Corruption Per sqaure!!

Corruption| Adarsh housing scam What makes India's property market the biggest sink of black money in the country? The Adarsh Housing Society scam threatens to topple ministers, politicians and military top brass, but that's unlikely to slow property transactions in Mumbai, Delhi or anywhere else in the country. Some of these, according to anecdotal evidence, could involve as much as 60% to 70% of the payment in hard cash.

"Real estate is where most of the cash generated in the economy flows," admits a finance ministry official, who doesn't want to be identified. He should know. In December, the ministry compiled the results from income tax investigations across the country: of the relatively modest Rs 4,500 crore uncovered, nearly half —Rs 2,000 crore—was unearthed from real estate. About a quarter of the total was traced to manufacturing and a tenth to bullion.

We don't notice it often, but despite its success in modern technology and services, India largely remains a cash economy. We pay the cabbie cash; we hand over banknotes to the family help and despite the growth of organized retail, we do most of our shopping at the local kirana store where the gentleman has a sign that reads, "In god we trust, rest only cash."

One such store we visited claimed to service 300 households in the neighbourhood, supplying everything from soap and shampoos to cooking oil, flour, butter, biscuits and even plastic utensils. The owner refused to talk about sales and earnings, but the math wasn't hard. Let's say a household spends Rs 15,000 per month on essentials. This store's takings would be Rs 45 lakh per month.

Retail margins vary widely, from as little as 5% for soap and shampoo to as much as 50% to 100% for food and baltis. Even so, an average margin of say,a third, would leave the store owner with a profit of Rs 15 lakh a month. That's Rs 1.8 crore a year. And it's all cash.

Every time you see a truck drive by, think cash. There is a high chance the trucker has been paid in cash. The average nine-tonne truck charges about Rs 25,000 for a full load on a Delhi-Mumbai run. If it averages a hundred such runs in a year, that's Rs 25 lakh per truck per year, mostly cash. India's trucking industry is heavily fragmented: of the 5.2 million trucks on the road today, more than four million are run by people who own 10 trucks or less.

The taxman's survey found that manufacturing generates a lot of cash. That's surprising because it should be relatively easy to measure – and tax –what comes out of factories. Not quite, explains the finance ministry official. "In the past when we had excise inspectors physically present at excise gates, most factories had a second gate to take untaxed output to the market," he says. "VAT was supposed to change all that, but people have found ways around that too."

If you drive a car, I'll tax the street; If you try to sit, I'll tax your seat; If you get too cold I'll tax the heat; If you take a walk, I'll tax your feet; Taxman! Cos I'm the taxman, yeah I'm the taxman (Taxman, lyrics by George Harrison)

It's hard to tell whether Indira Gandhi was inspired by the Beatles, but from the 1970s, when she hiked top income tax rates to 90%-plus, well heeled Indians have played cat and mouse with the taxman with gusto. In the early 2000s, economist Arun Kumar reckoned that about half of India's wealth was stashed away as black money. In a trillion dollar economy, that's about $500 billion.

Some of this money is salted away overseas. A few years ago, a Ford Foundation-sponsored study by think tank Global Financial Integrity (GFI) found that Indians had salted away $23 to $31 billion dollars overseas in 2006.

India's economy has grown since then and it's safe to assume so has the volume of funds salted away overseas. But even if you double the outflows to $50 billion, there's still another $450 billion sloshing around the country. You can't eat two breakfasts a day, you can't buy too many expensive cars with cash, so what's the best place to park cash? Bullion of course, but real estate is right at the top of the list.

"It's out there, you don't need to hide it, it can't be stolen and the best thing,it doesn't have a price sticker on it telling the government how much you paid for it," explains the head of a Delhi-based real estate brokerage that does deals for high networth clients.

It's not as if governments haven't tried to keep tabs on–and tax—property. For several years, the Delhi government has set something called 'circle rates' – the minimum prices at which property can be traded in the city. It recently hiked those rates, in some areas even doubling them to Rs 125,000 per square metre. That narrowed, but hasn't closed the gap between the official and market rates. For example, the highest circle rate could still be as low as a fifth to a quarter of what you'd actually pay to buy property in those areas.

"The market is changing for the better," says the real estate broker agehead. "More professionals are entering the market, forcing builders to accept cheque payments, forcing the cash component down." But he still reckons that most secondary transactions have a cash component of anywhere between 40% and 50%. The cash market is fickle, he explains. In many cases it depends on the background of the seller and how much he's paid in cash.

"Businessmen have more cash than professionals. And if someone's paid 70% in cash to buy, he'll want the same when he's selling," shrugs the broker, "History matters, you know."