Estimates of Trade Mis-invoicing and Their Macroeconomic Outcomes for the Indian Economy

This paper has two main objectives. First, it computes capital flight (CF) through trade mis-invoicing from India for the period 1988-2012. India's trade with 17 major trading partners is considered. We find that CF has accelerated since 2004 and particularly sharply since 2007. It peaked at nearly $40 billion in 2008 with the total outflow between 1988 and 2012 exceeding $186 billion. Second, we model the mutual dependence of GDP growth, CF, and various risk factors in a VAR framework. We find that, if left undisturbed, CF through trade mis-invoicing will continue to be high and play a significant and, by its very nature, an uncontrollable macroeconomic role. Hence, reducing, if not eliminating CF, is essential for its own sake as well as for the proper conduct of macroeconomic policy.