It is all black.

The latest Wholesale Price Index has fallen to 7.18% in December compared to 7.24% in November and 7.32% in October. This is being seen as a sign of inflation coming under control and a prediction for further falls in the future. The Consumer Price Index rose by 10.56% in December compared to 9.90% in November which is being blamed on high food prices. But is it? The Index of Industrial Production fell by 0.1% in November and the capital goods sector contracted by 7.7% which means that the fall in WPI is because of falling demand for manufactured goods because of inflation. Further proof is provided by the fact that the CPI was 10.74% higher in rural areas in December while it was 10.42% up in urban areas. If the CPI is being pushed up solely by higher food prices one would have thought that it would be lower in rural areas as food prices are much lower in villages. Also there has been bumper harvests of wheat and rice and the supply of winter vegetables are at their highest in December. After February supplies will start declining, as summer heat builds up, until September when food prices may start coming down again if the Gods are kind and give us good monsoons. What then is driving the CPI? It is probably the ever present specter in India, which is black money. A study commissioned by the government last year has just released its report. It estimates that the amount of black money is probably more than 10% of the GDP or above Rs 1 trillion. Previous studies carried out in 1976 put the amount of black money at 15-18% of GDP and in 1981 at 18-21% of GDP. TOI 11 January. While Rs 1 trillion sounds an awful lot of money it may not be a true reflection of the actual amount because black money by its very nature cannot be quantified. Our previous Finance Minister, presented a white paper last year in which he blamed transfer pricing as the main avenue of generating black money. Transfer pricing is the mechanism whereby a company sells goods or assets to a sister company within the same group at a certain price. When there is a deal between 2 unrelated companies the buyer and seller arrive at a fair price through a market driven system of price discovery. However, when both companies are within the same group one company can charge a very high price to reduce the tax burden of the other company. So, a foreign company based in an offshore tax haven charges its Indian subsidiary an unnecessarily high licence fee or for intellectual property thus reducing the tax liability of the Indian arm. But this money is going abroad and so does not increase black money in India even if it comes back as Foreign Direct Investment or into the stock market through the Participatory Notes route. No, black money is generated in India by bribes paid to politicians and civil servants, in property transactions and by the immense hawala market where any amount of cash can be transferred within the country for a fee of Rs 200 for every Rs 100,000. The higher the taxes the higher the avoidance. Elementary economics.