Why Piyush Goyal's Claim on Indians' Money in Swiss Banks Is a Red Herring

Deposits made by Indian residents in Swiss banks have once again made headlines, this time owing to the assertions made by the acting finance minister, Piyush Goyal, in parliament. Goyal said that 'non-bank loans and deposits' by Indians have declined by 80% between 2013 and 2017.

The data presented by the minister and widely reported in the media, however, contains a blooper which the finance ministry has not rectified yet. The Bank for International Settlements reports the data on outstanding cross-border claims and liabilities for all reporting countries, including India, on a quarterly basis. This is stock data. Goyal has arrived at annual  figures for 2013 to 2017 by adding the stock data of the four quarters for each year, which has yielded grossly erroneous estimates. His claim regarding the reduction in the outstanding amounts in Swiss Bank deposits by Indian residents is therefore methodologically erroneous.

The data presented by the acting finance minister is reproduced above. End-year data (so Q4 for each year) on Swiss banks' outstanding loans and deposit liabilities vis-à-vis Indian residents, both total and for the non-bank sector, is reproduced in Table 2. The link to the original quarterly dataset provided by the Bank for International Settlements (BIS) is also provided. We have used the rupee-dollar exchange rate data from the OECD and Reserve Bank of India in order to provide the data in the Indian currency too.

Table 2 clearly shows the following:

1. Total loans and deposit liabilities of the Swiss banks vis-a-vis Indian residents from all sectors had fallen from $787 million in 2013 to $249 million in 2017,  but has risen again to $453 million or Rs 2945 crore in Q1: 2018 (end-March);
2. The loans and deposit liabilities of the non-bank sector, which the finance minister has suggested to be an indicator of black money, fell from $701 million in 2013 to $94.8 million in 2017, but has risen again to $101 million or Rs 656 crore by end-March 2018;
3. Overall, there is a steady decline in the outstanding liabilities of the Swiss banks vis-à-vis Indian residents/counterparties. This decline, however, started from 2008. Understandably, it was the global financial crisis of 2007-08 which had broken the increasing trend of Swiss Bank loans and deposits by Indians. This declining trend has continued under the present regime (2014 onwards). There is nothing to suggest that this decline is caused by any policy action undertaken by the government. In fact, just as the declining trend had reversed temporarily in 2013, another such reversal is visible in 2018.

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The BIS also provides flow data on loans and deposit liabilities, adjusted for foreign exchange movements and breaks in data, which indicates the direction and quantum of change on a quarterly basis. The chart above corroborates the finding that the flow of deposits and loans into Swiss banks from India (for both total and the non-bank sector) had increased steadily from 2004 till 2008, after which the direction reversed. Apart from a few quarters in 2010, 2013, 2015 and the first quarter of 2018, non-bank flows of loans and deposits into the Swiss banks from India have been in negative territory for every quarter since 2009.

The stock and flow data on Indian non-bank loans and deposits in Swiss banks provided by the BIS, however, does not nullify the data on Swiss bank deposits provided by the Swiss National Bank (SNB). Table 3 reproduces the SNB data on total liabilities and customer deposit liabilities of Swiss Banks vis-à-vis Indian residents. While the media reports which suggested that the increase in total liabilities vis-à-vis India from $674 million in 2016 to $1 billion (Rs 6,600 crore) in 2017 reflected a substantial increase in black money stashed away in Swiss banks had misinterpreted the data to an extent, the fact remains that the outstanding amount in customer deposits from India in Swiss banks did increase from $382 million in 2016 to $471 million (Rs 3,070 crore) in 2017.

A plausible reason for the divergence between the SNB data and BIS data on Swiss banks' liabilities vis-à-vis Indian counter-parties can be the fact that the BIS provides statistics on locational basis, whereas the SNB data is based on the reporting offices of Swiss Banks located both inside and outside of Switzerland. If that is indeed the primary reason for the divergence, then what can be reasonably concluded from the two datasets is that while loans and deposits liabilities of the bank offices located in Switzerland vis-à-vis non-bank Indian counter-parties declined between 2016 and 2017, the Swiss banks' offshore branches witnessed an increase in customer deposit liabilities vis-à-vis Indian residents during the same period. Since there is just a single overseas branch of a Swiss bank located in India, this increase must have taken place in overseas branches located outside India.

Are Swiss bank deposits really important?

From the point of view of the tax authorities, tracking the cross-border claims of Indian residents is vital in detecting tax evasion, checking illicit capital outflows and retrieving black money. Rather than pitting the BIS dataset against the SNB's in order to make unfounded and exaggerated claims, the finance minister would have done well to delve deeper into the BIS dataset, to understand the recent pattern of cross-border bank deposits and other offshore bank assets being accumulated by Indian residents. The BIS dataset not only reports other countries' liabilities vis-à-vis India, but also Indian resident's claims within the other countries/jurisdictions.

Table 4 reproduces the BIS data on cross-border claims of the non-bank sector in India and ranks the top 20 reporting countries on the basis of the outstanding amount held by Indian residents in all instruments (including loans and deposits, debt securities and other instruments), of which loans and deposits data is also presented separately.

Several points emerge from Table 4:

1. Total cross border claims by the Indian non-bank sector increased from around $87 billion in end-2013 to $94 billion in end-2017 and further increased to $96 billion in Q1: 2018;
2. Loans and deposits by Indian non-bank sector in the BIS reporting countries fell from $86 billion in end-2013 to $72 billion in end-2017 and then increased to $74 billion by end-March 2018;
3. Out of the outstanding cross-border claim of $96 billion in Q1: 2018 by the Indian non-bank sector vis-à-vis all BIS reporting countries, banks in Switzerland accounted for only $76 million, i.e. less than 1% of the total cross-border claims;
4. Japan, Hong Kong, UK, France and the US accounted for over 51% of total cross-border claims of the non-bank sector in Q1: 2018;
5. Between end-2013 and Q1: 2018, the sharpest rise in outstanding cross-border claims (including all banking instruments) of India's non-bank sector has occurred in Japan. France had also seen a significant increase in total outstanding claims by Indian residents till end-2017, after which there has been a decline. Other reporting jurisdictions where Indian residents' claims have increased, both for all instruments and for loans and deposits, include Chinese Taipei, Jersey, Australia, Ireland and Spain. Indian non-bank sector's claims have declined or remained stagnant in Hong Kong, UK, US, Korea and Sweden.

Clearly, Swiss bank deposits, which account for less than 1% of cross-border deposits held by Indian residents, are nothing more than a red- herring. If the government is serious about gathering better information on cross-border deposits and other instruments of Indian residents the focus needs to shift to those countries which have witnessed a rise in these assets in the last few years, especially Japan, France, Chinese Taipei, Jersey, Australia, Ireland and Spain. Other countries which account for high proportions of Indian cross border claims like Hong Kong, the UK and the US should also be in the radar. Interest rates in almost all of these countries have remained at very low levels since the Great Recession of 2009, and are much lower than what has prevailed in India during this period. The factors which have attracted cross-border depositors from India into these lower interest rate regimes need to be investigated.

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BIS data on the cross border claims of the non-financial sector in India – so the non-financial corporates and individuals – is available since Q4: 2013, and it is not reported country-wise. The aggregate data of total outstanding claims of the non-financial sector for all banking instruments and within that, loans and deposits, is depicted in the chart above. Non-financial Indian residents' loans and deposits in offshore banks have witnessed a remarkable increase from $16.4 billion (Rs 96,000 crore) in end-2013 to $38.9 billion (Rs 2.52 lakh crore) in Q4: 2018. Total cross-border claims of the non-financial sector including all instruments have increased from $17.5 billion (Rs 1.02 lakh crore) in end-2013 to $58.2 billion (Rs 3.78 lakh crore) in end-March 2018.

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The quarterly flow data of cross-border claims (adjusted by BIS) has been mapped in the chart above. In seven out of 17 quarters from Q1: 2014 to Q1: 2018, there was net outflow on account of loans and deposits of the non-financial sector, and in ten quarters there was net outflow on account of total claims including all instruments, especially the last three quarters. Thus, whatever the finance minister has claimed in terms of the decline in Indian deposits in Swiss banks, the fact is that many times more that amount has flown out of India into offshore bank accounts across various countries. Before making grandiose assertions on the declining stock of black money stashed abroad, the acting finance minister should explain why the outstanding amount in cross-border bank deposits have risen so sharply under the present government's watch, and what is being done to detect and retrieve the proportion of illicit hoard within it.

The total expenditure of the Central government estimated for 2018-19 in the latest Union budget is Rs 24.42 lakh crore, which is around 13% of the projected GDP for 2018-19. The total non-bank loans and deposits from India in banks based in Switzerland amount to around Rs 330 crore, going by reporting from the side of Indian claims, or Rs 650 crore going by reporting from the Swiss liabilities' side. Whatever is the proportion of black money in this deposited amount, it is peanuts. If the government truly intends to finance a significant proportion of its public expenditure by retrieving black money from abroad, it should focus on the Rs 3.7 lakh crore cross-border banking assets of the Indian non-financial sector, held in various countries other than Switzerland.

Prasenjit Bose is an economist and political activist. Zico Dasgupta is a research scholar at Jawaharlal Nehru University.

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