‘Note ban’ not enough to win voters for Modi

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Geopolitical Notes From India

M D Nalapat

It has been calculated that the Chief Minister of a moderately prosperous Indian state can amass more than $ 600 million a year, with his or her ministers not far behind. Last week, an Income Tax Department raid on a legislator in Bangalore belonging to the Congress Party netted nearly $ 20 million in cash in his house alone. The amount of money kept in other locations may be much larger. Although every once in a way, courts in India send a politician to jail for amassing wealth “disproportionate to income”, given the large scale prevalence of corruption within politicians and officials, such arrests have only had a negligible effect on the behaviour of those holding important posts within the government. Meanwhile, the citizenry labour under twin weights of taxes and bribes.
India has a substantial “informal” economy, and it was to extinguish this that Prime Minister Narendra Modi accepted the advice of the Reserve Bank of India Governor, the Principal Secretary to the Prime Minister and the Revenue Secretary of the Ministry of Finance to withdraw from circulation the Rs 1000 note as well as the Rs 500 note, thereby taking away 86% of the country’s currency. This columnist was asked by a high-level official about the November 8,2016 “Note Ban” the next day. His response was that this would ensure that the BJP tally in the 2019 Lok Sabha polls fell to below three figures ie to 99 seats in the Lower House of Parliament or less. Of course, several Union Cabinet ministers regard the Note Ban as a sure-fire vote getter.
On Match 11,when the results of five state assembly polls are out, the country will know if such optimism is justified. The withdrawal of currency notes has become the single biggest issue during the election. Across the country, hundreds of thousands of small units belonging to the “informal” sector have closed down as a consequence of demonetisations. Although the “informal” sector is under attack by the central government for not paying taxes. What officials forget is that almost all such units pay huge amounts in cash to politicians and officials, who will still demand the same amount even if such units pay taxes to the state. Many such units will thereafter have to close down, as they will not be able to afford taxes plus bribes the way larger units do.
Millions have lost their jobs because an economy which functioned on the basis of cooperative coexistence between the formal and informal sector has now seen the latter largely wiped out in several locations because of the zeal of Prime Minister Narendra Modi to ensure a “cashless” economy on the model of Sweden. Being a master politician, the Prime Minister surely knows that he has run a huge political risk by going in for the Note Ban. Across the country, angry citizens are complaining of having to waste hours standing in line at banks, only to be told that there is no cash in the branch. This columnist went to 27 ATMs during the past four days, in only one of which was there cash.
The small sector in India operates on very low margins, and given that the quantum of bribes has not come down after the November 8 measure, many units have closed their shutters as they cannot afford to pay taxes in addition to bribes. Had the government ensured that bribes were blocked, the public would have welcomed the Note Ban. However, those who asked for money in the past continue to do so now, although a few have given the concession of asking for payment only after the new Rs 2000 notes become available in significant amounts. India is probably the only country in the world where the price of petrol at the pump has gone up despite a fall in the world price of oil from $ 130 a barrel to $ 40 now. The gain to the Union Government from this has been estimated at over Rs 200,000 crores.
The public have yet to feel any benefit from this huge windfall, and because they are still being charged high prices for petrol, are angry that the benefits of the lower international price of oil has not been passed on to them. Had it been, the cost of several commodities would have come down. In particular, the cost of transportation would have been sharply reduced, instead of being higher than they were before oil prices started to plummet. Although Prime Minister Modi was expected to lower tax rates, this has yet to happen, with the result that the urban middle class in the cities is not happy about the direction of policy. Modi is known to work more than 16 hours a day and sleep only for two hours or three on several nights. However, despite such efforts, the change actually experienced by the citizen is still regarded by many as not high enough to justify the huge expectations of the people when Modi was sworn in on May 26,2014.
Will such a mood have an effect in the five states holding elections, and the others to follow next year? March 11 will tell. The formal and informal economies depend on each other in India. For example, much of the petrol which provides such huge returns to the central exchequer through indirect taxes is bought using cash. The overwhelming majority of those using only cash are from the poorer elements of society. Conversely, commercial banks are routinely used to launder vast sums of money, including by under-invoicing exports and over-invoicing imports, with the difference flowing to Swiss bank accounts. Several exports from India are to shell companies that almost immediately resell them to actual buyers at a much higher price than what has been shown in the books of the company making the initial export.
In much the same way, such mega items as commercial and military aircraft have been bought by companies and government at prices much higher than those offered to some other countries. To take a single example, Air India is reported to have bought several aircraft from a foreign manufacturer at prices much higher than was paid by two private airlines, Go Air and Indigo, and at almost the same time. There are hundreds of such instances that remain ignored by the authorities. The “Note Ban” will do little to prevent such anomalies, as all transfers in such deals are made through banks. The demonetisation has shown that there is no single “magic bullet” towards the ending of corruption. Prime Minister Modi will need to work hard before 2019 and its national election to convince voters in India that the Note Ban or indeed the thus far seemingly less than satisfactory Special Investigative Team on Black Money are not his only weapons in the battle against corruption by officials and politicians.
—The writer is Vice-Chair, Manipal Advanced Research Group, UNESCO Peace Chair & Professor of Geopolitics, Manipal University, Haryana State, India.
Email: mgnalapat@gmail.com