Has the Quest for Equity become Irrelevant in India?

Has the Quest for Equity become Irrelevant in India?

Arun Kumar, Sukhamoy Chakravarty Chair Professor, CESP, SSS, JNU.

Yusuf Meherally Memorial Lecture at GPF, Sept 23, 2014. 

I.          INTRODUCTION

Yusuf Meherally was in the vanguard of India's struggle for independence who played a leading role in peasants' organisations and trade unions. He was imprisoned eight times during the freedom movement. The 'Quit India' slogan coined by him was adopted by Gandhiji for India's final Nationwide campaign for independence. One of the founders of the Congress Socialist Party, Yusuf Meherally wrote, "I hate ugliness and cruelty and that is why I am a socialist. My socialism is based on aesthetic and ethical premises and not on Economics."  In the words of late Dr. Zakir Hussain, the Vice President of India, "It was the primeval sorrow of Man for what Men do to each other, knowingly or unknowingly, which moved him … ." (www.yusufmeherally.org). It is this philosophy and the growing all round inequity in society that made me choose the topic of this talk.

Historically, most societies known to us have had disparities whether looked at in terms of living standards or other aspects of life. Earlier, the differentiation between various groups of people was less for many reasons but perhaps above all because there was a greater sense of justice associated with equity due to the higher value attached with community life which seems to have eroded over time. Atomization and alienation of individuals are responsible for this decline and led to a greater acceptance of inequity in society.

Disparities are of course multi-dimensional with political, social, historical, cultural, geographical, economic, etc., factors contributing to them. These reflect themselves in differences in living conditions (including housing), access to health and education, in environmental factors or differentiation in incomes and wealth, etc. The differentiation may manifest itself in terms of gender, class, community and caste. All this gets embedded in social consciousness and, therefore, inequality takes societal, cultural and civilizational forms. Consequently, inequality becomes difficult to tackle (reduce) or deal with.

II.        RECENT HISTORICAL TRENDS

Present day India is characterized by growing inequality (See Graph I). On the one hand, we have the largest number of poor people in the world and on the other hand, we have a large number of billionaires. The number of billionaires is larger than in many other much richer countries than us. We also have the largest number of malnourished and the largest number of illiterate people in the World. Inequality across the nation is also substantial with regional disparities growing over time (Table 1).

II.1.     National Developments

Is equity in society a natural state of affairs? History tells us that is not so. Equity is a social construct and each society has had its own ideas about it. In India, during the colonial rule, there was not only extreme poverty among the masses but society had become highly iniquitous with a small well off elite class created by the colonial masters to rule the country. After independence in 1947, society strove to not only eliminate poverty but also reduce inequity. Government was given a large role in this and policies were pursued to achieve these ends. The policy paradigm adopted in 1947 had the underlying view that individuals are not responsible for their problems of poverty, illiteracy, ill-health, etc. These were seen to be the result of social processes hence characterized as social problems which had to be solved by the nation as a whole (Kumar, 2013). These tendencies need to be understood in a historical context.

II.1.1 Colonization, Disruption of Society and Present Day Inequity

Just like biological systems are determined by their genetic make up, societies are conditioned by their history. However, there is no determinism since people can change the course of society because they are conscious beings and not automatons. But change in social consciousness is often slow so that social change also takes place gradually unless there are revolutionary times.

Societies in the developing world were disrupted by colonization and India was no exception with its colonization beginning around 1750. This left a deep mark on Indian society; its social dynamics was disrupted by the colonial masters to suit their own ends of control and exploitation. It linked the Indian elite to interest of the foreigner rulers and distanced them from the common people of India. As Macaulay said in his Minutes of 1835 that there was a need for a class intermediate between the rulers and the common people of India. There was a hegemonization of the thinking of the Indian elite. The impact of disruption was on every aspect of Indian society. Agriculture, industry, education, etc., were all impacted and the effect persisted after independence (Kumar, 2013). Society as a whole lost dynamism.

The knowledge base of society and its understanding of itself become dependent on that propagated by the colonizer. Even after independence, the nation has substantially depended on knowledge generated in the advanced countries. Thus, Indian intellectuals have become largely `derived intellectuals’. There is a continuing loss of value of ideas and curtailment of creativity.

Consequently, the leadership at the time of independence was enamored of western modernity and wanted to copy it quickly. This bias introduced contradiction in government’s policies with the ruling elite in pursuit of western modernity going for a top down model of development. This marginalized the vast majority and aggravated inequality. Thus, while the government paid lip service to the poor and to equity in society, its overall policies did not work to reduce inequality in society even though specific policies were supposedly working in favour of the poor. The former dominated while the latter could not achieve their goals.

The growing black economy undermined all policies – marco and micro – so that general development was set back with consequent ill effects for the marginalized. Policy failure due to both the top down approach and the growing black economy was visible from the mid 1960s. This only worsened as the years rolled on with the downgrading of planning and the failure of the public sector to mobilize resources. The final nail in the coffin for the state dominated economic policies came with the Iraq crisis in 1989. India found itself in a debt trap in 1989 due to its embracing massive consumerism in the 1980s based on imported goods (especially, petro products). The foreign debt rose from $10 billion in 1980 to $ 90 billion in 1990.

The crisis starting in 1989 led to a shift in policy paradigm in 1991 to `marketization’ (See Section V). While markets always existed, marketization was new. The state retreated in favour of capital with `market friendly state intervention’. Solutions to problems lay in the market – removal of poverty, employment, education and health. Individuals had to accept blame for their own problems and society was largely absolved of its responsibility. However, after the collapse of the South East Asian Tiger economies in 1997, this was called `crony capitalism’ and the World Bank changed its line to a pure market based growth strategy called `growth at any cost’. The US economy was booming on the back of the asset bubble in the financial markets. The Fed chief, Alan Greenspan, pronounced that `markets are self correcting’ and there is no need to intervene in them.(The Age of Turbulence:2007, not sure, but in this book he has presented this ideology as per the sources on the internet). Government of India also pursued this strategy and under it, all costs have fallen on the workers and the environment. This has aggravated inequality further.

II.2      Global Developments

Rising inequity since the mid-1970s is a global phenomenon (Picketty, 2014).  The welfare state put into place after World War II, following Keynesian prescription faced the crisis of stagflation after the mid-1960s. Consequently, these policies were largely replaced by the neo-liberal economic paradigm. Mrs. Thatcher came to power in 1978 and argued that `There is no alternative’ (TINA) and attacked the Trade Unions. Mr. Reagan became the President of the USA in 1980 and he pushed these policies. Given the weight of these countries in the institutions of global governance, like, the IMF and the World Bank, these institutions also pushed the developing world to adopt more conservative, market based policies which came to be known as the Washington Consensus (Williamson 1989).

Globally there was a shift in the strategic balance which aided this process of Anglo-American domination. With the passing away of Mao in 1976, Deng  Xiaoping came to power and he moved China’s economic policy paradigm to Capitalist policies under an authoritarian regime and called it Socialism with a difference.

Soviet Union which used to help the developing countries balance the pressures from the Western powers itself started to falter from the mid-1970s due to growing inefficiencies and corruption. From 1980, when Reagan announced the Star War programme, the collapse of the Soviet economy set in. The weight of defense expenditure became too much for them to sustain. By the mid-1980s it was clear that the developing countries would have to deal with the Western powers on their own and India was no exception. Thus, the Western powers were emboldened to introduce the new issues in GATT in the Uruguay Round of negotiations in 1986. The collapse of the Soviet bloc in 1989 was sudden and capitalism become dominant.

The rapid growth in some of the poor countries like, China and India and the rise of the South East Asian economies has meant that across countries, disparities have declined in the last 25 years. However, in each country the disparities have increased. Thus, if disparity is measured globally between the top 1% and the bottom 50%, they have risen (Picketty, 2014). These trends have had their impact on India.

III.       EQUALITY AND EQUITY – FROM ABSOLUTE TO RELATIVE

All important religions and philosophies talk of equality among people. Our Constitution talks of equality of all before law. Why then does it not come about? People are born equal (except when there are genetic problems) with the same social potentialities but it is in terms of their social existence, they become unequal. The potentialities of individuals get modified by social processes – where one is born, the social status of the family and so on. These become the sources of inequality in society. Even if there are natural differences amongst different people, it depends on society whether they would be treated as equal or if not, how unequal.

Treating everyone as equal even when people are recognized as have varying capabilities as per different attributes of life is an absolutist idea. The dominant sections decide on who gets what status and for their own benefit create divisions/hierarchies. This is justified as a `natural’ division to lend legitimacy to their view of society. Their notion of justice is also based on such views.

Even the oppressed or the victims of the system largely accept it as `just’. For instance, in the present day male dominated world, successful women also adopt the male centric values of society and implicitly accept them as a natural state of affairs. Similarly, in the Indian caste ridden society, the oppressed, like, the Dalits, adopt upper caste norms.

Equity is a relative idea which specifically recognizes the differences amongst individuals. According to principle of equity, equals should be treated alike while unequals need to be treated unequally. For instance, two individuals with the same level of income should pay the same amount of tax. Those with different levels of income ought to pay different amounts of tax. How unequal should the treatment of unequals be is for society to decide. There is no one rule for it since different societies value equity differently – some more and others less.

III.1     Wider Context – Social, Political and Economic

Features affecting our notions of equality/equity are not just economic but also social, political, cultural, linguistic, ecological and so on. Change comes through change in social consciousness and not just through the good intentions of the rulers.

Societies are not in a stationary state and are buffeted by new ideas and influences from outside so that they keep responding to different factors. Existence of inequity and changes in it are both causes of tensions in society. Any time there is change in the prevailing level of inequity in society, there is a build up of tension. Whether it is an increase or a decrease in the prevailing levels of inequity there is resistance from those who lose out. Both existence of inequity and changes in it can disturb social harmony.

All known societies have had various degrees of inequity. At times, societies seem to accept inequalities easily and without disturbing their functioning. Keynes (1936) and Hicks (1974)have pointed out that a historically given income differentiation amongst the various groups does not lead to big social conflict while rapid changes in does so.

The acceptability of a historically given income ladder is perhaps reinforced in a variety of ways. If society attaches a notion of justice with the prevailing income disparity, it becomes socially acceptable. Rapid changes in income relativities would then be seen by those who are losing out as unjust and resisted.

In post independence India, income relativities have been disturbed significantly. The nature of the elite changed and businesses started playing a more dominant role. In a democracy, like, in India, those in control of larger numbers also played a significant role and tried to get a larger share of the national pie. The peasantry/ rich farmers fall in this category. The judiciary and the executive consisting of the police and the bureaucracy (who were essential to the colonial rulers for their continued hold over the country and hence constituted the elite of the country) slowly lost out to these upcoming groups. There was a reaction to this via the instrumentality of the black economy.

III.1.1  Material Aspects of Social Progress

Economists have principally used income distribution to measure disparities in society believing it to be the principal manifestation of inequality. It correlates well with the other economic parameters that signify inequality. However, it may not be able to explain other social, political and cultural aspects of inequality. Like, in India, disparities based on incomes need to be supplemented by the caste and community factors.

In spite of these limitations, traditionally, economists have principally measured disparities in terms of skewdness of incomes. More recently, there have been attempts to take into account multi-dimensional factors by constructing indices like, the human development indices but as is usually the case, they suffer from a certain degree of arbitrariness about the weights attached to their different components. Of course, different societies may view each factor differently and assign different weights making inter-society comparisons difficult. Even in income terms, comparisons across nations may be difficult since the exchange rate used may have a degree of arbitrariness.

In brief, while inequality has many dimensions, today it is taken to refer largely to the material dimension. The question is whether material progress can be the sole yardstick of progress.

The present age is one of selling everything from self to one’s reputation to the Taj Mahal (Bunty and Bubbly style). Advertisers depend on creating a feeling of dissatisfaction amongst the people and especially the young; contentedness amongst individuals is a casualty. Sex and violence are used to sell products and this both commercializes them and also creates a sense of dissatisfaction in people. Hence material progress is disjointed from being happy. Notions of freedom are used to justify any checks on irresponsible advertising. People are posited to be strong and able to discriminate between what is or is not good for them. However, the entire exercise of advertising is to weaken people and catch them at their weakest. Its psychological impact on people, especially children, needs careful analysis.

Since the purely material possession devoid of other attributes can only give momentary satisfaction, the purely economistic view of society results in short termism. It leads to a disjuncture between society’s long run (and existence itself) and short termism of the individual with severe consequences for Humankind.

IV.       DISPARITES – REGIONAL, SECTORAL, INCOME, GENDER AND MARGINALIZED.

The Indian economy started to open indiscriminately with the New Economic Policies (NEP) launched in 1991. While its exports and imports as a per cent of GDP in 1991 were around 7% (roughly the figures for the USA, Japan and China) now these numbers have risen to about 20%.

As already argued, NEP led to a paradigm change in policies. The market has taken over from the state and is playing a leading role in the growth process. This has meant giving concessions to capital and ignoring the distributional consequences of policies. As pointed out in Kumar (2007a) there is a simple dichotomy playing itself out between agriculture and non-agriculture.

Since 1991, while agriculture grew at about  3.1 per cent per annum, non-agriculture has grown at around 7.5 per cent. While agriculture still employs more than 50% of the work force, its GDP share is only 14%. In contrast, the Services sector employs 30% of the work force but it contributes more than 60% of the GDP. Thus, those in agriculture are the majority but marginalized in national income. Since agriculture is concentrated in rural areas and services in the urban areas, this disparity is leading to a growing rural-urban divide. Further, since the backward states are predominantly agricultural, they are lagging behind the advanced states which have a dominant contribution to the services sector. Finally, since agriculture employs largely unorganized workers there is a growing divide between the unorganized and the organized sectors (Kumar, 2007a). It is accentuating the disparities between the top 3 per cent (elite) and the bottom 40 per cent broadly those around the poverty line. (Graph II shows that the decadal rate of growth was unchanged).

The growing disparity is also based on the post 1991 concentration of resources in the hands of the private corporate sector which is investing in the organized sector and mostly in the advanced states except recently when it is investing in buying out natural resources. Thus, agriculture is receiving hardly 10% of the investment (for 50% of the work force) and is lagging behind in productivity and wages. It is hardly generating new jobs (Kumar, 2005a). In contrast, the corporate sector is investing but in capital intensive activities and is, therefore, shedding jobs in a kind of jobless growth. Consequently, overall, few jobs are being generated and this is resulting in rising under employment.

Growing problems of employment generation and rising disparities have led to increased political and social instabilities in India. There have been violent protests against land acquisition for projects and setting up of SEZs. Agitations for reservations and affirmative action have often turned violent since the government is seen as non-responsive and pro-corporate sector. Growing corruption has added to a loss of faith in the government which is seen to be working against the poor and in favour of the rich and the corrupt.

To correct its image, government has been forced to go in for programmes for the support of the poor like, rural employment generation (MGNREG), right to food, right to education, mid day meal scheme in schools, loan waiver for poor farmers and so on.

However, as Graph II shows, spurts in growth since 1991 have been short lived.

V.        NATURE OF GLOBALIZATION – ONE-WAY AND MARKETIZATION

Globalization is not a new phenomenon. It has been going on for a long time. India has traded with S E Asia, Arab countries and so on for thousands of years. Buddhism went from India two thousand years back and that is also globalization. The coming of the British was also globalization. But it was a two way process till the British colonized India starting 1750. That is when globalization became a one-way process with severe impact on the dynamism of Indian society.

V.1      Disparities and Marketization

As mentioned above, data indicate, the process of marketization of society has led to growing economic disparities in India since 1991. The pre existing disparities have worsened. While economic growth accelerated in the Eighties and went up from an average rate of growth of 3.7% between 1950/51 to 1980/81 to 5.3% in the Eighties, disparities remained in check. In the Nineties, this rate of growth was maintained but with rising disparities (Kumar, 2005b). After 2001/02, the rate of growth accelerated further to about 8.5% for 5 years but the disparities increased even faster (Kumar, 2007a). 

It needs to be clarified that markets are an institution of exchange of goods and services and have always existed. It is the process of marketization that is new. It leads to the penetration of market philosophy into every sphere of human activity and the guiding factor of social institutions. Markets are considered to be `objective’ and society as `subjective’. Thus, it leads to the advance of the former and the retreat of the latter.

V.2      Principles Underlying Marketization

Why does marketization result in growing disparities? First, markets in themselves are devoid of values which come from society. It is society which decides implicitly or explicitly what level of inequity or equity it should have. As society retreats and markets advance, judgments about equity become less important. Free competitive markets by themselves cannot deliver equity. It is well known that they are consistent with complete inequity with one having all and the rest nothing.

Second, markets are based on `dollar vote’. Purchasing power of the individual is what counts and not `one person one vote’. The outcomes of the market depend on the former and not the latter. This results in the `marginalization of the marginal’, that is, the less purchasing power one has the less one can influence the outcome of the markets. This operates at the international, national and regional terms accentuating disparities at all these levels.

Third, the notion of welfare under the markets is based on the idea that `more is better’ and leads to consumerism. This leads to demand for higher incomes to enable greater consumption. It justifies consumerism but that leads to environmental problems which affect the poor more than the well off and aggravate disparities through health effects (Kumar, 2006b). This principle also implies that sacrifice is stupidity so equity through transfers should be resisted and cannot be considered to be welfare enhancing.

Fourth, the market notion of `let prices prevail’ is used to justify the retreat of the state. Thus, in the labour market minimum wage laws are diluted and unemployment dole is frowned upon. Subsidies are considered to be distorting so they need to be withdrawn. This impacts prices of basic goods and the welfare of the poor since they are able to afford less of them. In fact, unemployment is considered to be desirable as a means of disciplining labour and this accentuates disparities by causing a downward pressure on wages.

The marketization process results in basic philosophical changes in society. The free goods of nature or the non-marketized aspects of life are marketized, like, beaches, rivers, common areas, etc. This leads to a deterioration of the situation of the income poor who could otherwise get some sustenance from these free goods (Kumar, 1997).

Fifth, marketization has led to a new international division of labour, with polluting industries relocating in the developing world and clean technology production concentrated in the advanced countries, reducing their pollution levels. Larry Summers argued that it is more efficient for people to die due to pollution in the developing world (The Economist, February 8, 1992) hence polluting industries should relocate in the developing countries.

Sixth, marketization has led to the notion of people as homo-economicus and `rational individuals’ working solely to maximize their profits. They are atomistic individuals. Optimization has become an important tool in Economics. There are benefits and losses of every action of economic agents and they optimize their gains to improve their welfare. There are no absolutes and everything becomes relative. There is an optimum level of smuggling, tax evasion and so on so the existence of ills of society are justified and need to be tolerated as rational. Hence principles are less important today.

Atomization of individuals has led to wider impact on thinking in society. In modern medicine a person is not a whole but parts and dehumanized. In modern education, people are a resource, like, a mineral. They are basically, a prerequisite for production. Education is referred to as Human Resource Development or human capital formation.

In such a framework, with things becoming relative, no stand on social issues need be taken by the individual. World is for enjoyment and not denial which is a cost to the individual. Since profit maximization requires minimization of costs, feeling of guilt has to be minimized. Consequently, taking a stand in favour of greater equity would mean sacrifice and it should be avoided by rational individuals.

These philosophical changes lead to the acceptance of the idea that the poor themselves and not society are responsible for their poverty. This makes inequalities acceptable. In this line of argument, it does not matter that markets fail and have done so more and more. The ideology of the `free market' which helps the better off sections is used to justify their privileges in society and to further them. The marginalized and the less marketized sections of the population fall behind due to marketization and resent this change.

Thus, it is clear that the degree of marketization in society stands in direct opposition to the extent of socialization or the public good nature of many activities. While the former helps the well off sections and the latter gives support to the marginalized but that is on the decline under pressure of marketization. Globalization has narrowed the space for pro-poor policies

VI.       MACROECONOMIC FACTORS – GROWTH, BLACK AND DISTRIBUTION

Under Capitalism, the biggest inequality is between wages and profits and not amongst wage earners. As the degree of monopoly rises, so does this gap. As capital gets concentrated in fewer hands and labour gets weakened, the degree of monopoly rises. Capital is able to push for policies favourable to itself. International finance capital has come to dominate policies globally and earn vast sums of profits.

The macroeconomic environment to promote growth, increase investment and exports has been weighed in favour of capital since 1991 and even before that since 1980 when India went to the IMF for loans to meet its balance of payment difficulties. This has led to a rise in the share of profits in the economy and led to greater inequality.

As the share of profits has increased, demand has to be generated by increasing investments. Even export demand has to be generated by holding down wages. Demand from the middle classes and the well off has to be based on creating asset bubbles like we witnessed in the 1990s and the 2000s up to 2006. None of this is a stable solution for growth but all of them lead to greater inequality.

VI.1     Inequality Leads to More Inequality

Economic growth has come to depend on the actions of the capitalist elite. Mobility of capital has helped it to extract concessions from different countries. Thus, taxes in country after country have been lowered in order to attract capital. Labour laws have been diluted across countries for the same reason. Within different countries too, capital has been able to extract concessions from society on the ground that it is the source of growth. Belief in welfare state has been replaced by an exclusivist and elitist model of development. Thus, inequality has become the cause of more of it.

But, long term growth can not be sustained on the basis of creating an increasingly unequal society. The global economic crisis starting in 2007 also followed growing inequity in each country and in the world as a whole.

VI.2     Public Policy and Equity: Fiscal Policies and Public Goods

Governments have had a close association with businesses but under the weight of globalization and the World Bank prescription of `market friendly state intervention’ they have become more closely integrated with businesses. So, Japan is called `Japan Inc.’ and in India too post 1991, we have become Indian incorporated. Crony capitalism and the associated corruption have been one aspect of this growing closeness between the businessmen and the politicians.

Democracy has been truncated in country after country. During the recent global economic crisis the `Wall Street’ dominated over the `Main Street’ and that led to the revolt of the 99% against the 1%. People in country after country have lost their right to choose their path of development. International Finance Capital is deciding that by propagating the notion of market `efficiency’. Thus, national rules are subservient to the global demands of WTO provisions. India’s food security or patent laws have to be as per the dictates of global capital.

For the Indian elite, globalization implies linking with the elite in the developed world. The emotional attachment with the nation is greatly diluted so that many of them have voted with their feet, becoming Non-resident Indians and taking their capital abroad rather than investing in their own capital short nation. The Social Contract has been shattered. The State with a monopoly over violence has used it with a heavy hand against all those who protest so that capital can be appeased.

Equity through taxation has been diluted due to concessions in direct taxes. There has been talk of replacing direct taxes by VAT or moving from progressive taxation to proportionate taxes. Both these shift the focus of taxation from making post tax income distribution more equitable to less equitable. Large concessions on property income had any way dented the progressivity of taxes on high incomes (Kumar, 2013). The number of public goods that generated some equity have also been reduced and now the emphasis is on shifting to the levy of `user charges’ for public goods.

In brief, the content of public policy for creating a more equitable society has declined over the last 25 years.

VI.3     Black Economy and Equity – From the Social Realm to the Individual.

The growing black economy implies rising illegality and is anti-social. It is currently estimated to be around 50% of GDP in India so is both systematic and systemic. It is concentrated in the hands of 3% of Indians and results in huge additional inequity which is not captured in data (Kumar, 1999:75-78). So, in 1995-96, the disparity between the top 3% and bottom 40% in the income ladder was 12:1 in the white economy it became 57:1 if the black economy is included. So, the real disparity in society is a result of the black economy. It makes social action difficult by leading to growing alienation of individuals.

The inequity due to growing black economy is not captured in the official data. This is true globally and especially in the developing economies. Typically, the black economy is concentrated in the hands of the already rich, the profit earners who try to increase their incomes by illegal means. They share a fraction of this, as in India, with the other elite sections of society, like, the politicians, the bureaucracy, the police and the judiciary (Kumar, 1999).

The black economy leads to policy failure and social waste. It results in less of tax collection and, therefore, to shortage of resources for development and lower expenditures on essentials like, health and education. Further, the money sent for development is siphoned out and that makes expenditures less effective. Consequently, expenditures do not lead to outcomes. Often due to it, resources are wasted, like, roads are poorly made and repeatedly repaired rather than new roads built. Thus, the rate of growth is shown to be less than the potential rate of growth by 5% due to the existence of the black economy (Kumar, 2005c). The Indian economy instead of being a $1.8 trillion economy could have been a $14 trillion economy this year. Thus, roughly $12 trillion of development is being missed out every year. This is a major cause of the growing inequity.

Globally, black incomes earners are using tax havens to both take their capital out of their national territories as well as round trip it back to their countries. The tax havens are also used by the corporate sector to siphon profits out of the developing countries via transfer pricing or under and over invoicing of exports and imports. Illicit flow of funds from India has resulted in loss of opportunity of about $1.2 trillion since 1948. The MNCs like, Amazon, Google, Apple, etc., are taking billions of dollars of profits out of the USA to Ireland.

Illegality is also damaging the environment in severe ways and the impact of this degradation of the environment falls disproportionately on the poor through attack on their employment opportunities and health.

Since the black economy is illegal it moves economic activity out of the realm of the collective and into the hands of the individuals. Mobility of capital has made the situation more complex and enabled capital to evade government actions. This has become a major cause of the growing inequality globally and in each of the nations.

VII.     POLITICAL ASPECTS – DEMOCRACY SUBVERTED.

The black economy operates by subverting democracy in the nation. Political parties represent the interest of vested interests rather than the interest of the citizens from whom they get the vote. The leadership of almost all political parties across the ideological spectrum have been accused of corruption and a party to the subversion of democracy.

Democracy has become formalistic. Choice for the people is restricted to voting for one or the other corrupt set of people. Data on candidates standing for elections shows how they multiply their wealth while in power. This is the declared wealth and not the actual which is often held as benami and through a complex web of holdings in India or abroad in tax havens.

Leaders of parties do not encourage criticism within parties. Leadership which used to identify with the poor by living simply has given way to one which socializes with the rich and copies its style of existence. Parliamentarians with designer clothes, gold and diamond watches and fancy cars are now a common sight. These people when they get to power subvert democracy to make gains. Even the leadership of the marginalized sections has rapidly got corrupted under the influence of this undemocratic politics based on vote bank politics. They feel they can only win elections if they have big money and not because they have the support of the citizens. The result is unresponsive and unstable politics, a weak democracy and a shift away from the politics of achieving greater equity in society.

VII.1   Collective Action - Difficulties

Organizing people is becoming increasingly difficult. National governments have become more authoritarian and global capital has become all powerful. Society’s horizons have become increasingly narrow and so have the horizons of individuals. The process of atomization of the individual and the retreat of the social in favour of the `objective and valueless’ market has added to the difficulties of sustained mobilization of the citizens.

Arab Spring and the movement against the one per cent have faltered with negative consequences. In the Arab world country after country is in disarray – Egypt, Libya, Syria and so on. There is a lack of a global society and global values. The power of global capital also is enormous and it keeps the various movements divided. This is also the case in India where we have many single issue movements but not ones that can challenge capital as a whole. 

The Gandhian principles can form a basis for change. He remains relevant even if he appears to be not so in the present materialistic world. His principle, `last person first’ can be a truly democratizing one which can check the growing inequity in society.

VIII.    CONCLUSION

Society has a civilizing aspect and even if there are natural differences among people, they can be overcome because of the potentiality of social thought and social organization. Civilized societies protect their weak since they recognize the potential of each citizen. Thus, society has to regain its domination and counter growing marketization and atomization. Altruism is basic to people. This is being denied in the race for competition. Youth is robbed of its best years and atomized. Its idealism and energy are largely turned into cynicism.

To conclude, while many factors are responsible for inequality in society, only some of the important ones have been dealt with in this paper. The historical and international roots have been pointed out and the importance of marketization, the black economy and some macroeconomic factors have been highlighted. While the market marginalizes the marginal, the failure of the free market framework is further accentuating the problems. The large and growing black economy as indicated by the growing levels of corruption is vitiating the problem of inequity by taking the issue out of the realm of the social.

Thus, today while the need to promote equity in society is greater, the predominance of economics over other disciplines and the economic system resulting from one-way globalization and the growing marketization are marginalizing the quest for equity in India. Even the marginalized social groups that should fight for equity are affected by these factors and their struggle gets subverted by their leaders. Capitalism is not known to produce equity but this feature has been known to lead to its periodic crisis. The present juncture is also one of continuing crisis because of rising inequality in society. The Indian ruling elite has made the struggle for achieving equity irrelevant by ignoring it but they do so at their own peril.

Note: This paper is substantially based on my book on Indian Economy since Independence. Kumar (2013).

arunkumar1000@hotmail.com 

Planning in a Modern Economy: Is its Role Over in India?

Planning in a Modern Economy: Is its Role Over in India?

Arun Kumar

Sukhamoy Chakravarty Chair Professor

CESP, SSS, JNU, N Delhi 110067.

Published in Mainstream, Vol. LII No. 37. Sept 6, 2014.

The Independence Day speech of the PM announced that the Planning Commission set up in 1950 would be closed. Given that this institution has played a central role in the way government functioned in India, does this announcement presage a major institutional change in governance in? A new body/think tank is supposed to replace this institution. Would this proposed institution essentially do what the Planning Commission did but under a different name and rubric? One may also ask whether in spite of the many perceived failures of the Planning Commission in India, planning is still needed?

 Big companies in their annual reports announce plans whether to increase their market share, introduce new products, etc. Individuals plan to save to build their homes or give their children good education, etc. Political parties plan to come to power by polarising the voters, etc. Mr. Modi planned for the last many years to become India’s PM. So, we are all planners.

However, these are all examples of individual or firm level planning while what the Planning Commission was supposedly doing was economy wide planning. What is the difference? Those with faith in capitalist ideology oppose system-wide planning while favouring planning by individuals and firms in a given milieu. After 1991, when the India embarked on the path of marketization, Planning was downgraded and since then the role of the Planning Commission has been increasingly questioned. However, none of the governments since then have eliminated it because they found uses for it. The Modi government may also need it but is making a political point by announcing a break from the Nehruvian path of development.

All economies face the problem of change over time. Time is divided between the past, present and the future. We are always in the present. The past is already gone and is a parameter of the system. The real complication is that the future is ahead and unknown. So, there will always be uncertainty associated with it. What is planned may not be achieved so that there is failure of expectations and consequent problems. If we look at the future just ahead, it is a continuation of the past so not too uncertain. But if we look further ahead, the uncertainty is larger and the possibility of failure greater.

If all economic agents act in an atomistic fashion, without any coordination, they face very large uncertainty. If the aggregate economic system has some coordination, it gives all the economic agents some guidance to plan their actions and that reduces the uncertainty for them. But, the aggregate system itself faces uncertainty which cannot be eliminated. However, it may be moderated by government actions.

Left to its own device, a capitalist economy was found to go through business cycles with booms and busts which is costly, especially for the poor. It is only with increased government intervention the world over since the mid-1930s that the major cycles have been moderated and replaced by political business cycles. So, for individuals and firms in a capitalist economy macro coordination is important. The global economic downturn starting 2007 did not turn into a depression because of massive government interventions in the major world economies.

Many successful economies of today have not had central planning and done well while India in spite of planning has lagged far behind? So, it is legitimate to ask whether systemic planning is at all needed? In 1947, India was extremely poor and backward. The savings rate was 8.6 per cent. Yet, the ambition of the ruling elite was to copy western modernity and become like a European country. That required massive investment in infrastructure, like, education, health, transportation, energy, basic goods and so on. The imperative was that there be full utilization of scarce resources and elimination of waste through coordination of economic activity. So, planning was needed as an optimizing exercise - how best to utilize resources to achieve rapid growth?

The Bombay Plan was drafted in 1944 by several of the Indian big businessmen associated with the Congress party. It suggested the need for a large public sector to create the necessary infrastructure for the economy to modernize since the private sector was short of capital. The need for optimal use of resources followed from it. The USSR had used planning to grow rapidly and was a readymade example to follow. Nehru and Bose were impressed with the Soviet model and were ready to emulate it.

Modern day economies face many situations of market failure. In such situations, neo-classical paradigm suggests the need for government intervention to help achieve optimality. What the markets cannot achieve has to be obtained via government intervention. In 1870, governments of OECD countries spent 9% of GDP. By 1990 they were spending 43% of GDP. As economies grew and more and more situations of market failure came to the fore, government intervention increased. So, it is not just in the poor countries that government intervention is needed. Markets are known to work on the basis of `dollar vote’. If one has more purchasing power one can influence the market more. Markets `marginalize the marginal’. Thus, they are not able to cater to the basic needs of the poor. The implication is that the poorer countries need larger government intervention than the rich countries.

With competing demands optimization is needed. The Modi government wishes to start 100 mega cities, eliminate filth and dirt everywhere, start bullet trains and so on; all commendable ideas. But the government would not spend only on these projects. The existing schemes would continue. The new projects would have to be initiated while continuing with most of the existing priorities. How can this be done without a new prioritization and sequencing which requires planning?

If bullet trains idea is pursued, it would absorb most of the scarce resources available with the railways so that the rest of the system would be starved of funds and begin to breakdown. Thus, overall there may be even greater inefficiency while some bullet trains run. Thus, a balance will have to be struck. Similarly, if 100 mega cities are planned and that requires lakhs of crore of investment per city, then funds for existing cities and villages which are anyway crumbling will fall further short so that there would be enclaves of development and massive increase in disparities. Thus, proper prioritization and sequencing is needed to implement some of these grand schemes.

India anyway faces major regional disparities. It is being argued that the states should have greater autonomy to do what they would like to. In a federal structure this is essential. Any plan should be based on the needs of its components and should not just be top down. Consider banking in India. It collects savings and lends to those in need of funds – mostly businesses. Market based investments go where profitability is higher, so funds flow out of the poorer states to the richer ones aggravating the existing disparities. As it is, the poor states generate less savings and of that also if a bulk goes to the richer ones their investment levels would further lag behind that of the advanced states. Thus, the gap would widen between the backward and the advanced states.

It is only when there is overall coordination of investment that the poorer states may have a chance to catch up. Yet, in spite of coordination through planning commission and finance commission, disparities across states have increased. Disparities within states have also increased. Maharashtra, one of the most advanced states has Vidarbha which is one of the most backward areas with a high rate of farmers’ suicides. So, do these examples contradict the idea that planning is better than no planning? Not really, imagine if coordination at least at the level of the public sector was not there, how much wider the disparities would have been. There would have been severe social and political costs, like, far greater migration and regional conflicts.

Reduction of disparities and inequalities require a degree of coordination. According to neo-classical theory, markets cannot affect redistribution so government intervention is needed. Unfortunately, modern day economies are also plagued by policy failure. For the Indian economy, the rapid growth of the black economy (presently, over 50% of GDP) has led to increasing policy failure and non-fulfilment of targets. Only a fraction of the money sent by the Centre reaches the ground leading to policy failure. According to Rajiv Gandhi in 1988, only 15 paisa reaches the ground and according to the Supreme Court, now that figure is even less. The existence of the black economy leads to lower tax collection so that the economy appears to be resource short. Due to flight of capital, the opportunity cost to the economy is more than a trillion dollars in the last 65 years. Black economy also leads to wastage of resources through activities which are like `digging holes and filling holes’. Thus, the economy operates at much below its potential.

India embarked on the course of central planning in 1950 and its rate of growth rose sharply, industry diversified, infrastructure improved and so on. However, the top down approach adopted by the self-centred ruling elite did not prioritise rural areas, agriculture and the marginalized sections. This resulted in failure of planning and severe problems in the drought years of 1966 and 1967. The economy lived from `ship to mouth’ with food imported under PL 480. The US extracted concessions for rescuing a sinking Indian economy and the Rupee was sharply devalued. Planning was downgraded with three years of plan holidays in 1967 to 1969. This was the turning point for planning in India. When planning was revived after 1969, various ministries and states became more assertive and planning largely became ex-post. Political interference in the PSUs increased sharply leading to its many problems. Planning continued in form but not in essence. The Fourth Plan had the vision of eliminating poverty. Mrs. Gandhi had come to power in 1971 on the `Garibi Hatao’ plank. But the top-down approach of the policy makers came in the way of its success.

Planning has to be ex-ante and not ex-post. At the end of the year, money would have been spent by the different parts of the economy and by each of the ministries but it would be uncoordinated (ex-post) but without a vision or an advance plan (ex-ante). We can list many things like the present government has done but to implement them one needs to have coordination between various requirements.

In 1977, the Janata government came to power and proposed a rolling plan to end Plans. But, it was too busy squabbling and could not push for major changes. However, it did down grade the public sector and its R&D effort was set back with long term consequences. For instance, the collaboration between BHEL and the Soviets was replaced by that with KDW of Siemens which refused to part with technology. The Fertilizer Corporation (FCI) was split up so that technology for upgrading of the 900 tons per day plants was lost. The 1350 tons per day plants were imported.

In 1980, India went to the IMF due to the BOP problems following severe drought and the Iran and Afghanistan problems. That is when the consumerist phase of the economy started and imports grew sharply. India’s foreign debt rose during the decade of 1980s from $10 billion to $93 billion. This along with the Iraq war of late 1980s led to a huge BOP crisis and this time there was no Soviet Union to help bail India out – it had collapsed. IMF and the World Bank forced marketization of the economy and planning was further downgraded. Formulating the Plan itself became difficult and each plan document got ready only a few years into the Plan. Joan Robinson had perceptively observed that planning cannot succeed with a large private sector. The poor have been left to their own devices so that disparities have widened significantly – consequently, India has one of the largest number of billionaires and the largest number of poor.

The UPA saw the revival of the importance of the Planning Commission because the Deputy Chairperson was close to the Prime Minister. But that did not lead to the restoration of planning because both of them believed in promoting markets. Plan size was arbitrarily cut year after year to meet fiscal deficit targets. `Growth at any cost’ strategy was adopted with little attention to the cost imposed on the environment, rural areas and the poor; little coordination was attempted.

In brief, the failure of planning in India is due to the black economy, the top down approach adopted by the ruling elite and its being downgraded over the last many decades. Then, is it not legitimate to close the Planning commission and end planning which is anyway formal only. But then, which agency will perform the many essential functions listed above? This needs to be understood rather than throwing the baby with the bath water. Can the Ministry of Finance replace the Planning Commission? Not really. It is largely for accounting - to collect revenue and allocate them keeping the deficit under check. So, its task is to cut expenditures of Ministries and not to do overall coordination or give a vision. In the rush to break with the Nehruvian path, is the Planning Commission being closed little realising that it may reappear in another form?

 

Based on sections from the author’s book, `Indian Economy since Independence: Persisting Colonial Disruption’. N Delhi: Vision Books.

arunkumar1000@hotmail.com

Swiss accounts are a diversion. Bulk of black money is right here in India

Swiss accounts are a diversion. Bulk of black money is right here in India

Arun Kumar

CESP, SSS, JNU

The Hindu, 6 July, 2014

The scent of 'black money' is in the air again. At the Supreme Court's order, Modi sarkar has set up a Special Investigation Team to look into cases of illegal outflow of money to foreign havens.

Astronomical figures of treasure hoards hidden abroad have been bandied around, especially in the recent elections. To understand what black money is and how it can be recovered,Subodh Varma spoke to India's pre-eminent expert on the black economy, Prof Arun Kumar of Jawaharlal Nehru University, Delhi.

How do you define 'black money'?
Actually , 'black money' is a tiny component of the huge 'black economy'. All unreported incomes whether by legal or illegal means, and their subsequent use in consumption or investment forms the 'black economy'. The part of this economy which is available as 'money' is called black money . Often black money is taken to mean money generated through illegal activities like bribery. That's just one part of black money. If a private tutor or a doctor earns some income, that's not illegal. But when it is not included in his income returns it becomes `black'. At the societal level, this is a system, it's institutionalized. A sugar mill owner will under weigh the sugar cane, the juice and the crystalline sugar, and also bribe excise officials to report less production. So he gets extra unreported income at every stage of production and distribution.
My estimate is that more than 50% of India's economy is black. About half of this is consumption while the remaining half is savings.
Of these savings, about 20% is taken out of the country . That means, of the total black economy , about 10% is in foreign banks. Some is consumed there (yachts, houses, vacations) and some is routed back to India through various means including hawala, or through the Mauritius route. If all the money that has been illegally taken out were to be invested back in India, the gain would be equivalent to $2 trillion (about Rs 120 lakh crore). This is not the amount of money stashed abroad — it is the opportunity cost of that.


How can the foreign-based black money be retrieved?
First of all, I think going after just the foreign component of black money is a diversion. The bulk of the money is right here in the country! It is very difficult to get money out of foreign tax havens unless someone has been really stupid. Let me clarify that all Indians with foreign accounts are not criminals. If it is untaxed, unreported income then it needs to be tracked and brought to book. No amount of agreements to avoid double taxation or infor mation sharing will yield information on real account holders. There are devious means by which money is transferred through several layers of shell companies. If you ask a Swiss bank, they might tell you the 'names' they have but these are not the real people. It will require a great deal of meticulous work here to get the right persons. This is what the US did in the case of its citizens who had stashed money in UBS. They prepared a case in US and presented it to the Swiss. That's what India should do.
The only other way is to wait for somebody to steal the data as happened in the case of LGT — the Lichtenstein based trust.


The present government seems to be very active in pursuing black money. Will this yield results?
Since 1948, about 40 committees, commissions, etc have looked at the problem from different angles. There have been raids, there have been amnesty schemes. The result is zero. My feeling is that the Special Investigation Team (SIT) set up by the government under Supreme Court pressure will be of limited use.
It is going to look at existing cases and go by what is offered to it - nothing more. The problem is that there is a triad of vested interests that runs everything in the country -business, politicians and the executive arm of the government. The Radia tapes have shown a glimpse of this nexus. This triad is the main beneficiary of the black economy . So, there has never been a political will to tackle the black economy in the past, and I doubt that the present government has it. Otherwise, Modi can order a crackdown on all hawala operators and all other routes of illegal money flows. Only pressure from people's movements will force the government to crack down on the black economy .


Would the black economy cool down if taxes were lowered?
This is like saying that if the red light was not there you would not be charged with jumping it! Remember, India has one of the lowest direct tax to GDP ratios in the whole world. Chidambaram used to say that our tax-GDP ratio has improved. But that's because of the enormous increase in corporate profits. Calculations show that just the top 0.1% of the population earns more than the bottom 55%. This is because of deregulation and concessions in taxes. Yet the black economy is flourishing.

‘SIT is diversionary tactic’

‘SIT is diversionary tactic’

INTERVIEW WITH PROF.ARUN KUMAR

Published in the Frontline June 27, 2014.

Professor Arun Kumar is the Sukhamoy Chakravarti Chair Professor in the Centre for Economic Studies and Planning, Jawaharlal Nehru University.  An expert on the black economy in India, he has been a member of the Group producing Alternative Economic Survey for the last 15 years, providing alternative analysis of the official data. He is also associated with movements such as Right to Housing and against corruption.  He is the author of the book, ‘The Black Economy in India’ (Penguin, 1999) and most recently, of ‘Indian Economy Since Independence: Persisting Colonial Disruption’ (Vision Books, 2013).  In this conversation with V.VENKATESAN, he answers questions based on his recent book, and on the SIT, set up by the Government, to bring back unaccounted monies stashed in the foreign bank accounts of Indians.

Q: Your recent book has a whole chapter on the black economy. I found the distinction which you draw between anecdotal and the larger picture of black economy interesting. In a sense, would you describe the SIT, set up by the Modi Government, to investigate the black money stashed in foreign bank accounts by Indians, as dealing with the anecdotal or the larger picture?

A: My first point would be that steps could have been urgently taken by the new Government. This government has taken advantage of the Supreme Court’s direction to set up the SIT in the Ramjethmalani v. Union of India case.  All the agencies which are in it – like ED, IB, RAW etc. – they already have a lot of information. The question is why they were not acting on it.   Because politically it is not convenient to act on the information that is already there.  To give one instance, hawala takes places in certain places in Delhi, Mumbai, Kolkata, every city.  Now, these places are tracked by government agencies.  So, this is not as if they don’t know where hawala takes place from.  Who are the hawala operators working from there?  And who are the people visiting their houses?  This information should have been there with IB, and ED.  So, if the Prime Minister wants to stop hawala, it can be done in five minutes, because that information on where it is operating from is already available to the government agencies.  So, why was this not the first step? Hawala is the main conduit for taking the money out and bringing it back.   In the Jain Hawala case, which was discovered in a hostel in JNU, how was it discovered?  One Kashmir terrorist was caught with a draft of Rs.15 lakhs.  So where did the draft come from?  So, immediately, they raided the residence of S.K.Jain, and got hold of names of politicians.  Out of that, the BJP president, L.K.Advani admitted that he got money for party.  Janata Dal (U) leader, Sharad Yadav admitted that he took Rs.3 lakhs. But nobody was prosecuted at the end of it. So, the point is this information about where hawala operates from is known to the intelligence agencies. So that could have been the first step.

In the HSBC case, where the stolen data was received from the French Government, around 700 Indians had bank accounts in that Zurich branch. There it was revealed that HSBC was working as the hawala operator. The modus operandi was this: if I wanted to transfer money, I would call certain number, and they would send somebody, an account would be opened, and then when I wanted to transfer money, somebody would come, pick up the money and next day, I would be given the receipt that the money had been deposited in that Zurich bank account and when I needed the money, I would call up that number, somebody else would come, and bring the money. This is what the HSBC Bank was doing as a hawala operator.  Now I am told that all the multinational banks do this.  So, the other thing that could be done is to curtail banking secrecy. SIT is set up because Supreme Court has directed the government to do so and so it had to be done. But independent of the SIT, if the Government was serious, it could have taken immediate steps to control the black economy, by curtailing hawala, by moving against the places where hawala takes place, and by immediately moving to curtail the secrecy in the banking system and so on. 

I doubt the sincerity of the Government in setting up the SIT that they are serious about bringing the black money back.

From 1947 onwards, more than 40 commissions and committees of different kinds have been set up which have looked at different aspects of the black economy.  They have analysed the different aspects of black economy very seriously in the last 65 years. These committees and commissions have made thousands of suggestions. Wanchoo committee is rich with suggestions.  And, hundreds of them have been implemented also.  Yet, black economy has continued to grow. 

The black economy is characterised by waste of capital.  I call it `digging holes and filling them’.  You set one man to dig a hole during the day, and at night set another person to fill it. So this is activity without productivity.  Capital is being utilised, but output is zero.  A large part of black economy is like that.   Because of black economy, a large amount of illegality is associated with economic activity.  The point is, there is output in the black economy, but the economic potential is not reached due to waste.  The potential in the Indian economy today is 12 per cent rate of growth. Because of black economy, it is only going it at an average of 7 per cent.  In the 1970s when the potential of the economy was 8.5 per cent, we were going at 3.5 per cent.    South East Asian economies are examples of successful state intervention, while India is not.  But corruption is growing in China despite successful state intervention.  It is not as if black economy doesn’t exist there.  But it doesn’t come in the way of policy being implemented.   They have a sort of vertical strict hierarchical structure in which once the policy is decided, it gets implemented. People make money, but work is done. It is like Pratap Singh Khairon effect in the 1960s.  Pratap Singh Khairon was supposed to be taking money.  But he was doing the work.  In India, we are characterised by subversion of policy.  That is why we have lagged far behind the South East Asian countries.  We have democracy, while these countries don’t have that. China doesn’t have it. There is a big difference in the political structure.  Because we have democracy, everything has to go through the political process, and this process gets subverted by the black economy. And this subversion of the political process results in policy failure.

When I say black economy is today 50 per cent of the GDP, it means almost all activity has some associated illegality.  In my book, I have described many sectors where black incomes are generated, but I could not discuss all since the list is long.   Whether it is education, health, environmental regulation, traffic on the roads, law and order, industrial regulation, mining, whichever sector you take, it has black income generation. So it is widespread. It is `systematic and systemic’.  It is not anecdotal.  It is not that one day I do it, next day I don’t do it.   Under the system followed in production, the excise fellow will be bribed, the sales tax fellow bribed so much, the local politician, the policeman and so on taken care of. It doesn’t matter what the tax rate is, because the system is in place. So whether the rate is 97.5 per cent or 10 per cent, the businessman will evade taxes.  That is why in India, even when the tax rate has come down, the black income generation has gone up. So, over the years, the tax rates have been reduced, controls have been reduced, MRTP, FERA, small scale reservation, licencing and many other controls have gone, and yet the black economy is increasing. Why? Because laws are systematically violated. How are the laws systematically violated? By having the policy-maker and the implementer of the law a party to its subversion.

So, underlying the black economy is a `Triad’.  The triad consists of the corrupt businessman, the corrupt politician and the corrupt executive.  The corrupt executive consists of the corrupt bureaucracy, the corrupt police and the corrupt judiciary.  Judicial corruption is also enormous as many recent exposes point to.

The above analysis suggests that is the problem is political in nature and all parties are involved in it, so, the political will to tackle the menace has not been there.  Private information exists in the entire system. Bureaucrats know, Judges know, policemen know, who are the people to be contacted for hawala, who are the people to be contacted for setting up bank account there (in the tax havens), all these information exist.  It is there with intelligence agencies also.  But it is not being used to tackle the problem, because it is political.  Because all parties are involved in it, they don’t want to deal with them.

Q: Can the SIT provide this political will?

A: No. SIT cannot.  What will come out of this?

Q: Ram Jethmalani, the petitioner in the case before the Supreme Court, says the SIT can file the FIR.

A: But then what after that? Proceed and prosecute one or two? But there are tens of thousands of them. The big fish is very clever. If, say, the Ambanis want to send some illegal funds abroad, they will not do so in the name of Anil Ambani or Mukesh Ambani.  It will be through layering. It will always be through various shell companies.   Big fish have a lot of money there, (in the tax havens) but it is not directly in their names.  How will the SIT find that out?  It has to catch them here in India.

Q:The terms of reference of setting up the SIT entrust it with the responsibility of preparing a comprehensive action plan, including the creation of necessary institutional structures that can enable and strengthen the country’s battle against generation of unaccounted monies, and their stashing away in foreign  banks or in various forms domestically.  Don’t you see this as a broad mandate, which will help fight the black economy?

A: This has been the kind of mandate which was there with the earlier committees also. It was there with Wanchoo and Santhanam committees.  They have made hundreds of suggestions.  It is also discussed in the report of the National Institute of Public Policy which studied the problem in early 1980s.  This is not the first time.

Q: But this time Supreme Court will be monitoring, that is the big difference.

A: But who are the people involved? Who do you catch?   The point is there is no death of knowledge about how black incomes are generated, how black income is taken abroad, and how it is round-tripped. But we don’t have specific names. Who will investigate now? The same Enforcement Directorate. The same IB. The same IT department.  The same Central Board of Direct Taxes. Why were they not doing it till now? This data is kept, but not being used.  There is private information, but it does not become public information which can be acted on.  How will the SIT get hold of all these data?  The SIT can establish general institutions, principles, which are already established. But how will it catch individuals?  Only through raids? That the CBDT can do on its own and has done so selectively?  It doesn’t need to be told by an SIT. But, raids have been political weapons and hence discredited. There is a Member, Investigations in the CBDT who is supposed to get raids conducted.

Q: Why do you think SIT doesn’t inspire confidence?

SIT may do something different and surprise us.  But, what has been the experience of committees and commissions? I am not despondent.  It is one more attempt, where much more serious things could be done even without the SIT – raid hawala houses, close them down, end banking secrecy.  I am not, in principle, opposed to SIT. What I am saying is this (SIT) may be a diversionary move.  Now whenever the questions are asked of the government it ca conveniently say that SIT is looking into the matter.  When under public pressure, three institutes were asked to look into the problem of the black economy, the Government used them to say it would answer questions when their reports come.  Pranab Mukherjee (Finance Minister in 2011) said in his next budget he would present the reports also.  Three years down the line, it has not been done. So, this can also be a convenient excuse for the government to stall answering inconvenient questions.

Q: Is the apprehension that the Court may take over the functions of these executive bodies valid?

A: The Court may make them accountable. That may work positively.  The question is why is the ED, with so much information not acting? They were not acting because of political reasons. So, how will SIT get over that?  Because even now, even though the ED, IB and RAW may be part of the SIT, will they reveal the full information?

Q: Chairman and Vice-Chairman can ask them.

A: They can ask what? If they ask for something specific on Hasan Ali, yes. Beyond that, the agencies under political guidance can also say they don’t have information.  For Hasan Ali case, what have they done? To nullify RTI, very often, the reply is that the information sought for is not available. So the same thing can be done.  If the political bosses want information revealed, it would be done. The Judges (the Chairman and the Vice-Chairman of SIT) won’t know what to ask for.  How would they know what to ask for?  They are outsiders to the system.  Political control is very important.  That is why in Lokpal, it was very important to keep it outside the political control.  As long as the political control is there like in the case of CBI, the CBI plays games.  Where ever it wants, it reveals something.  Where ever it doesn’t want, it doesn’t reveal. And wherever it likes, it spoils the cases.  Very often, the Courts have scolded the CBI for spoiling the cases. So, it is the political will that matters finally. 

Q: What then is the logic of this SIT?

A: Well, the Supreme Court thought that Court monitoring of these two cases (Hasan Ali and LGT case) may help.  But how will it help in general curtailing of black economy?  We have got any number of institutional structures, which are already supposed to be doing all these.  Our agencies track hawala operations. What more can they set up?  Instruments are already there.  Income Tax Department used to have a survey ward, which was supposed to investigate whether people are filing returns or not. But it had become corrupt. Similarly, there has been a valuation department, which is supposed to arrive at correct valuation of properties for purposes of taxation but this has also not served its purpose due to corruption.

Q: Do you think SIT can encroach on the powers of the executive, as the previous Government told the Supreme Court?

A: The SIT can only ensure that the Executive functions as per the law.  In that sense, the SIT can monitor specific cases.  The Court is not saying that SIT will do policy-making. It can only suggest changes and it is for the government of the day to accept or not.

Q: The Modi Government has come to power on the plank of corruption-free governance etc. Should not the Court wait and see whether the agencies, responsible for unearthing black money, fulfil their responsibilities without fear or favour? 

A: The order in the case was delivered earlier, prior to the coming to power of the new Government.

Therefore, it is a continuing process.  Once the Court had given the order in 2011 that the SIT be set

up, it is now being implemented.  All I am saying is, don’t expect too much from the SIT.  SIT may

help in specific cases.  Like the case of 700 people who are caught up in the HSBC disc.  In the LGT

disc, 26 names have come up.  They can try and investigate whether there were more than 26 names,

whether there are other names, which the Government is not revealing. Or suppose if a new case is

discovered, it can also be taken up by them. Beyond that, our expectations may be far-fetched.  It is a

very complex political question since it involves the nexus among politicians, businessmen and the

executive; the ruling elite of the country.  That nexus has to be broken.

Q: The chairman of the SIT, Justice M.B. Shah has said there are complexities in the SIT’s task. 

What are the complexities involved?

A: The SIT’s task is complex because the nexus among the triad itself hides a lot of things.  They are

the ones who are working in secrecy (the politicians, businessmen and the executive).  This nexus can

be politically broken.  When the anti-corruption movement was at its peak with Anna Hazare and

Baba Ramdev leading it, you could see that the Government was almost shivering.  When Baba

Ramdev came to Delhi, four Cabinet Ministers went to receive him. Cabinet Secretary was there.

Suddenly, the Government was willing to act on corruption.   Public opinion is the only thing that can

change the apathy that the government has shown most of the times.  As long as the Government was

fearful that something was going to come out, they promised Lokpal.  As soon as the movements

subsided, they again started going slow on Lokpal. Towards the end, just to show that they are anti

corruption, they allowed the Bill to pass.  Only public pressure will change things for the better. 

Government can put pressure and make SIT ineffective by signalling the government officials who

are members of the committee not to reveal certain information, not to be pro-active. SIT has to

function within the parameters of what the politicians wish or what the executive says.  From SIT, I

expect only limited gains.  Because it won’t be able to generate public information, which would be

actionable. May be, we can expect some results in two or three cases, but these are of 2007 vintage. 

By now, the money will not be there.  In Hasan Ali case, when the disc was captured, it was supposed

to have 8 billion dollars.  In 2011, the Finance Minister, in his press conference, revealed that only

60000 dollars were left.

Q: Ram Jethmalani, in an interview to a television channel, has said footprints can be easily

identified, and the money trail can be followed.

A: Not so easily.  What happens is when you transfer money from one shell company to the other,

you close the previous one.  Then, how do you go back?  India cannot investigate tax havens,

belonging to other countries. The advantage the advanced countries have is the money which they get

from tax havens is giving them additional capital.  Why is it that the advanced countries were happy

with these tax havens and not acting against them earlier? Because, they were finding that the capital

is flowing from the developing world to them.  One of the arguments has been that after colonisation

ended in the late 1940s and early 1950s, these tax havens were deliberately set up by the developed

countries so that the capital which was earlier coming from the developing countries as drain of

wealth, could now come through these tax havens into their economy. And they were benefitting. 

Latin Americans lost hundreds of billions of dollars through these tax havens to the European

countries. India and other countries lost to Britain because money was going through these tax

havens. Of late, after the global economic crisis of 2007, there has been pressure from the OECD

countries that the taxation secrecy should go.  That is why the Swiss banks have opened branches in

Singapore, and Dubai.   Even if Switzerland complies more with whatever pressure they get from

OECD, their branches operating in other countries would continue to act.  That is why Credit Suisse

was caught now in the US and fined $2.5 billion. UBS was caught in 2007.  Therefore, banking

secrecy should end globally. Only then we can catch them.

One important thing I must point out.  In 2008 when the financial crisis took place, that time Fortis

Bank collapsed and the Netherlands Government took it over. They found that Fortis Bank had 700

subsidiaries in tax havens. So the whole purpose of subsidiaries in tax havens is to allow high net

worth individuals to move money.  This is a standard practice of multinational banks especially, the

Swiss, British and the big American banks. So this should be checked.   Now HSBC has been caught

for allowing hawala operations to take place through its official channels.  But no action has been

taken against them as yet. 

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