Happy holding elephant’s tail
Dr Bharat Jhunjhunwala says white paper on black money only shades corrupt politicians
THE HUGE black elephant of black money is invisible to the Finance Ministry. It is happy singing of measures to wash the tail. The White Paper on Black Money says that black money is generated in two ways. One is illegal activities such as smuggling, crime, abductions, drug trade and corruption. Note that corruption has been clubbed with other crimes to take it away from the spotlight. Second source of black money is tax evasion in commercial activities that are themselves legal. A steel mill may be legally making steel but may create invoice at lower price or sell some steel out of the books to evade taxes. However, in my reckoning black money generated from illegal activities is much greater than that being generated in tax evasion.
Black money from illegal activities arises from two sources. One source is criminal activities like smuggling and abductions. The other is corruption by politicians and officials. Again, I reckon that black money from corruption is much more than that from illegal activities. There appear to be three major sources of corruption. One is the allotment of natural resources. Ministers collect huge sums for allotment of forests, minerals, spectrum, rivers and government land. The Finance Ministry is essentially silent on this. It says meekly that “oversight in the form of comprehensive regulations, independent regulator, and appointment of ombudsmen for grievance redressal… can be considered as a remedy.” It beats me how oversight by an ombudsman appointed by a corrupt minister will help contain corruption of the same minister.
The second source is cuts in government procurement such as in Bofors’ gun deal. The White Paper notes with satisfaction that the government has brought the Public Procurement Bill to create transparency in the procurement process. The Bill is welcome. However, we must not be under the illusion that this will root out corruption. Provisions of the Indian Penal Code are adequate to deal with the problem. Difficulty is that the same corrupt ministers are bosses of the police authorities who have the responsibility to catch the culprits.
The third source of black money is economic policy change. One chief minister had perfected this art. Notification would be issued raising sales tax on certain commodities. Businessmen would soon reach a suitcase and the notification would be promptly withdrawn. Policies can be made to make profits for specific businessmen as well. Hamish McDonald gives many instances of this in his book “Ambani and Sons.” The Patalganga plant of Reliance came on stream in 1982. The government imposed an additional anti-dumping import duty of Rs 15,000 per ton on PFY within three weeks of this. As a result domestic prices went up and Reliance made a windfall profit on its production. Black money generated from such policy changes does not find mention in the White Paper.
The fourth source of corruption is the officials. Thankfully this finds mention in the White Paper. It is mentioned that leakages are taking place in welfare oriented social sector programmes. I had occasion to study the flood relief programme in Gorakhpur in the late nineties. The Patwari was collecting grease money of Rs 200 from grief-stricken folks to hand over cheque of Rs 1,000. It has been suggested that welfare money may be deposited directly in the bank accounts of the beneficiaries. This is welcome. However, the White Paper is silent on the corruption of the higher officials. It is well known that top officials get a cut from the bribes collected by lower officials in issuing drivers licences or in providing copy of land records. One chief minister had perfected the art of such collection. The lucrative posts would be auctioned to the highest bidder. It would be discreetly ascertained how much money an official was willing to pay for a particular posting. The posting was done upon receipt of the agreed sum. The official, in turn, would establish quotas for his junior officers. One paying Rs 1 crore to get a posting would collect Rs 10 crore. Thus the top politicians sucked out the black money just as the top of the coconut tree sucks the water from the roots. The white paper is woefully silent on the complicity of the politicians in generation of black money from these sources.
THE FOCUS of the White Paper, instead, is on the black money being generated due to tax evasion. Some good suggestions have been made such as imposing tax on bullion transactions. This is but the tail of the elephant. Say the total black money is Rs 100. I reckon Rs 30 of this may be generated from illegal activities like smuggling and tax evasion. Of the remaining 70 percent being generated by government machinery, 10 percent may be from officials. One-half of this may be going to the politicians. Thus, the share of politicians in the total black money may be about 65 percent. The White Paper makes not a single suggestion of rooting out black money from this source. It is happy to hold the tail of the huge black elephant.
The White Paper expresses helplessness in bringing back black money stashed abroad because of provisions of secrecy in laws of the host countries. The point is well taken. But these there are other ways. American Jews had raised the issue of Nazi gold in the nineties. It was alleged that many Jews had deposited gold and money in Swiss Banks during World War II. They perished in the Holocaust before they could reclaim the money. The banks simply sat on the money, effectively treating it as windfall gain. They denied any wrongdoing saying that various commissions after the war had settled the matter. Not to be cowed down, Senator Alphonse d’Amato, Banking Committee Chair of the US Senate, threatened to revoke the right of Swiss banks to operate in the United States, and toward the end of 1997 New York City actually imposed sanctions against the Union Bank of Switzerland. That brought the Swiss banks to their knees and they agreed to pay a compensation of more than a billion dollars. Government of India can similarly threaten that Swiss multinationals operating in India shall be nationalised and their patents confiscated if they did not disclose and return the money stashed by Indian nationals. Similar pressure tactics can be applied against tax havens like Mauritius. Alas! Ministry of Finance has no stomach for such suggestions.
True objective of the White Paper is to fool the people into believing that the main problem is tax evasion by businesses and the government is serious about checking it. The unsaid objective is to take corrupt politicians out of the spotlight. The solution, of course, is to appoint honest ministers. But that is scarcely possible when those appointing the ministers are themselves corrupt. One cannot expect the thief to appoint an honest police inspector.
Jhunjhunwala is a former economics professor at IIM Bengaluru. The opinions expressed are his own.