India Moves to ‘Claw Back’ Hidden Overseas Funds as Voting Ends

May 13 (Bloomberg) -- India’s next government that emerges from elections ending today needs to follow through on pledges to bring back cash stashed overseas to help fund an $85 billion economic stimulus plan and bolster markets, Credit Suisse Group AG and Credit Agricole SA say.

“India has to claw back every cent it can get,” said Joseph Tan, chief economist for Asia in Singapore at Credit Suisse, the second-biggest Swiss bank. The prospect of “revenue is the impetus for this crackdown on tax evasion and tax havens,” he said.

The government said in a Supreme Court filing this month that it proposed a new tax agreement with Switzerland to improve the exchange of banking information. The affidavit followed an April petition from Ram Jethmalani, a law minister in the previous Bharatiya Janata Party-led government, calling for the repatriation 70 trillion rupees ($1.4 trillion) of funds he estimates are illicitly held overseas.

Cracking down on illegal outflows from India may help extend a rally in the nation’s stocks and currency, said Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, the investment banking arm of Paris-based Credit Agricole. The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, climbed 49 percent since closing at a three-year low on March 9, while the rupee gained 5.2 percent in the same period to 49.315 per dollar.

“If they do get back even a part of the money, it would be positive for the rupee and Indian stocks,” Kotecha said.

Matter of Priority

Calyon forecasts the rupee will appreciate almost 3 percent to end the year at 48 a dollar, while Barclays predicts 47 in six months. The median estimate in a Bloomberg survey of 27 analysts is for the rupee to trade at 49.20 on Dec. 31.

The Global Financial Integrity program, a Washington-based non-government organization campaigning for tighter controls on tax havens, estimates “illicit outflows” from India probably averaged as much as $27 billion annually in the five years through 2006, equivalent to about 35 percent of the nation’s budget deficit.

“The government has already initiated action,” Jayanthi Natarajan, a spokeswoman in New Delhi for the Indian National Congress, the biggest party in the coalition government, said in an interview on May 6. “It is not an election issue for us, though the opposition has made it an issue. This is a matter of principle and priority.”

Election Rhetoric

India’s Supreme Court asked the government on May 4 to provide more information on money held in offshore accounts in response to the request by the BJP’s Jethmalani. The government has failed to act so far because politicians may be among the offenders, the petition said. The government said in a statement filed this month it has no “authentic” estimates of the amount lying in those bank accounts.

“This is election rhetoric,” said N. Bhaskara Rao, chairman of the Center for Media Studies, an independent policy research group in New Delhi. He said he expects the government won’t follow through with its pledge.

Both parties made election promises to build roads, bridges and rural health centers in a country where the World Bank estimates 76 percent survive on less than $2 a day. They have also pledged to reduce a budget shortfall that has swelled to 6 percent of gross domestic product, the most since 2001.

‘Join the Queue’

Lal Krishna Advani, leader of the BJP, vowed last month to bring back the black money within the first 100 days of its administration, the Press Trust of India reported on April 17.

Both the Congress party and the BJP may need to form a government in coalition with smaller parties, which have won support by criticizing corruption among officials, according to surveys before balloting began on April 16.

“It is time India joined the queue,” Sitaram Yechury, leader of the Communist Party of India (Marxist), said in an interview in New Delhi on April 30. “We are on a better wicket now after the Swiss banks relented” to the U.S., he said, referring to favorable playing conditions on a cricket pitch.

UBS AG, Switzerland’s largest bank, paid $780 million in February and agreed to part with about 250 names of American account holders after the Justice Department accused the lender of conspiring to defraud the U.S.

European leaders among the Group of 20 countries said in March that they would introduce more transparent regulations for tax havens. Under the new rules, Switzerland will assist in all investigations provided the governments produced “concrete evidence of wrongdoing,” said James Nason, a spokesman for the Basel-based Swiss Bankers Association in an April 30 e-mail.

Speculation is growing that Indians are bringing money back to the country “due to the fear that a new government will take action on Swiss funds,” said R.K. Gupta, who oversees the equivalent of $130 million in Indian stocks at Taurus Asset Management Co. in New Delhi.