the likes of Vladimir Putin, David Cameron and Nawaz Sharif, among others.

Panama is a small sliver of a country in Central America joining North and South America. A 77-km man-made canal which is capable of accommodating large ships joins the two oceans. The revenues from this were for long the nation's biggest source of income since the canal opened in 1914.

Panama soon found that becoming a tax haven that assured investors of their privacy provided a much more lucrative income. The proximity to the Americas, and the balmy Caribbean islands, and countries like Colombia with its huge cocaine production and export business, and Latin America’s many kleptomaniac tinpot dictators made Panama even more attractive. Till not long ago, the entire Canal Zone was under the protection of US troops, and that too served as an incentive for Americans seeking an offshore tax haven.

Panama is a tax haven, which means it is a country that offers foreign individuals and businesses little or no tax liability in a fairly politically and economically stable environment. Tax havens also provide little or no financial information to foreign tax authorities. This in short is the reason Panama is so important to our moneyed people, who have good reason to hide their real wealth.

Why do the rich then want to hide their wealth? This is simply because officially they are not as wealthy as they really are. And if they honestly declared their true wealth, they would not only be liable to pay more income-tax but could also open many of them to various charges of corporate fraud and malfeasance that could earn them hefty jail terms. To comprehend this one must understand how most of our “captains of industry”, many of whom sit on the Prime Minister’s Council of Trade and Industry, actually became rich and powerful. When an “industrialist” launches a new project, the project costs are usually hugely overstated. The suppliers of plant and machinery then pay the promoter kickbacks, which become the promoter capital. Thus, the more the number of projects an individual promotes, the wealthier he or she becomes. But it is not income that you can declare. So, it gets hidden in a tax haven and snakes its way back through Mauritius (27 per cent), Singapore (21 per cent) and Cyprus, etc., as foreign investment.

These are now the home of hundreds of corporate entities that act as a conduit for funds being held overseas for Indians or by Indian entities. These countries are little more than a cut-out for monies held in other more distant tax havens like Panama, the Cayman Islands, Bermuda and Lichtenstein. The smaller the country, the more pliable the officials.

The 14 PSU banks control almost 80 per cent of the commercial credit advanced in India. In addition, the government also owns the two big project finance institutions, IDBI and IFCI, and large institutional investors like the Life Insurance Corporation and general insurance companies like Oriental and GIC. The state ownership of these, with powers vested with the political and bureaucratic powers that be in New Delhi, ensures that the projects are suitably “gold plated” without any scrutiny. And why scrutinise them when projects seldom fold up, and particularly in a system where restructuring means lending more money to evergreen the loans?

The list of NPAs includes almost the entire roster of top Indian companies. The total amount of Gross Non-Performing Assets (NPAs) for public and private sector banks is over Rs. 7 lakh crores. According to RBI estimates, the top 30 loan defaulters currently account for one-third of the total gross NPAs of PSU banks. The country’s top five PSU banks had outstandings of Rs 4.87 lakh crores to just 44 borrowers, if borrowers were to be categorised in terms of those having outstandings of over Rs. 5,000 crores. These businesses include Essar, Reliance ADAG, Jaiprakash Associates, Adani, Vedanta, GVK, GMR and Lanco.

Of the big companies or groups, only the Tatas, Reliance Industries and AV Birla can be considered free of financial stress. Most if not all the money earned by gold plating plant and machinery, under-invoicing of exports and over-invoicing of imports is retained abroad. Has anyone wondered why the UAE is the second largest destination of India’s merchandise exports ($33 billion) and third largest source of merchandise imports ($26.2 billion)?

The UAE is also the largest source of legal and illicitly imported gold. Last year India officially imported over 900 tonnes of gold worth $35 billion. The mysteriously owned corporations incorporated in tax havens like Panama mostly finance these exports. And a good part of the illicitly exported gold also.

According to a leading pink newspaper, Indians were estimated to have illicitly sent out $83 billion in 2020. Where does this money go? Countries like Switzerland that offer banking secrecy usually do not pay any interest on such deposits. So, money goes to corporations in tax havens from where they are invested in businesses world over. Have you ever wondered how many of our top businessmen have managed to become so big overseas so soon?

This is where the countries like Panama come in. There was a time when Panama, in India, was synonymous with a leading brand of cigarettes manufactured by the Dalmia-owned Golden Tobacco Company. That Panama too is now forgotten. Now Panama is synonymous with offshore corporations and assured secrecy. The times have changed.

(The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.)