India’s Gold Fetish and
Switzerland’s Data Secrecy
Devesh Kapur, Marla Spivack,
Arvind Subramanian, and Milan Vaishnav*
November 5, 2013
*Devesh Kapur is at the University of Pennsylvania, Marla Spivack and Arvind Subramanian at the Center for
Global Development, and Milan Vaishnav at the Carnegie Endowment for International Peace. The authors
are grateful to Alex Cobham, Edward Collins, Kimberly Elliott, Willa Friedman, Kishore Gawande, Nabil
Hashmi, Christian Meyer, Andres Missbach, Mead Over, and Justin Sandefur for advice and comments. All
errors are our own.
Agenda
I. Motivation
II. Data
III.Explanations
IV.Conclusions
Motivation
Recent years have seen much higher
growth rates than previous decades
8
6
4
2
0
Percent annual GDP growth
10
India
annual
GDP
growthRate
rate
India's
Annual
Growth
1981
1985
1989
1993
1997
2001
2005
2009
2013
Source: World Bank. Annual percentage growth in GDP. Aggregates are based on constant 2005 USD
A period of large scale scandals – as the pie
grows so do opportunities for rents
Ethereal
Terrestrial
Subterranean
2G telecom scam:
Ex-chief minister Y.S.
Reddy land scandal
“Coal-gate” scam:
Price tag: $13 billion
Price tag: $16.2 billion
Price tag: $33 billion
What about illicit outflows?
Near-perfect correlation between gold
imports and current account deficit
Gold and Current Account Deficit
Four Facts about Gold Imports
1. Financial savings and gold
2. Composition of gold imports
3. Share of gold imports from Switzerland
4. Discrepancies
1. Financial savings have been falling
relative to GDP as gold imports have been
rising relative to GDP
4%
3%
12%
3%
11%
2%
2%
10%
1%
9%
1%
8%
1998
2000
2002
2004
HH savings as a share of GDP
2006
2008
2010
0%
2012
Gold imports as a share of GDP
Sources: IMF International Financial Statistics, Reserve Bank of India, UN Comtrade
Gold Imports as a Share of GDP
HH Savings as a Share of GDP
13%
Indian Gold Imports by Typ
2. Gold imports
are
mostly
Quantity in Kilograms
composed of gold bars
1,000,000
50,000
Indian Gold Imports by Type of Gold
Indian
Gold
Imports
Partner
Indian
Gold
Imports
by
Partner
Indian
Gold
Imports
byby
Type
of Gold
Value Millions of 2010 USD 40,000
Value
Millionsof
of2010
2010USD
USD
Value
ininMillions
Value
Millions
of
2010
USD
Quantity in Kilograms
800,000
Quantity
Kilograms
Quantity
Quantityinin
inKilograms
Kilograms
50,000
50,000
50,000
50,000
1,000,000
1,000,000
1,000,000
1,000,000
30,000
600,000
40,000
40,000
40,000
40,000
800,000
800,000
800,000
800,000
10,000
200,000
10,000
10,000
10,000
10,000
gold bars
manufactured and powdered gold
Allother
otherpartners
partners
Switzerland
All
gold bars
manufacturedSwitzerland
and
powdered gold
gold bars
0
000
0
1999
1999
2006
1999
1999
2000
2000
2000
2000
2007
2001
2001
2001
2001
2002
2008
2002
2002
2002
2003
2003
2009
2003
2003
2004
2004
2004
2004
2010
2005
2005
2005
2005
2006
2006
2011
2006
2006
2007
2007
2007
2007
2012
2008
2008
2008
2008
2009
2009
2009
2009
2010
2010
2010
2010
2011
2011
2011
2011
2012
2012
2012
2012
1999
1999
1999
1999
2000
2000
2000
2000
2001
2001
2001
2001
2002
2002
2002
2002
2003
2003
2003
2003
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
2006
2007
2007
1999
2007
2007
2008
2008
2008
2008
2000
2009
2009
2009
2009
2010
2001
2010
2010
2010
2011
2011
2011
2011
2002
2012
2012
2012
2012
0
2003
200,000
200,000
200,000
200,000
0
000
20,000
20,000
20,000
20,000
20,000
2005
400,000
400,000
400,000
400,000
30,000
30,000
30,000
30,000
400,000
2004
600,000
600,000
600,000
600,000
gold bars
manufactured and powdered gold
Allother
otherpartners
partners
Switzerland
All
gold bars
manufacturedSwitzerland
and powdered gold
manufactured and powdered gold
3. Switzerland is aPartners'
key import
Export of Gold to In
Less India's Import of gold from P
partner for India
Quantity in Kilograms
Valu
Indian Gold Imports by Partner
1988
1990Quantity in Kilograms
Value in Millions of 2010 USD
1992
1,000,000
50,000
1994
1996
800,000
40,000
1998
2000
600,000
30,000
2002
2004
400,000
20,000
2006
2008
200,000
10,000
-1,000,000
All other partners
-800,000
-600,000
Switzerland
Switzerland
-400,000
-200,000
All other partners
All other partners
0
-40,000
Switzerland
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
1999
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2012
2001
2000
0
1999
2010
-30,00
Swit
4. There are large discrepancies in India’s
Partners' Export of Gold to I
reported imports ofLess
gold
and Import
partners
India's
of gold from
reported
exports to India
Quantity in Kilograms
Va
1988 export of gold to India less India’s import of gold from partners
Partners
Partners' Export of Gold to India Less India's Import of gold from Partners
1990
Quantity in Kilograms
1992
1999
Value in Millions of 2010 USD
1994
1999
2001
1996
2001
2002
1998
2002
2000
2004
2000
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2000
2003
2005
2002
2006
2004
2007
2006
2009
2008
2008
2010
2010
2012
2011
2012-800,000
-1,000,000
-600,000
Switzerland
-1,000,000
-400,000
-200,000
0
-40,000
All other partners
-800,000
-600,000
Switzerland
-30,000
-20,000
Switzerland
-400,000
-200,000
All other partners
-10,000
0
All other partners
0
-40,000
-30,
Sw
Papers in the existing literature examine underinvoicing exports to avoid taxes, but what about
capital outflows via over invoicing of imports?
“Tax Rates and Tax Evasion: Evidence from ‘Missing
Imports’ in China”
Fisman & Wei (2004) Journal of Political Economy.
“Tariffs, enforcement, and customs evasion: Evidence from
India”
Mishra, Subramanian, & Topalova (2008) Journal of Public
Economics.
Data
Indian Imports
India import from country c of product p in time t
Country c export to India of product p in time t
Outflows: over invoicing of imports
Country exportcpt – India importcpt ≤ 0 = over invoicing of imports
over invoicing of imports = financial outflow from India
Challenge: many unmatched pairs
Indian Imports
Observations Share
Partner exports to India with no
matching import
367,797
23%
Indian imports from partners with no
matching export
539,235
33%
Matched Indian Imports and Partner
Exports
721,851
44%
Total
1,628,883
Two possible extreme assumptions for
unmatched observations:
Smuggling Assumption
Assume, if India reports an import and partner does
not report an export, the product was smuggled or
never actually never exported. Code the missing
value as 0.
No Smuggling / Error Assumption
Assume, if India reports an import and partner
does not report an export, this is an error. Drop
these observations.
Total outflows increasing over time under both
smuggling and no smuggling assumptions
Partner reported exports to India less India reported imports from partner
Total outflows
- no smuggling
assumption
No smuggling
assumption
Total outflows - assumption
smuggling assumption
Smuggling
1999
1999
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2007
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
-200,000
-150,000
-100,000
-50,000
0
-80,000
-60,000
Millions of 2010 USD
-40,000
Millions of 2010 USD
Millions of 2010 USD
-20,000
0
Key commodities standout in over
invoicing of imports
Partner reported exports to India less India reported
imports from partner
Smuggling assumption
No smuggling assumption
Millions of 2010 USD
Key commodities make up a greater percentage of
over invoiced imports than of total imports.
Key commodities as a percentage of Key commodities as a percentage of
total imports
over invoicing of imports
73
70
64
62
70
72
60
57
63
53
65
64
55
56
57
51
46
36
smuggling assumption
Key partners standout in over
invoicing of imports
Partner reported exports to India less India reported
imports from partner
Smuggling assumption
No smuggling assumption
Millions of 2010 USD
Key partners account for a greater percentage of
over invoicing of imports than of total imports
Percent of total imports from key
partner countries
59
58
59
58
54
50
48
Percent of over invoicing of imports
from key partner countries
55
42
48
45
50
43
44
39
40
38
25
smuggling assumption
Switzerland stand’s out in over
invoicing of India’s gold imports
Partner reported exports of gold to India less India reported
imports of gold from partner– smuggling assumption
These discrepancies persist when we look
at discrepancies in quantities.
Partner reported exports of gold to India less India reported imports of
gold from partners – smuggling assumption
Discrepancies are not the result of mispricing.
Indian prices closely track world prices
0
500
1,000
1,500
2,000
World and Indian
GoldPrice
Prices,
Nominal
of Nominal
Gold Dollars
1990
1995
2000
year
Indian price
2005
World price
2010
Gold bars stands out in total over invoicing of gold imports,
but when we drop unmatched observations these
inconsistencies disappear, why?
Partner reported exports of gold to India less India reported imports of
gold from partner
No smuggling
assumption
Value
Millions of 2010
USD
Smuggling
assumption
Value Millions
of 2010 USD
1999
1999
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2007
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
-40,000
-30,000
gold bars
-20,000
-10,000
manufactured and powdered gold
0
-6,000
-4,000
gold bars
Millions of 2010 USD
-2,000
manufactured and powdered gold
0
We see extreme discrepancies in gold bars because
Switzerland (and other countries) do not report country
specific exports of gold bars
Indian imports from Switzerland
Swiss exports to India
Explanations
Benign explanation
Swiss don’t report, but not for any nefarious
reason. Non-reporting policy was adopted
many years ago (see next slide) and
remains because of policy inertia.
If Switzerland reported country-specific
figures for its gold exports we would see that
they closely mirror India reported imports
from Switzerland.
January 1981
“
“
Switzerland stopped publication of detailed
statistics on monthly gold movements in and out
of the country after complaints from leading
Banks that it was bad for business....
…the “Big Three” [banks] manager of the Zurich
gold pool complained that identification of
countries of origin and destination was harming
business, as anonymity is a vital element in
dealing with sellers and purchasers of gold.
”
”
Malign explanation
Switzerland is an attractive destination for
capital, because of Swiss financial secrecy.
Those wishing to move funds out of India
are taking advantage of the Swiss nonreporting to mask illicit flows in the large
Swiss-India gold trade.
June, 2013
““
…Efforts to lift the veil on Swiss banking secrecy have gained
momentum…
…India dispatched - 232 requests for secret financial information - to
Switzerland, [and] 145 similar letters to Mauritius during 2012-13.
…While a huge investment into the country is routed from Mauritius, a
number of high-value and criminal probes - are connected to black money
stashed in Swiss banks…
….Among the major countries to which India dispatched its secret tax and
finance related queries during 2012-13 fiscal were United Arab Emirates
(38), United Kingdom (26), United States of America (61), British Virgin
Island (22), Cyprus (16), Denmark (11) and Singapore (19)...
”
Swiss Federal Customs Agency confirms that
1981 policy is still in place
“[An] MP has asked
parliament to revisit
this policy. If
parliament agrees
to a more detailed
publication of data
[a new policy] could
come into effect by
2014.
“Since …1981,
gold data can only
be published
quarterly and
without partner
countries.”
Wrapping up: benign explanations
• Increase in gold imports reflects gold
prices and domestic inflation
• Imports from Switzerland because
Switzerland produces high quality gold
bars
• Discrepancy because Switzerland does
not publish export data
Wrapping up: malign explanations
• Growth led to ill-begotten wealth, some of which is stashed
domestically in gold
• Hence the decline in financial savings and increase in gold
imports
• The gold trade channel offers a convenient way of
expatriating wealth to the tax haven, which also happens to
be the source of imports. This channel is not only, convenient
it is also “legitimate,” at least in the limited sense that
payments can be made through the banking system for prima
facie legal (namely trade) purposes.
• And conveniently, Switzerland does not publish details of gold
export data even though it publishes all other export data
When endogenous rents emerge, gold
offers 4 advantages
Domestically, many prefer to store wealth in gold
Internationally, over invoicing gold allows outflows
Money can be sent to Switzerland without suspicion
Swiss do not publish exports of certain types of gold
Conclusions
• Since 1981, the Swiss have not reported country specific data on
imports or exports of gold
– What is the rationale behind this policy in 2013?
• The international community has made great strides in efforts to
improve transparency and curtail money laundering and tax evasion.
– Switzerland has been responsive to these efforts, led by the the US and other
rich nations
• It is time to extend transparency to areas of concern to developing
nations, struggling to improve governance and reduce corruption.
– Switzerland could help in this endeavor by publishing details of its gold trade.
• Unraveling the mystery of India’s gold fetish could well be in the
hands of the bureaucrats of Berne.
– The clarion call from developing countries to Switzerland should be:
“Publish or We Perish”
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