Present Cash Crunch will not have a major impact on curb Black Money Campaigns

Present Cash Crunch will not have a major impact on curb Black Money Campaigns

Indian prime minister Narendra Modi’s surprise ban on Rs500 and Rs1,000 notes was designed like a game of musical chairs, intended to catch out Indians with stashes of illicit black money, earned through corruption or simply hidden from tax officials. Estimates state that black money stored in notes is any where between 6 to 13 % only, hence the pain seems to be more than the overall gain in this exercise. 

Until November 8, black money was circulating merrily through the economy, powering purchases of luxury apartments, gold jewelry, foreign holidays, lavish weddings, and more. But with New Delhi’s overnight ban on using the high-value bank notes and its proclamation that notes not turned in to banks by December 30 will be worthless pieces of paper; the music abruptly stopped.Hence any person who holds the so called black money would end up laundering the amount by taking a discount which in being reported in the market anywhere between 25 to 40%. Banks so far have reported that almost 5 lac crs has been deposited/ exchanged so going by this trend by 30th December if this figure really swells the question is where was the black money ? The problem is banks would report total deposit/ money exchanged however India being such a large agriculture economy a farmer can go to the bank and deposit the money claiming that it is his money which would be treated as tax free and would be withdraw at a latter date and could be returned to the original providers of the monies after the charges as a discount. 

Another problem is in order to change these notes and launder the black money the route of gold could be used there by increasing demand for gold import there by rupee pressure on the rupee which could have long term impact of the trade balance of the country. We have already seen with two weeks the volatility in the rupee, almost touching 69 to the $. 

Indians with illicit cash squirreled away face a choice of acknowledging their hidden wealth or losing it, unless they can circumvent the system. Among those hard hits are Indian politicians who rely on hidden slush funds provided by donors to finance their costly election campaigns.

It is probably no coincidence that the clampdown on cash comes just as Uttar Pradesh, India’s largest state, is gearing up for important state elections, whose outcome could influence Mr Modi’s own re-election prospects in 2019. The opposition parties have made claims that there is no question that part of his motive is to choke off funds to the rival parties and this would swing the UP elections in favor of BJP.

Political parties’ rapacious demand for cash for electioneering has long been seen as one of the major drivers for Indian businesses to generate and maintain large stashes of black money, hidden from tax officials’ eyes. Mr Modi’s own glittering, high-tech 2014 national election campaign is thought to be one of the most expensive. The political system needs the lubrication of money and which every party can provide this lubrication would end up doing better than the rest in the elections.

During forthcoming state elections, parties especially in opposition will undoubtedly face problems, as political funding dries up. Furious rivals of Mr Modi’s ruling Bharatiya Janata party claim it had advance notice of the move that rendered 86 per cent of India’s cash supply virtually useless.

But the cash crunch is unlikely to purify India’s democracy without substantive reforms to bring transparency and accountability to its opaque campaign finance system.

It will make a one-time dent in election spending, but it’s not going to have any long-term impact because you are just going to regenerate black money.

India’s political parties have been hooked on secret donations since the decades after independence, when extensive state control over the economy encouraged businessmen to foster strong ties with political elites.

Political funding grew more opaque in 1969, when then prime minister Indira Gandhi banned corporate donations to political parties.

As the incumbent with all that power, the Congress would find ways of twisting people into giving below the table, but others wouldn’t have those benefits, Modi’s calculation is somewhat similar as it seems. 

Though corporate contributions were made legal again in the 1980s, political parties still closely guard the identity of their donors.

India ostensibly has strict and, many argue, unrealistically low campaign spending limits, but they too are riddled with loopholes, applying only to individual candidates, and not to parties. Parties’ financial accounts are not subjected to any independent auditing either.

Amid the disruption unleashed by his currency ban, Mr Modi has talked a good game about purging black money from the economy. But until political parties, including the BJP, are compelled to lift the veil of secrecy over those pumping monies into their coffers, India’s democracy will remain infected by black money

It will make a one-time dent in election spending, but have no long-term impact. 

_Farzan Ghadially