Demonetisation is a noble start: What Modi must do to fight corruption
The complete failure of Bharat Bandh on November 28 and election results of municipal corporations in Maharashtra and Gujarat have come as a vindication of government's demonetisation move.
The total rejection of bandh call and BJP's improved performance in the final tally in two states has belied the hopes of opponents who were banking on popular resentment due to long queues at banks and ATMs. The developments should come as a shot in the arm for Prime Minister Narendra Modi who has taken a dramatically bold step against black money.
However, as we know, hoarding of large amounts of unaccounted cash which the drive seeks to punish is but one manifestation of the larger malaise - corruption. And though the present shocker has jolted the parallel economy out of its stupor, it is a long haul before we as a country could draw a sense of satisfaction.
On a broader perspective, for the cycle of black money not to slide back into it's old ways will require dismantling the incentive structure for corruption and fixing operational flaws in our governance. With high credibility for the present government and matching public enthusiasm, it should be the most opportune time for some radical changes in our system.
Firstly, in the present imagery which works at the misery of rich at some level, it will be important to remind ourselves that unless one was a hermit or a socialist parasite adept at feeding off the labour of others, pursuit of wealth is a worthy and welcome pursuit. And while individuals as social beings are required to comply with decided rules, prudent governments, on their part, would align policies so as to constitute a healthy social contract.
Moderate taxation would inspire wealth creation, willing compliance, higher revenue for government and cascading social benefits such as reduced unemployment. Unreasonably high taxes not squaring up with tangible returns for taxpayers and wasteful spending, on the other hand, will set in resentment of the kind where the exercise is seen as little better than extortion and evasion appears socially acceptable.
A shift from progressive income tax to a reasonable flat tax regime would go a long way in encouraging wealth creation and discouraging tax evasions. Progressive income tax is, in a way, penalising wealth creation.
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| The total rejection of bandh call and BJP's improved performance in the final tally in two states has belied the hopes of opponents who were banking on popular resentment due to long queues at banks and ATMs. |
East European countries, particularly Baltic nations, ever since the adoption of flat tax regime in '90s have posted high growth figures with least accompanying corruption. Australia and Poland are also considering flat tax proposals in their political discourse.
Experience has also shown us that governments which arrogate larger roles for themselves breed both inefficiency and corruption. In fact, patronising governments meddling in roles beyond core governance, even with best of the intentions, end up promoting corruption.
The first Industrial Policy in 1956 came up with quota, permits and licensing system with a declared aim of curbing concentration of wealth in a few hands. It, however, ended up doing precisely that. It became the single most important factor for the perpetuation of a select few business houses in Indian economy for the next four decades.
60 years later, even after some major reforms, politics still retains enough power of patronage and discretion to attract crooks seeking careers and duping public exchequer to the tune of numbers beyond the usual numeric scales.
The consequences of sector specific policies of an interventionist government have been detrimental across the board. Income Tax exemption for sgriculture which has become a glaring loophole for laundering black money is a case in point.
It makes no sense why a rich farmer whose earnings fall in taxable brackets should be exempt from income tax. Even if the senstivities of the sector had to be kept in mind, an additional exemption slab could be introduced. Blanket exemption for agriculture sector under income tax rules has been widely exploited and was most comical in case of Rabri Devi's returns showing income worth lakhs from dairy farming inside chief minister's official residence.
According to a local newspaper report, in the 15th UP legislative assembly, dairy barons, builders and "educationists" comprised one-third of the floor srength.
Duty drawbacks on exports are another striking example. In a sensational case CBI, last year, arrested a Delhi-based businessman and two colluding customs officials for claiming drawbacks worth Rs 300 crore on exports which were never made.
Since it is obvious that any subsidy to one sector is a collective burden on rest of the society, it is beyond any justification to subsidise the blue blooded economic elite. The rationale for drawbacks, on the lines of Modvat, was a set off against excise duties paid for raw materials procured. After the introduction of GST, even this feeble rationale ceases to exist.
If drawbacks on exports are a major prospect for duping public exchequer, prohibitive duties on imports and a complex tarriff structure are prime reason for a massive parallel economy. A major share of overseas payments for imports is remittances through circuitous routes to compensate for the difference between declared value and real value of goods.
The phenomenon, referred to as hawala in popular parlance, is so rampant that it once prompted Australian cricketer Dean Jones to enquire on NDTV what it actually was.
Equally amusing but not the least erroneous was a Delhi-based tweeter's response: "Sir, it is the lifeline of India". A large market for hawala can be eliminated by bringing import tariffs down to realistic rates.
Over-regulated and intervened, education and health are two other sectors which contribute to a thriving parallel economy.
Granting both an industry status will not only improve accountability but make operations easier and bring the two into commercial tax net. It will also legitimise the monetary pursuit in these sectors which remains mired in the hypocrisy of fraudulent trusts.
It is not possible to entirely remove government's participative role in economy but the same can surely be limited to bare essential. Enlisting specialists for short terms in place of a permanent bureaucracy in as many places as possible would help in not just improving efficiency but also to curb corruption.
In most tenders and contracts, the scope for ambiguity after lowest bids is the supposed need to "educate" non-specialist bureaucrats of the merits of higher bids.
Specialists can help draft requirements in such details that ambiguity and the need for further technical negotiations after financial bids is minimised.
The emphasis, however, should still be on extricating governance of its discretionary powers and encouraging private entrepreneurship in as many spheres as possible.
Although an all-interventionist, patronising state vested with discretionary powers is the wellspring of corruption, a few systemic changes like incentivising plastic money and electronic transactions, mandating UID for all banking transactions, phasing larger denomination currency out of monetary system and reducing human interface in public dealings will also help stem the tide.
There is a lot of talk on state funding of elections as panacea for top-level corruption. This begs some attention, not for the merits of the case but decibel levels in public discourse. It is suggested by almost every other commentator that corruption exists because of the enormous amounts spent in election campaigns and that state funding of elections will check corruption.
The understanding is not only simplistic but reflective of a mindset where governments are expected to play ever growing roles in all aspects of our lives. There is no guarantee, in reality, that the candidates will not top up state grants with their own funds or that the exercise will not become a ponzi scheme for non-serious candidates interested in making a quick buck.
Even on the lines of Indrajit Gupta Committee recommendations which suggested funding in kind in place of cash, state funding of elections is essentially a status quoist idea. A new political party will find it hard to dislodge old parties running on state patronage.
In free societies, mobilising funds for social and political causes should be left to individuals sympathetic to the cause. This writer is of the opinion that even limits on election expenditure should be done away with.
The real problem with elections, as pointed out earlier also, is not the expenses per se but the enterpreneurial lucre of political positions for which candidates are willing to spend vulgar sums.
Lastly, if an interventionist government vested with discretionary powers and its inspectors running all over promotes corruption, weak and lethargic judiciary further emboldens it.
The record of Indian judiciary is a mixed bag. Even though higher judiciary has mostly risen to occassions, lower level judiciary is beset with all sorts of problems. And while our courts have a reasobably good record of upholding the principles of democracy, freedom and equality, their record on corruption is uninspiring.
From Bofors to 2G, cases involving the high and mighty have dragged for far too long. Even in cases such as fodder scam where lower courts have pronounced judgements, the slow pace of appellate jurisdiction has ensured that culprits remain free to move around. The badly needed judicial reforms are long overdue.
While demonetisation has announced the nobility of PM Modi's intentions, lasting change will be achieved only with the elimination of red tapism, tax reforms and full economic freedom. Delay and procrastination on real concerns will mark the episode as a daring yet qualified measure in the fight against corruption.
After the surgical strike against black money, it is time for PM Modi to live upto his promise of a minimum government.
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