Illegal Foreign Exchange Transactions Make Up a Bullish Black Market in India

Aslambhai works hard and long in his small shop in central Bombay. His stated business is labor recruiting, but in reality he is one of many illegal foreign exchange dealers.

Aslam, whose shop is open around the clock, is one of nearly 200 such operators in Bombay, their offices hidden behind the Victoria rail terminus, where the crowded lanes are lined with shops full of smuggled goods and people jostling to buy them.

Most of the foreign exchange operators have legal fronts: a recruiting agency for gulf jobs in the case of Aslam, selling cigarettes or other wares for others.

Aslam quotes “d-rates”--exchange parlance for U.S. dollar buy and sell rates--in the business-like manner of an authorized dealer. He gets his dollars from many sources.

Black Market Rate

Among them are tourists, Indian overseas workers visiting home and, to a smaller extent, people such as taxi drivers or hotel waiters who receive foreign exchange tips.

From Aslam they can get a black market rate of about 16 rupees per dollar, contrasted with the official rate of about 13.

“But more than the business done locally, these illegal exchange outfits act as conduits for funds for financing big-time smuggling,” said Sandeep Tandon, deputy director of the Finance Ministry’s Enforcement Directorate, whose main job is to detect violations of the Foreign Exchange Regulations Act. “It is difficult to estimate the value of smuggling and what part of it is financed through illegal foreign exchange deals.”

Smuggled Items

But he quoted estimates that goods worth between $4 billion to $9 billion are smuggled into India each year.

The main items smuggled are gold, textiles and electronic consumer goods. Textiles alone are valued at nearly 30 billion rupees (more than $2 billion).

Illegal foreign exchange transactions, locally known as havala, meaning assurance, are a widely practiced racket. They help to bring foreign exchange into India but leave no trace and no paper work.

“The havala market is quite large and is a banking system by itself,” Tandon said. He said unofficial estimates put it at about $75 million a year.

1% to 2% Commission

He said that havala agents receive money in foreign exchange from Indians or others living abroad and pay its equivalent in rupees in India to their contacts or relatives at ruling black market prices, taking a commission of 1% to 2% on each deal.

“Smugglers are daring but they are not accountants. They always depend upon havala agents for safe and efficient money transactions,” Tandon said.

Illegal funds come mainly from the Persian Gulf, Hong Kong and Singapore, as well as Europe and the United States, where a large number of Indians work or have settled.

“The impact is threefold,” Tandon said. “First, the legitimate flow of foreign exchange into India is affected, and second, the money paid to sources in India is unaccounted for and no taxes are paid on it. And third, goods that are smuggled in are dumped in Indian markets, pushing local products out of competition.”