Demonetisation Fails To Target Largest Black Money Source – The Govt-Corporate Nexus

Posted by Siddhant Kalra in Business and Economy, Politics
December 30, 2016

In November, PM Narendra Modi launched a ‘surgical strike’ on black money in the form of the infamous demonetisation scheme, which resulted in a swarm of opinions throughout the political spectrum. The most common one sums up the move as “well intentioned, but not as masterfully planned and executed.” This opinion reflects more than anything else, a widespread acquiescence on the issue of black money and corruption, regardless of political persuasions or socio-cultural background. Pretty much everyone understands the part that these two evils play in the denigration of India’s true potential. In the meantime, Mr Rahul Gandhi made ‘quaking’ allegations in Mehsana on December 21, which were neither a new discovery nor an ‘earthquake’. The Sahara-Birla diaries, which he referred to in his speech, had been discovered in 2013 in a CBI raid on Hindalco, and in 2014 on Sahara.

However, what Mr Rahul Gandhi did manage to do, was re-introduce the issue into public discourse in the middle of the roller-coaster ride of demonetisation.

What Are The Sahara-Birla Diaries?

In separate CBI raids in 2013 and 2014, on the two companies mentioned above, large quantities of hard cash and accounting documents were seized from the respective offices. The documents which were seized contained a detailed account of payments allegedly made to high-ranking political figures. Amongst these figures are politicians from both BJP and Congress – Shivraj Singh Chauhan (CM-Madhya Pradesh); Raman Singh (CM–Chhattisgarh); Shaina NC (treasurer of BJP in Maharashtra); Sheila Dikshit (former CM of Delhi).

The documents related to the Birla matter also contain the signature of the deputy director of the Income Tax (Investigation). Despite this seemingly incriminating information, the Income Tax Department did not push for a further enquiry with the CBI. According to Mr Prashant Bhushan’s allegations, KV Chowdary did not look into the matter when he was the head of the income tax department.

According to Mr Prashant Bhushan, in an interview with The Wire, Mr Chowdary has been associated with controversial issues in the past – Ponty Chaddha’s income tax assessment and the stock guru scam. Despite this, he was appointed as the chief of the Central Vigilance Commission, against which the citizen collective Common Cause filed a writ petition in 2015.

Supreme Court has asked for more evidence on the matter. Meanwhile, many representatives from the BJP have rubbished the allegations, while representatives from the Congress and other parties seek an investigation into the issue. Little can be said as to what these documents will amount to in the court of law, as the next hearing is set to happen in January.

However, these allegations form another link in a series of alleged big-business scams involving the government. It makes the writer wonder, that if big corporate scams are indeed the biggest culprits of money laundering and corruption, shouldn’t we be targeting them instead of ₹500 and ₹1000 notes? Do meagre bribes by the majority of the people in the country even compare to the amounts cited in big corporate scams? Let’s find out.

Black Money In Corporate Scams, Political Campaigns And Demonetisation

Scams, as big as the Coalgate scam, raise many important questions about how best to identify, as well as, deal with the central issues surrounding black money.

Recently, other alleged major scams by corporates as revealed in the Essar tapes – wherein investigation is under way concerning the alleged systematic bribing of senior political officials, and the Directorate of Revenue Intelligence’s (DRI) probe into over 40 of India’s biggest energy companies (including Adani and Reliance) for artificially inflating prices of imported coal.

The amounts in these scams are believed to be massive. Thousands of crores of rupees. It is no secret that large amounts are laundered offshore to tax haven countries like Switzerland, Mauritius, etc.

There are many estimates of India’s foreign black money. According to economists Pellegrini, Sanelli and Tosti in an interview with Times of India, the amount invested in shares, debt securities and bank deposits in tax havens alone may add up to $181 Billion or ₹10.5 Lakh Crore. One of the higher figures was perhaps given by Prof. R Vaidyanathan of IIM, who estimated that there was more than ₹70 Lakh Crore in 2007-08, stashed away in more than 70 tax havens in the world!

Whether it is  ₹10 lakh crore or ₹70 lakh crore, the amount of money laundered offshore is a significant proportion of the GDP.

To add to this, let us consider probable circulation of black money through political parties, which get special exemptions and are not even subject to RTI. It is alleged in India that illegal funds are used by political parties for campaigns, which often come as unaccounted cash from unknown donors.

The 2014 elections were the second most expensive elections in world history, estimated to be $4.9 Billion (More than ₹3 lakh Crore) having been spent on campaigning for seats. Fourteen of India’s biggest industrial houses set up electoral trusts to give money to their favoured parties.

The amount of money involved in the slew of corporate scams and party politics goes into thousands and lakhs of crores. To put it in perspective, India’s GDP for FY16 was ₹135.7 lakh crores. In 2007, the World Bank had estimated the size of the black economy to be 23.2% of the GDP in 2007.  According to India Ratings, the withdrawal of high denomination notes is likely to destroy  ₹4 lakh crore – about 12% of the total black economy. To do this, about 86% of all the cash in circulation was withdrawn in the form of ₹500 and ₹1000 denomination notes.

These figures should make everyone ask one question. Has demonetisation of high-value notes really struck at the heart of the black money economy? The writer is no economist. However, it doesn’t take an economist to see that the amounts of money involved in corporate scams and party politics constitute of a major chunk of the black economy. Moreover, the mechanisms of money laundering in these two cases rarely rely on the liquid cash economy and are even safeguarded by colloquial electoral and political practices.

Income Inequality in India – The Real Problem?

It is clear that the move of demonetisation fails to target this corporate-government nexus, which is at the heart of the black economy. Instead, it targets the counterfeit money supply and the comparatively meagre amounts of bribery, corruption and hoarding. The war against the black economy has no hope of success without abolishing the corporate-government nexus in the country. However, it seems like an idealistic dream at best, considering the overt nepotism at the core of India’s politico-economic system. If private industrial houses actively fund governmental elections, it is fair to assume, and in fact would be naive to deny, that nepotism is, in fact, the modus operandi of both big business and big politics. A simple look at the degree of income inequality in India conveys an alarming situation. It also alludes to the real problem of black money in the country.

A report by the World Economic Forum suggests that the top 1% of Indians own more than 50% of the entire country’s wealth, while the top 10% own more than 75% of it. These are alarming figures! This income disparity is often cited as the second-worst in the entire world, only better than that of South Africa! What’s worse is that the lower half of the population has a share of only 4.1% of the total wealth. Considering the fact that just a few corporate scams and an election campaign can generate black money going into significant percentages of the GDP, where does the real source of black economy seem to be coming from?

How much black money can the people in the lower rungs in India really generate? On the other end of the spectrum, the top 1% can and have been known to generate amounts going into lakhs of crores of rupees!

Even if we are to assume that everyone generates an equal proportion of black money in accordance with their personal share of GDP (which is entirely false), the top 1% can potentially generate just as much as the rest of the 99%! If for instance, we take the percentage of black money to be 25% of the total wealth, a single person in the 1% can generate  ₹16.875 lakhs in black money, whereas one person from the lower 50% can potentially only generate  ₹2250 each.

If that be the case, doesn’t it make strategic sense to strike at the comparatively smaller 1% with a much higher propensity to generate black money, than the much larger 99% which doesn’t even come close? The fact is that the mechanisms of black money generation by the top 1% are far too nifty to be plugged by the demonetisation of currency.

One can infer that the state of social inequality in India suggests that the top 1% generate as much black money as the rest put together. At the same time, they are the least affected by demonetisation. Steps have indeed been proposed by the NDA government to affect even those. Whether they are mere rhetoric remains to be seen. The corporate-government nexus emerges as the primary culprit in its contribution to the black economy. Without dealing with this nexus, demonetisation will remain a move without any substance or grounding in reality.

Moreover, social inequality in India is a much bigger problem than black money has ever been. The Corporate-Government nexus only makes it worse and will continue to do so, regardless of how much black money we have.

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Image source: Daniel Berehulak/ Getty Images

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