Make offshore money work for the economy

New Delhi must permit untaxed money lying abroad to be invested in lowcost, sovereign government bonds

As demonetisation slowly marginalises the parallel economy, there is concern about black money lying abroad. Here’s where we can draw lessons from the US treasury and their handling of public debt.

The US debt is more than $19 trillion. There are also reports of over $2.4 trillion in earnings of US companies lying un-repatriated abroad. But soaring public debt notwithstanding, the US has chosen to maintain its calm and also defer taxes on the earnings of US companies lying abroad. Is there a lesson in this for India?

In an article in the New York Times, Paul Krugman explained that the US doesn’t worry unduly because although foreigners hold large claims on the US, including government debt, they put their US investments in safe, low-yield assets, and America earns more from its assets abroad than it pays to foreign investors.

American assets take the form of foreign subsidiaries of US corporations, which earn a higher rate of return than US liabilities since foreign investments are mostly in low-yield treasury bills or securities. Due to the provisions of deferral, the US taxes its multinationals on profits earned abroad only after these are repatriated. This untaxed money is largely held in US banks through the provision of allowing this to be invested in US sovereign debt and securities.

Making the money offshore work for the Indian economy is possible if the government permits money lying abroad to be invested in low-cost, long-term, sovereign government bonds.

It would require that those with cash offshore be permitted to purchase zero-return bonds with a minimum lock-in period for funds repatriated from abroad, no questions asked. The upside — we get money back to India, at zero interest, and the taxpayer gets an opportunity to bring back his money without resorting to hawala and other avoidance structures, and can use it as an asset to raise loans, etc.

More importantly, the government wants to ease monetary policy and the central bank could only have done this by selling securities on the open market and pulling money out of the private banking sector. This way, the money supply is not reduced, since the investment in debt is coming from overseas, thus providing the government the facility for easing monetary policy and pump priming.

To invest in treasury bills currently a special scheme will have to be devised by the RBI requiring the issuance of a Master Circular. These are inward remittances through banking channels, and normal regulatory oversight through reporting by banks to the FIU only need apply. Without wasting any more time, let’s consider bring our offshore money home.