Breaking the Politics-Business Nexus Will Be the Real Surgical Strike on Black Money

The Centre is effectively saying it wants a cashless economy for the millions who survive in an honest cash economy. The dishonest cash economy controlled by big business is allowed to continue and thrive.

Credit: Reuters

The status quo is unlikely to go away with the new currency regime. Credit: Reuters

Prime Minister Narendra Modi’s grandstanding over the demonetisation of Rs 500 and Rs 1000 rupee notes will not create structural change in India’s historically-evolved parallel economy of $1 trillion or 50% of GDP.  After the public relations effect of Modi’s address to the nation wears off, it will be back to business soon. Politicians across the country who have influence over cooperative banks will have enough time to change their notes and get fresh 2000 rupee notes which will be easier to carry in smaller gunny bags. A study by the National Institute of Pubic Finance and Policy, which has not yet been published but has been submitted to the finance minister, shows about 80 per cent of major political party funding are in cash and broken into lots of Rs 20,000 or less received from unnamed individuals. Therefore the Modi’s “transformational move” in demonetising 500 and 1000 rupee notes is not going to change the manner in which elections are funded.

In fact, come election time in UP, Punjab and Gujarat next year, one will see hordes of freshly printed 2000 rupee notes stacked in bags and delivered by big corporates to political parties. Can Prime Minister Narendra Modi or finance minister Arun Jaitley give a commitment that the BJP will not take cash from corporates in the upcoming elections? This is the crux of the issue when you discuss transformative policies to eradicate black money.

The government today is effectively saying it wants a cashless economy for the millions of small traders, farmers and workers in the informal sector who survive in an honest cash economy.  The participants of this honest cash economy are scrambling to get their few thousand rupees changed. The dishonest cash economy controlled by big business is allowed to continue and thrive. They can continue to over-invoice imports, use the stock market route to generate black money to fund important politicians and political parties. How can you call a shift to such a system “transformational”?

Workers and small business owners are queuing up in large numbers before banks to change their 500 rupee notes. Many are even scared to go to the banks fearing what the authorities might ask. The poor is often made to feel guilty without committing any wrong.  The manner in which the decision to demonetise came has spread panic among the ordinary people. There is a thriving local currency trade around the country in which 1000 rupee notes are being discounted by 40% to 50% by money launderers who know how to book the demonetised notes into back dated transactions, thus legitimising them. There is chaos in the market as the government and RBI clearly seem unprepared for this. The finance minister admitted there will inconvenience for some time but he didn’t specify for how long.

A BJP spokesperson defending the demonetisation on TV channels told me that fixing election funding will take a long time but the attack on black money must begin by pushing the unorganised sector into the banking system as is happening now.

I believe the BJP has got the sequencing wrong though. The ordinary people of this country have figured that the nexus between politics and big business will not change however much Modi may grandstand about “eradicating black money.” The NDA government-driven SIT on black money has in its possession fully investigated reports on how big business houses have laundered billions of dollars by over-invoicing imports. Many of these corporate houses are also among the most indebted list of borrowers from public sector banks. The real surgical strike will be to  see how much black money these mega businesses generated in recent years. Does the present dispensation have the courage to go after them?

Instead, there is only focus on pushing and coercing the small traders, shopkeepers and workers in the informal sector to declare their cash. There are poignant stories in newspapers of how housewives in rural and small town India had saved few thousand rupees hidden in their quilts and under their beds and so on.  These people are now being coerced to stand in long queues at various bank branches where the clerk will most probably treat them with disdain. Unfortunately, the poor participants in the cash economy are never treated with dignity. Such top down “transformative” decisions to demonetise 85% of all currency notes leads to more humiliation of the poor. The BJP will realise the effects of this during the forthcoming elections in various states, especially in UP.

In any case,  you can’t transform the basic structure of the black economy by such one-time measures. We have had demonetisation in the past too but the basic structure of the parallel economy did not change. Politics in this country continues to be run by big cash generated from the big business. If PM Modi eradicates this and then addresses the nation on television, he will have carried out the real surgical strike!