by Vivek Kaul
In fact, the Congress Party has argued along similar lines against the 2013 order of the Central Information Commission to bring the six national parties under the ambit of the Right to Information Act. In June 2016, it argued before the Commission: “Declaring a political party as [a] public authority under the RTI Act would hamper its smooth internal working, which is not the objective of the RTI Act.”1002 In fact, the argument is exactly the same as the one used by the Modi government to the Supreme Court in August 2015.
In fact, the Congress Party further said that if political parties were brought under the RTI, rivals would maliciously file a large number of RTI applications and adversely impact functioning of the political parties. This parrots the Modi government’s stand and is a pretty ridiculous argument, given that if some party decides to do this with the Congress, the Congress can do the same with that political party. Hence, there is already a sense of balance in the system.
If political parties are brought under the ambit of the RTI Act, they will have to function in a much more transparent way in comparison to how they do now. This would mean keeping proper records of where the funds to finance them are coming from.
Furthermore, real estate companies and builders are major financers of political parties, at least at the state level. There is some very good research evidence to suggest that builders do finance politicians before elections. In a paper titled ‘Quid Pro Quo: Builders, Politicians and Election Finance in India’, Devesh Kapur and Milan Vaishnav look at the cement consumption of builders to show that builders make payments to politicians.
All construction requires cement. When it comes to cement demand, the real estate sector accounts for a major part of the demand in India. When the construction activity carried out by the real estate sector goes up, the demand for cement increases. If the real estate companies are key financers of politicians, as they are assumed to be, then, just before the elections, they would need money to finance the electoral campaigns of politicians.
If the real estate companies do pay the politicians, it would mean that they would have lesser money to carry out their own activities. This would mean a slowdown in their construction activity. And a slowdown in construction activity should lead to a fall in cement consumption.
Hence, cement consumption can be tracked to figure out whether real estate companies are actually financing politicians. Kapur and Vaishnav looked at elections in seventeen Indian states between 1995 and 2010. They found a “contraction in cement consumption (representing a 12 to 15 per cent decline) during the month of state assembly elections”. What this clearly tells us is that real estate companies do finance state-level politicians, as is indeed commonly inferred.
Interestingly, the authors even offer some anecdotal evidence. A builder constructing a hotel in Mumbai was told by the government that it would issue the permits required if there was some quid pro quo. And what was the quid pro quo? It wasn’t cash, but a stake of five per cent in the hotel in the name of a firm connected to a local politician.1003
In fact, an October 2012 newsreport in the Tehelka magazine stated that, in Mumbai, “almost every MLA and MP, both past and present, cutting across political lines, owns at least one real estate project”.1004
Hence, if political parties are brought under the ambit of the RTI, the nexus between politicians and builders would come under proper scrutiny. This is something that no political party can afford. Given this, it is very important to bring political parties under the RTI. Only then will a serious crackdown on black money happen.
There are a few other steps that the Modi government can take in order to seriously tackle black money.
1) Any purchase of gold from now on should be mandatorily made against a PAN card. Currently, a PAN card is required only when gold worth greater than Rs. 2 lakh is bought. In fact, this allows jewellers to split large sales of gold into smaller bills of less than Rs. 2 lakh and spread it out. This is how many jewellers operated on the night of November 8, 2016, when demonetisation was first announced. In the process, they helped convert a significant amount of demonetised money into gold.
2) The nexus between politicians and real estate builders needs to be broken down. There are already newsreports appearing that state governments are in the process of diluting the pro-consumer Real Estate (Regulation & Development) Act (RERA) of 2016. The least that the Modi government can do is to ensure that this does not happen in states where the BJP is in power.
3) Real estate should be brought under the Goods and Services Tax (GST). If real estate is brought under the GST, then if the builders want to claim input tax credit, they must request documentation from all the suppliers and contractors that they work with. This will hopefully start cleaning up the real estate business as more and more builders will have to operate through legitimate means. Once they stop using cash in dealings with their suppliers, their proclivity to ask for cash from their customers will also go down. This will ensure that the generation of black money comes down.
Of course, this would mean that the state governments would have to agree to the change as well. This will be a big attack on Big Government and, given that, is unlikely to happen.
4) Stamp duty rates on real estate transactions need to be slashed. This is one reason why the real estate sector is at the heart of black money. If stamp duties across states are reduced and brought to realistic levels, the tendency of people to under-declare the value of real estate transactions will come down. Hence, the proportion of cash transactions will come down and so will the generation of black money.
5) The Income Tax laws of this country need to see some real simplification. Even the simplest Income Tax form (Sahaj) currently runs into six sections on an Excel sheet. The laws need to be simplified to a level where at least the salaried class should be able to file their own income tax returns without having to work through CAs.
As mentioned earlier, December 30, 2016, was the last day to deposit demonetised money into banks. On December 31, 2016, Prime Minister Narendra Modi addressed the nation. While people were looking for specific answers on demonetisation, what they got instead was a long list of generalities.
Sample this: “Over the last ten to twelve years, 500 and 1000 rupee currency notes were used less for legitimate transactions, and more for a parallel economy.” This is something that the Ministry of Finance press release accompanying the demonetisation decision had also pointed out.
Both Modi and the Ministry of Finance were essentially saying the same thing. High-denomination notes facilitate the black economy. Take the case of a real estate transaction. A home is sold. The buyer and the seller carry out a part of the transaction in cheque and the rest is carried out in cash.
There is no record of the transaction being carried out in cash. Hence, the buyer does not pay stamp duty on that part of the transaction and the seller does not pay any capital gains tax on it. The cash that is paid is in high-denomination notes. Hence, high-denomination notes facilitate a black economy transaction on which taxes are not paid.
Furthermore, individuals keep a part of the black money they have earned in the form of high-denomination notes. Demonetisation was supposed to hurt them by rendering the Rs. 500 and Rs. 1,000 notes useless overnight. That hasn’t happened.
The idea that high-denomination notes facilitate the black economy is well accepted internationally. Take the case of the United States. The highest denomination note is $100. In Britain, the highest denomination note is £ 50. Hence, the highest denomination note in the United States is 100 times the lowest denomination note of $1. In Britain, it is 50 times. In India, until demonetisation happened, the highest denomination note was Rs. 1,000, which was 1,000 times in value the lowest denomination note of Re. 1.
Given this, one would have appreciated the decision to demonetise Rs. 500 and Rs. 1,000 notes if a new note of Rs. 2,000 hadn’t been issued. If Rs. 500 and Rs. 1,000 notes were facilitating black market transactions, then so will Rs. 2,000 notes, in fac
t to a larger extent.
As on November 8, 2016, 685.8 crore Rs. 1,000 notes were in circulation. These notes have been replaced by the Rs. 2,000 note. As on November 8, 2016, the RBI had printed and kept around 247 crore Rs. 2,000 notes in its kitty. Since then, it would have printed more. 247 crore Rs. 2,000 notes can replace 494 crore Rs. 1,000 notes. It is safe to say that more than 72 per cent of the Rs. 1,000 notes have already been replaced by Rs. 2,000 notes.
Now, these notes can be used for facilitating black economy transactions, just like the Rs. 1,000 notes earlier were. So, what is the way out of this? Some economic commentators have suggested that, in the time to come, the Rs. 2,000 note should be demonetised as well. As we have come to know by now, demonetisation is very disruptive.
The best way to go about this is to phase out the Rs. 2,000 notes gradually. This idea has been suggested by the economist Kenneth Rogoff in his new book, The Curse of Cash, in a different context. Paper money has a limited shelf life. As Rs. 2,000 notes run through their life-cycle, they need to be replaced by Rs. 500 notes, and not by new Rs. 2,000 notes.
This won’t happen overnight and will take time. Meanwhile, the government, unlike this time around, can be ready for the situation, and print enough Rs. 500 notes in advance. It will take four 500-rupee notes to replace a Rs. 2,000 note. Over a period of a few years, the Rs. 2,000 notes can be replaced by Rs. 500 ones. Of course, all this is subject to the condition that the government genuinely wants to attack black money and not just talk about it.
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What is clear is that if India’s demographic dividend has to be cashed in on, Big Government in many areas needs to go. This means that the government needs to look at newer ways of doing things when it comes to educating India’s children. It’s not just about setting up new schools which have playgrounds attached to them and where teachers complete the syllabus.
The government needs to limit its ambition and get out of banks and companies, where it just can’t compete. At the same time, it should concentrate on providing those basic public goods without which any society cannot operate efficiently. These include proper roads, railways, electricity transmission systems, sewage systems, national defence, and so on.
In fact, each of these things can contribute towards the successful implementation of a programme like Make in India. At the same time, the government needs to work towards sorting out the mess in India’s land markets as well as its labour laws. Only when these two important issues are sorted out will small Indian firms start expanding and want to become big firms, which is something that is currently not happening.
Also, the government needs to make a distinction between paying for goods and services in comparison to producing and distributing them. This would mean moving on to cash transfers in the case of many subsidies that the government provides to the citizens of this country. This would hurt the incumbents who have been feeding on the system and the current way of doing things. Also, if cash transfers are to become the order of the day, the current system needs to be rapidly improved upon.
Over and above this, the government needs to honestly work towards bringing down the total amount of black money in Indian society. And any successful implementation of this cannot come about unless political parties start by cleaning up their own closets first, the demonetisation notwithstanding.
To cut a long story short, reforms, both political and economic, are needed. The trouble is that in India any sort of reform is looked upon with suspicion. Hence, politicians have always pushed through any sort of reform using stealth, without bothering to explain them to the people of this country.
This fear of reforms also stems from the fact that some stories are stronger than the data suggests. Take the case of the Atal Bihari Vajpayee-led National Democratic Alliance (NDA) losing the 2004 Lok Sabha elections when everyone expected them to win it. One of the post facto explanations that came out after Vajpayee’s loss was that he pursued economic reforms and then ran the India Shining campaign.
The larger question is whether or not the Modi government believes in the conventional explanation behind why Vajpayee lost. From the way they have abandoned the ‘Minimum Government, Maximum Governance’ slogan, it is only fair to speculate that they do believe in the conventional explanation behind Vajpayee’s loss.
There is also the fact that the process of the second generation of economic reforms, which was expected to be put on a fast track after Modi had won, hasn’t really taken off.
Nevertheless, the question remains: Do reforms and economic growth finally lead to votes for the incumbent political party the next time it fights elections? What does research say on this front? In a research paper titled ‘Does Good Economics make for Good Politics? Evidence from Indian States’, Milan Vaishnav and Reedy Swanson look at 128 state assembly elections across 18 states over a period of the more than three decades between 1980 and 2012. These states account for 93 per cent of India’s population.
And what did these researchers find? When they looked at the elections over 32 years, they did not find any correlation between economic growth and electoral performance.
But things get more interesting when the data is divided into three categories. The researchers divided the time period into three decades, namely, the 1980s (1980-1989), the 1990s (1990-1999), and the 2000s (2000-2012). In the 1980s, there was a weak association between economic growth and electoral victories. In the 1990s, there was a negative association between economic growth and electoral wins, i.e., the incumbent government could possibly have lost if it had delivered on economic growth. This, perhaps, explains why Lalu Prasad Yadav did so well in Bihar in the 1990s.1005
In the 2000s, the situation changed, and there have been “increasing electoral returns to growth”. This means that if a government delivers on economic growth, its chances of winning the next election go up. Vaishnav and Swanson found that a 1 per cent increase in the economic growth rate of a state “is associated with a 7.6 per cent increase in the likelihood of a government being re-elected”.1006
This is how things stand when we look at state assembly elections. And what about the Lok Sabha elections? In a research paper titled ‘Growth and Election Outcomes in a Developing Country’, Poonam Gupta and Arvind Panagariya look at the 2009 Lok Sabha elections. The 2009 Lok Sabha elections had been preceded by 8 to 9 per cent per year economic growth.
And what did they find? As they write: “Candidates of the incumbent party do better in high-growth states than those in medium-and low-growth states.” In fact, 69 per cent or more of the candidates of the incumbent parties won elections in high-growth states. In low-growth states, this falls to 50 per cent.
The point being that, while economic growth may not have led to electoral wins earlier, things have certainly changed in the 2000s. In fact, even in the 2014 Lok Sabha elections, economic issues played a key role in deciding which way the voter voted. In fact, survey evidence from the 2014 National Election Study carried out by the Centre for the Study of Developing Societies found that economic issues were the most important determinants of how voters behaved on the day of the election.1007
This essentially means that politicians, if they want to keep on winning, need to pursue economic growth as a strategy. Of course, for any sustained economic growth in this low-growth world, reforms, both political as well as economic, are very necessary. These reforms, when carried out at the national level, will ultimately deliver growth at the state level.
I guess it’s time that politicians also come around to changing the way that they look at economic growth and economic reforms and that they come around to realising that delivering good economic growth leads to their chances of winning in the next election going up.
The trouble is that any reform takes time to implement. This is why it is important that any new government carry out reforms during the first half of its term, so that the benefits from the reforms are reaped during the second half of its term.
But that hasn
’t happened with the Modi government. With the next Lok Sabha elections less than two and a half years away, the political cycle has already started, and given this, it is highly unlikely that any major economic or political reforms will be pushed through during the remaining term of the government.
This means that jobs won’t be created at the same pace as the growth in the labour workforce. India’s demographic dividend will start to unravel. One of the impacts of this will be an increase in the disguised unemployment in agriculture, which would mean greater poverty. At the same time, with the general unemployment going up, the demand for reservations in government jobs from the land-owning upper castes can only go up in the days to come.
With jobs not being created at an adequate pace, economic growth will either be slow (vis-à-vis what India needs; we might still be one of the fastest-growing countries in the world) or it will be inequitable. And, over the decades, this will have its own share of political repercussions as well.
As Wucker writes in a slightly different context: “By 2045, Africa will be home to 400 million [40 crore] people between the ages of fifteen and twenty-four who will need livelihoods, without which they will direct their considerable energies to protesting and worse.... How will Africa provide enough jobs for the rising number of youths and prepare the new generation for whatever the jobs of the future end up being—or risk the kind of unrest that makes the aftermath of the Arab Spring look like a child’s playground?”1008
Now replace Africa with India in the above paragraph. In fact, more than 54 per cent of India’s population is under 25 years of age.1009 And, if in the decades to come, there aren’t enough jobs going around for them, things in India will turn out to be along similar lines as Wucker expects them to be in Africa. While it is difficult to confidently predict an Arab Spring-like situation, it is safe to say that the general joblessness of the nation’s youth will have political repercussions.