European Rich Wish to Pay more Taxes; What about the Indian Rich

European Rich Wish to Pay more Taxes; What about the Indian Rich

Arun Kumar

CESP, SSS, JNU

Published in The Hindu, September 7, 2011.

Startling news, the rich in many European nations have asked their governments to tax them more. This follows the call by Warren Buffet in the US that the rich should pay more taxes. The motive is self interest - to save their economies from sliding further, going into a double dip recession and preventing the kind of youth violence witnessed in many countries in Europe. The recession looming on the horizon (if we are not already in it) will be more difficult to deal with since this time the cause is political rather than financial, as the case was with the global recession that started in late 2007.

In 2007-08 the experts and the analysts were `behind the curve’ and in a state of denial about the start of the recession. The IMF did not acknowledge the recession till late 2008; almost a year after it had started. Mr. Ben Bernanke, heading the Federal Reserve of the US only admitted problems in February 2008 when the first stimulus of $ 160 billion was announced. The US Treasury secretary did not admit of basic problems in the financial sector even in July 2008 when Freddie Mac and Fannie Mae faced imminent collapse.

By the time Lehaman Brothers collapsed and AIG was on the verge of collapse in September 2008, things had gone out of control. The situation could not be salvaged even with the announcement by the US government of a bail out package of $750 billion. $ 350 billion was pumped into AIG alone to keep it afloat.

Globally, an unprecedented amount of liquidity was released by the Central banks. In normal times that would have led to hyper inflation but in 2008, there was a fear of deflation. The problem had originated with the sub-prime crisis in the housing mortgage market and that spread like a contagion to all financial institutions due to the inter-locked balance sheets.

There was a crisis of trust. The financial system had got linked to the shadow banking which was highly leveraged and unstable. It meant that even a small decline in the prices of the assets of a company led to a big fall in profits and valuation. With the accounting practice of `marked to market’, these losses came on to the balance sheet and the company was in danger of losing its entire capital. Thus, as the stock markets and other markets collapsed, most financial sector companies lost their capital and with that their viability. The governments had to step in and bail out these companies.

In the financial markets where borrowing and lending is the name of the game, with trust evaporating, since it was not clear which company would go under next, none could be trusted and lending ceased. Entities that were considered to be `too big to fail’ were failing one by one – Bear Stern, Freddie Mac, Fannie Mae, Lehman Brothers, AIG, Citibank and so on. No amount of liquidity was enough to revive the financial markets until the situation stabilized with the stoppage of the practice of `marked to market’. There was fraud with the major financial entities not telling the entire truth to their customers about the product they were selling them. The US government has just launched investigations into this fraud.

Globally, governments boosted demand following the Keynesian device of creating deficits. The US budget deficit went from 3% of GDP to 12%. The same happened in India. China provided a $600 billion boost to infrastructure. Japan and much of Europe went in for budget deficits to boost the demand in their economies. Nonetheless, unemployment rose sharply everywhere. In the US, it reached the level of 9.6%. In India, exports which were growing at 35% stated plummeting at 35% leading to large scale unemployment in labour intensive sectors like, textiles, gems and jewelry and leather goods. Many industries and services like, transportation, finance and real estate went into a tail spin.

ILO estimated that 60 million jobs were lost in spite of the attempts by various governments to boost their economies. The workers and the poor bore the brunt. Not that the dollar billionaires did not lose as their wealth declined sharply but they had the cushion of their hundreds of millions and billions of assets still in tact.

The reason for the anemic recovery was that the stimulus was no where as big as was needed to boost employment and revive the economies strongly. So, when the big economies started climbing out of the recession in early 2010, employment hardly rose in the major economies.

Politics entered the picture globally soon thereafter. The conservatives started pushing the neo-classical paradigm of tax cuts for the rich and balancing the budget. The anemic recovery was used as an excuse to argue that the Keynesian prescription of boosting the economy does not work. The implication of the conservative’s  programme of  cutting the taxes on the rich leads to a decline in tax revenue so that the deficit tends to grow but since the budget has to be balanced, expenditures have to be curtailed - the opposite of what the economy needs. In Britain, the new Conservative government cut back the budget and reduced public sector employment by half a million.

In the USA, after the Democrat’s big losses in 2010 elections, Obama could not push his expenditure programme and had to come to a compromise with the Republicans. In the beginning of August 2011, the US government almost came to a grinding halt due to the logjam between the two political forces and this panicked the markets.

Euro zone had its own problems of coordination amongst its many disparate constituents. One after the other, Greece, Ireland and Portugal teetered under debt and had to be bailed out by others but on condition that they implement austerity packages. This led to revolt by workers and youth facing unemployment. The possibility of default meant that they had to borrow at higher cost and that worsened their debt situation. When the contagion spread to Spain and Italy matters have become difficult for the Euro zone because it is hardly feasible to bail out these economies. The possibility of sovereign default has increased and that has added to the difficulties of the financial entities that have leant to these nations.

The World economy faces a deep crisis for political reasons – that which is needed is not palatable to the conservatives who have once again got a grip over power in major economies of the world. India is no exception to this conservative mood with the government talking about balancing the budget in stages.

The rich, starting with Buffet have realized that in their own self interest, they have to accept higher taxes so that the governments can boost demand. In the pessimistic scenario now prevailing across the globe, the private sector on its own is unlikely to boost its investment. The citizens sensing trouble ahead are saving more for the rainy day so that consumption demand remains weak. Globally exports growth is weakening. Thus, the only source of boosting demand strongly can be government expenditures.

In France, Mr. Levy, the chief of Publicis and the president of the French association of private enterprises supported Buffet’s idea. 16 of the wealthiest French have signed a petition urging their government to tax them more. A group of 50 wealthy Germans have backed this petition. In Italy, the chief of Ferrari has weighed in with support.

The Indian well off avoid paying taxes both legally and illegally. They manipulate to get themselves huge tax concessions and then make even bigger sums as black incomes. The more property one owns the more tax concessions one obtains. For instance, income from dividend on ownership of shares in companies is exempt. Thus, if a Managing director of a big company gets Rs.30 crore of salary and bonuses, etc., but gets Rs.1000 crore as dividend, the tax liability is only Rs.10 crore, that is, a tax rate of 1% of the total income. No wonder less than 3% of the citizens file income tax returns and India has one of the lowest ratio of direct tax to GDP in the world.

Today, the corporates in the country (less than 0.1% of the population) control 20% of the national income, much more than what the 50% dependent on agriculture make. The legal exemptions they enjoy, called `tax expenditures’, amount to over Rs.5 lakh crores (See, Receipts Budget). Add to this the black incomes these corporates generate annually and their incomes turn out to be astronomical. The corporates pay an average tax of 23% of their legally declared taxable incomes whereas they should be paying about 33%. So, the Indian rich need not ask for a tax rate increase but only to allow the government to eliminate `tax expenditures’ and to voluntarily stop generating black incomes, to more than double tax collections which could give a big boost to the slowing Indian economy. 

arunkumar1000@hotmail.com

Direct and Indirect Benefits of Tackling the Black Economy

Direct and Indirect Benefits of Tackling the Black Economy

Arun Kumar

CESP, SSS, JNU

The Hindu, August 20, 2011.

Anna Hazare’s indefinite fast for the acceptance of the Jan Lok Pal Bill, his arrest from home and the widespread mass protest in urban India has shaken the government. Political parties have woken up to the depth of feeling in the country against corruption. Two things have come together - fight for the Jan Lokpal Bill and the violation of civil rights of the citizens to protest. The protest snowballing in the country is seen as against corruption. Obviously, the public are fed up with the day to day harassment they face. To put it in perspective, it is important to understand the benefits to society of tackling the huge black economy in the country.

Some argue that the black economy also generates jobs and production. For instance, they argue that a lot of goods are bought in the market from the black incomes and that leads to increase in production and employment. They argue that the black economy generates informal sector employment and helps the poor. Some go to the extent of arguing that India escaped the worst effects of the global recession in 2008 and the economy only slowed down because of the large amount of black money floating around which generated additional demand. Some justify bribes as speed money that enables work to be done faster. There is some truth in all this and yet, it can be shown that the ill effects of the black economy far outweigh its beneficial effects.

Think of bribe as speed money. To extract a bribe, the bureaucracy first slows down work and harasses the public. If work was automatically done, why would any one bribe. Thus, the system has to be made inefficient so that those who can afford to pay can get their work done quickly but the rest continue to suffer. Administration becomes run down since rather than devising ways of working efficiently, it is busy thinking of ways of making money by setting up roadblocks to efficient functioning. This has spawned a culture of `middle men’ and personal approach to officers. Things hardly happen in the routine manner and without personal appearance. The middleman is needed by the corrupt to insulate themselves from direct public contact lest someone reports them.  The bribe giver also not knowing how much to bribe and how to contact the administrator in-charge finds it convenient.

Much of the black economy in India is like `digging holes and filling them’. That is, one digs a hole during the day and then another fills it up at night, the next day, there is zero output but two salaries are paid. This is `activity without productivity’. An example is of poorly made roads that get washed away or become pot holed with every rain and need repeated repairs. Thus, instead of new roads coming up much of the budget is spent on maintenance. Teachers may not teach properly in class so that students have to take tuition. Families not only have to pay extra, the students find learning insipid and lose interest and this effects their creativity and the future.

Consider how millions of litigants, their families/friends and lawyers arrive daily in the courts and in most cases the hearing lasts a few minutes and the next date, months away, is announced and they go back home. Not only justice is delayed inordinately, consider the time lost and expense incurred in lawyers fees, travel and in taking leave from work and so on. This goes on since cases that could be resolved in a few months go on for years multiplying the costs. The expense of delayed justice is both direct and indirect. Delay is often a result of the impact of the black economy. Honest people who lose hope start resorting to other means which dents the notion of social justice and weakens society. This cost cannot be calculated in monetary terms but is significant.

Because of the growing black economy, policies fail both at macro and micro levels. Planning or monetary policy or fiscal policies do not achieve the desired results due to the existence of a substantial black economy. Targets for education, health, drinking water and so on are not achieved because `expenditures do not mean outcomes’. The economy does not lack the resources but it faces resource shortage. Much investment goes into wasteful/ unproductive channels, like, holding gold or real estate or abroad through flight of capital. This lowers the employment potential and the level of output in the economy. Capital sent abroad does not generate output in India but does so where it goes. A country that is considered capital short has been exporting capital. A nation that gives concessions to MNCs to bring in capital loses more capital than it gets and that too at a high cost from FIIs or as FDI. Our policies are open to the dictates of international capital because our businessmen and politicians have taken capital out in large doses since independence. Costs are huge.

The direct and indirect costs are of policy failures, unproductive investments, slower development, higher inequity, environmental destruction and lower rate of growth of the economy than it could potentially have been. According to this author’s estimates, we could have been growing faster by about 5% since the Seventies if we did not have the black economy. Consequently, we could have been a $8 trillion economy and the second largest in the world. The per capita income could have been seven times larger so that we would have been a middle income country and not one of the poorest. A huge cost.

The black economy also leads to `the usual becomes the unusual and the unusual the usual’. That which should happen does not and that which should not keeps happening. We should get 220 volts electricity but we mostly get 170 volts or 270 volts and equipment burns out so all expensive gadgets need voltage stabilizers resulting in higher capital costs and maintenance costs rise. Water in taps should be potable but it is of uneven quality because the pipes are not properly laid and sewage seeps in. Thus, we carry water bottles, use purifiers and boil water at great extra cost. Even then, we fall ill since how much can we escape the problem. 70% of all disease in India is related to water so that we spend extra on hospitalization and treatment and then there is the associated loss of productivity; the poor are particularly the victims of this.

Hospitalization can be traumatic because of the large scale callousness there. Public hospitals there crowded and doctors over worked. Due to unhygienic conditions, patients can get secondary infection or the attendants can fall sick. In private hospitals the patient is not sure whether unnecessary tests are being done and whether the consultants coming to see them at all needed. Even after all this, cure is not assured because the drugs maybe spurious or the IV fluid contaminated and so on. The poor suffer from the presence of large number of quacks in the market who give injections or steroids or overdose of antibiotics. It is the strength of the human constitution that in spite of these adversities, many get cured.

The result of all this is that costs everywhere are higher than they need be raising the rate of inflation. If capital is over invoiced by businesses to make money the cost of setting up industry is higher. If poor quality grain is sold in PDS, the price is higher. If tuition is needed for children because of poor teaching, the family’s cost is higher and so on.

At the social level, the cost is a loss of faith in society and its functioning. Hence many are now atomized seeking individual solutions and discount societal processes. At the political level there is fragmentation with states demanding their own package because the belief that the nation as a whole can deliver has been dented. The demand for smallerer states is a corollary because the bigger states neglect the less vocal regions. Each caste, community and region now wants to have its own party to represent its narrow interest leading to the proliferation of smaller parties. Can the cost of this fragmentation and loss of the national spirit be calculated?

New movements for a strong Lokpal, Right to education, to food and to information are likely to recreate a common national ethos that is so necessary and which may generate the political will to tackle the hugely expensive black economy – the fight for one is the fight for the other also.

 arunkumar1000@hotmail.com

The dangers of redefining democracy

The dangers of redefining democracy

Arun Kumar

CESP, SSS, JNU.

The Hindu, July 29, 2011

We have creatively redefined national interest, representation, democracy and corruption to the benefit of vested interests.

If bribe-giving is legalised, some have suggested, the vexed problem of corruption facing the government would be less severe. Some powerful voices from within and outside the government have even argued for this. The argument is in line with the theoretical case that corruption and smuggling improve economic efficiency. Such redefining of words is not an isolated activity today.

Prime Minister Manmohan Singh indulged in it at a recent meeting with newspaper editors. On the Lokpal bill, he said he personally favoured the Prime Minister coming under its purview but added that his Cabinet colleagues were against it — prevarication at its best.

Dr. Singh has acted decisively on issues close to his heart like the India-U.S. civil nuclear deal, which he pushed through in spite of the threat to his government and disquiet among many. Clearly, for him, the Prime Minister coming within the Lokpal's purview is not of much importance. It is consistent with his view that corruption is not as endemic as is being made out by the media and the Opposition, and that it is largely their creation. He also pleaded for moderating the campaign against corruption on the plea that it is spoiling our international image.

His argument that decision-makers act ex-ante, in uncertainty and without full information, must be music to the ears of wrong-doers. He clarified that in hindsight, one can be wiser about the mistakes committed. The sub-text is that inappropriate decisions are not deliberate, but genuine errors of judgment — an alibi for corrupt elements.

As a general proposition, the argument can hardly be faulted. But is it also true in specific cases? In the 2G spectrum allocation case, the CBI, under the Supreme Court's directions, has unearthed blatant wrongdoing. Giving a very short notice to file bids and, that too, a few hours, for instance. Without advance knowledge, a bid could not have been filed. Why did some of the licences go to those who had no experience in the field? None of this had anything to do with uncertainty.

Dr. Singh also argued that he could not be expected to look into details pertaining to each Ministry and that he was not an expert on all matters. But he has a string of agencies and experts at his beck and call. Why was their advice not sought? Especially, when the wrongdoings pertaining to the 2G case were immediately pointed to in 2008? The implication is that the system failed. Is someone accountable for the failure? In the Commonwealth Games scam, there was blatant loot in contracts and purchase of exercise machines and toilet paper rolls. None of this had anything to do with uncertainty or ex-ante nature of decisions or lack of expertise. Has the Prime Minister shifted ground — from his ‘coalition compulsions' argument to giving technical explanations for his silence and inaction?

If Dr. Singh's line of argument is to be accepted, from now on, no one need take responsibility or be accountable as mistakes can be said to be unintended or due to a lack of expertise. Further, one ought not refer to widespread wrongdoing lest it spoil the international image. The Prime Minister, a clever academic, has distorted the meaning of words such as “accountability” and “corruption.”

Changing the meaning of words like “accountability” will damage the system. Rule of law, social justice, good governance and building a civilised society depend on it. Similarly, when terms like “democracy,” “people's representation” and “justice” lose much of their content, democratic institutions decline. Thus the nation needs an institution like Lokpal to bring about accountability.

The government has decided to aggressively stall a stricter Lokpal bill. To be fair, arguments for leaving the Prime Minister and the higher judiciary out of the Lokpal's purview have been advanced by other respected persons too. Their argument is that the inclusion of the Prime Minster and the judiciary will undermine their independent functioning and prevent them from taking tough decisions for fear of being incorrect and inviting challenges. Logically, then, they should not come under scrutiny even after they demit office because even that could deter them from taking decisions. In other words, no accountability should be demanded of the Prime Minister.

Further, it is argued that in a democracy, the Prime Minister is accountable to Parliament. So, any wrongdoing by him would automatically be checked by the Opposition (enforcing accountability). It is also stated that the Lokpal, an agency external to the parliamentary system, will undermine Parliament. It is also feared that frivolous charges could be brought against the Prime Minister, given the nature of fractious politics. Every time a charge is levelled, there would be a demand for the Prime Minister's resignation and she/he would be immobilised.

All this begs the question: why is there a strong demand for bringing the Prime Minister within the Lokpal's purview? Why has Parliament failed to make the Prime Minister accountable? In the last 40 years, many Prime Ministers have been suspected of wrongdoing. Same is the case with many Chief Ministers, Ministers, Chief Justices and the higher judiciary. The existing institutional structure has patently failed to make these high functionaries accountable.

Further, due to corruption, justice is either miscarried or delayed (barring a few high-profile cases). There is a widespread feeling of lack of social justice. The political leadership and the top judiciary are seen to have failed the people in spite of the checks and balances a democracy is supposed to provide. Their credibility has been eroded, leading to the demand that they be made accountable in newer ways — outside the present democratic framework.

In brief, ‘democracy' is being given as the reason for not bringing the nation's highest functionaries within the Lokpal's ambit. The counter-argument is: because ‘democracy' has been twisted out of shape, there is a need for newer ways to re-energise it by, say, an independent Lokpal. Of course, it goes without saying that even the Lokpal may eventually get subverted since there can neither be a magic wand nor a perfect law to deal with social problems.

It is also argued that NGOs and civil society groups are not people's representatives — at best, they represent small groups. The legislators, on the other hand, are people's representatives. This view also emerged in the all-party meeting on the Lokpal bill. While formally this is true, the reality is that ‘representation' has lost much of its meaning. Does anyone represent people's interests today? Members of civil society groups and NGOs who have stood for elections have mostly lost. So the politicians are right in saying they represent only small groups. But this is not the whole truth.

The way the government initially caved in to the demands of civil society groups suggests that it panicked because these groups captured the popular sentiment of that section — the middle class — which has provided the government its legitimacy. The media, by playing up the issue, aggravated matters.

The government's flip-flop on the issue in the last few months ought to clarify whose interest it serves — citizens, the elite or vested interests. While workers' movements (big and small) have been routinely ignored by the government or dealt with a heavy hand, it responded to the middle class protests. With a scam a week surfacing in the last few years, the illusion of the middle class that the government represents its interests stood shattered, which is why the government initially reacted the way it did. As soon as it devised ways of confusing the middle class, it backtracked.

Revelations in the phone hacking investigations in the U.K. have brought out the nexus among the power elite and the erosion of accountability in the mother of democracy. In India, we are way ahead and have creatively redefined national interest, representation, democracy and corruption to the benefit of the vested interests.

 arunkumar1000@hotmail.com

Political Will Missing

Political Will Missing

Arun Kumar

CESP, SSS, JNU

The Tribune, 19 July, 2011

The government’s intention of tackling either the problem of black economy or bringing back money stashed abroad is suspect. The money stashed abroad by the corrupt businessmen, politicians and others could be a staggering few trillion dollars. If retrieved, it could transform the country. The public has understood this and is agitated about it.

It is hard to estimate the sums lying abroad since there are 77 tax havens where the corrupt keep their money. While Switzerland is the best known and possibly the biggest of them, it is very likely that a lot of money from there has been moved to other tax havens of more recent origin due to the pressure being brought on it by the advanced nations.

If the figure of $ 1.4 trillion dollars in Swiss accounts is correct, then the total in all tax havens would certainly be a multiple of that. However, this figure is not to be found in the source (Swiss Banker’s Association report) that is often quoted. Further, much of the money is kept in false names (benami) or via shell companies so that the real owner is hard to trace. Finally, if one is in danger of being caught one can turn into an NRI to escape the clutches.

In November last, the Global Financial Integrity Report estimated that India has lost $462 billion dollars since Independence due to illicit flows.

First, this figure is a gross under-estimate since it leaves out many of the forms of drain of savings from the economy like hawala. Secondly, it is the “opportunity cost” to the economy and not the actual sum lying abroad. It includes the interest income that potentially would have been earned on the savings but that may not be the case since these sums may have been partly consumed or moved to other forms of investments. Thus, one can only guess how much Indian savings are lying abroad in banks.

Bofors got buried

Can these savings be identified and brought back? Take the case of Bofors where illegal payments were moved through shell companies. Such money is moved through six layers so that the actual beneficiary cannot be traced unless one of the intermediaries is caught and the beans are spilled. The trail disappeared after the second layer.

In the Bofors case if Mr. Win Chaddha or Mr. Quattrochi had squealed, the final beneficiaries could have been traced. But due to the involvement of the top leadership, roadblocks to investigations were put up. For instance, Union Cabinet Minister Solanki chose to resign rather than reveal on whose behalf he had passed on a chit to the Swiss minister to stall the case.

The government conveniently claims that it does not have specific information pertaining to individuals. It also pleads that foreign governments ask for such information to reveal the details of bank accounts of individuals. The governments of tax havens depend on such opacity to carry on with their highly profitable business of being bankers of illicit funds.

Some of the advanced countries have tax havens in their jurisdiction like Britain has Jersey Island. Further, some of the biggest global banks provide conduits for the “high net worth individuals’ to transfer their illicit funds via their subsidiaries in tax havens whose task is it to facilitate these movements.

Three factors prevent the cleaning up of this corrupt global financial system. First, the clout of the rich countries hosting tax havens. Secondly, the clout of the financial system which can threaten to move funds out of a country that goes against its interest. And lastly, the reluctance of the leaders of governments (especially the developing world) who use these banks for siphoning out their illegal funds abroad.

The impasse can be broken if the problem is turned on its head. The black savings taken abroad are generated in India from the black economy which is now 50 per cent of the GDP (at current levels Rs.38 lakh crore generated per annum). Of this, a part is consumed (say, 50 per cent) and possibly 10 per cent (about Rs.3.8 lakh crore) is siphoned abroad. It is this sum that has been accumulating abroad. A part of this is being round-tripped back to India through the Mauritius route and foreign institutional investors (FIIs) and as FDI in the last 15 years. The facility of round-tripping was deliberately provided by the government (like an amnesty scheme) and has encouraged more black income generation in the country.

Be that as it may, most of the black savings are circulating in the country and not abroad. The former must be five times more than the latter. Not that we should not try to recover the wealth lying abroad, but why not tap the illegal wealth lying in India itself? In a sense, while the issue of black wealth held abroad is emotive, it is also a diversionary one – focussing attention away from the main issue.

If black income generation is tackled in the country, then its outflow will decline. Further, if those generating black incomes are caught in India, they could be forced to reveal what they hold abroad. Even if they have been clever and the government is not able to lay its hand on full information, it would have caught the bulk of the money escaping national development.

Further, it would be easier to pressurize Indian nationals to get information than forcing sovereign governments to yield information they are reluctant to reveal. It could obviate the need to investigate abroad or frame complicated new laws.

Govt not clueless

Is the government totally clueless about black income generation in the country? Not so. Intelligence agencies have a lot of information through their sources and by tapping phones. If lobbyist Niira Radia’s tapes are anything to go by, there is a lot of information there.

But, presently, the information is not acted upon since the entire elite class will get implicated and the system could collapse if the full facts come out. In brief, information exists in the system but it is treated as private information used for blackmail and not used as public information to clean up the system.

The apex court is then correct in distrusting the government’s intentions with regard to tackling the black economy. For instance, the Hasan Ali and Liechtenstein disc cases started in 2007 but little was done until the public pressure mounted in 2010.

In the US, prosecutions in the Madoff case ($50 billion) or the Rajaratnam case were completed within a few months. In contrast, in the Satyam case against Raju, the courts are yet to act. The Indian courts have often taken the prosecuting agencies to task for spoiling the cases, but with little effect. The courts are also partly responsible for the situation. Not only are corruption cases coming up against the judiciary, justice is delayed, emboldening the wrong doers.

The creation of one SIT by the Supreme Court will not solve the problem of black economy or bring back the black savings held abroad but it could increase deterrence. The composition of the SIT is such that it could force the intelligence agencies to use the data lying with them to act against black income generators.

Most of the ruling elite could be implicated if the black economy is effectively tackled. The problem is then one of generating political will to act but courts cannot help in that.

arunkumar1000@hotmail.com

Why fears of a foreign hand are real

Why fears of a foreign hand are real

Arun Kumar

CESP/SSS, JNU, N Delhi 110067

The Hindu on June 22, 2012.

Mr. Pranab Mukherji is likely to be India’s next President. It seemed to be touch and go till the tide turned in his favour. Those in the know suggest that the corporates swung it for him not because he is one of the most seasoned Indian politicians but because they wanted him out of the Ministry of Finance. He has acted tough on retrospective taxation and GAAR – the measures in his recent budget to tackle black income generation. But, apparently the real pressure was from foreign shores and the Indian corporates who are now MNCs are sensitive to that. So is our political leadership. Britain and Netherlands exerted strong pressure on the Vodaphone case. How much of our politics is being determined by such pressures?

Other recent cases of pressures are Mrs. Clinton’s visit to India to influence government’s policies on trade with Iran and on FDI in retail, the S&P downgrade of India, the Aircel Maxis deal. There are also less visible cases of pressures as in recent defense purchases (British were upset), energy sector investments (Oil, gas and nuclear), opening of markets and so on. These are impacting Indian politics, especially at the top because of a lack of coherence there.

The Bofors scam has had a continuing impact on politics at the top since 1987. The recent interview by the then Swedish chief police investigator, Mr. Lindstorm, has again brought the issue to the fore. That Mr. Quattrochi, an Italian businessman based in India and a close friend of the Gandhi family, was one of the recipients of kickbacks has been underlined. His role in swinging the Bofors deal at the last minute was known. It is not in doubt that pay offs were made or that the Bofors guns have proved their mettle. But the latter cannot justify the former. The only unsettled issue is who got the money.

That Mr. Quattrochi had powerful friends was confirmed when he was allowed to escape the country during the Congress rule. The case was apparently deliberately spoilt by the investigative agencies, including the CBI and, therefore, lost in the Courts – in Malaysia, Britain and Argentina. The red corner notice against him `could not be executed’ since our police agencies could not `find’ him even though journalists could interview him.

Evidence points to a high level cover up. Mr. MS Solanki, the then External Affairs Minister sacrificed his Cabinet berth rather than reveal what he wrote in the paper he passed on to the Swiss counterpart at a meeting. At that point of time, the Swiss bank accounts were being investigated by the Indian agencies to trace the Bofors pay-off trail. Could such a sacrifice of a political career be for an ordinary leader.

Who took the money even if not Rajiv Gandhi and why did the investigative agencies spoil the case? Investigations are essential to clear the air about these questions. A former Minister in the PMO mentioned to this author in an interview on the black economy that when he went with the Bofors file to the then PM, he was told to close the file since there could be threat to his life. No wonder, none of the non-Congress PMs changed the course of investigations to bring it on track and none of the Congress PMs have wanted the truth to come out.

Kick-backs have been common globally in dealings with MNCs. Sweden is one of the least corrupt countries in the world but its corporations have bribed to get contracts as the Bofors case points to. The US based MNCs have resorted to bribes in spite of it being illegal as per the US law. Recently, Walmart has admitted to having bribed its way through in Mexico. When the top management learnt of it, rather than exposing corruption, the internal probe was closed. The same Walmart has been trying to enter India. Mrs. Clinton’s agenda included `persuading’ India. The only CM she visited was Ms. Bannerjee, the important UPA partner opposing FDI in retail. It is reminiscent of Mr. Kissinger and the Secretaries of Energy and Defence flying to India to lobby for Enron in the mid-1990s. Enron admitted to spending $60 million in India, to `educate’ policy makers. Wikileaks exposed how extensively the US government keeps track of goings on in India so as to effect policies.

It is not just a few MNCs that indulge in corruption or use their governments to apply pressure on policies. MNC banks are known to help Indians take their capital out of India. UBS bank, the largest Swiss bank was fined $750 million by the US for helping its citizens to keep secret bank accounts. This same UBS bank was allowed entry into India in spite of its known role; was it a reward for helping some powerful people?

Executives of Siemens, a supposedly honest MNC and an important player in India, were  indicted in the US in December 2011 for bribery in Argentina. Investigations revealed that $1.4 billion of illegal payments were made between 2001 and 2007 in Bangladesh, China, Russia, Venezuela and so on. These were often routed via consultants. The company paid fines and fees of $1.6 billion to the US and German governments for the bribes it paid across the globe.

Siemens started bribing soon after the end of World War II to get contracts under the Marshall Plan which were mostly going to the Americans. Since its prosecution, Siemens claims that it has appointed Compliance Officers to check bribery. But, with the prevalence of a high degree of illegality internationally, can one company be honest while others are not? How would it win contracts when those in-charge expect to be bribed? Since non-transparent processes are set up, at every step, decisions need to be influenced as has been shown in the Bofors case or the 2G spectrum allocation.

The Vodafone case is important for revenue since MNCs (Indian and foreign) have used tax havens and tax planning to avoid paying taxes in India. They create a web of holdings to hide the identity of the real owners of a company are or who it is being transferred to. In 1985, in the Mcdowell case, the SC bench observed, “Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods”. This judgment was over turned in 2003 in the Azadi Bachao case filed against the use of the Mauritius route to avoid paying tax in India. The government had opposed the petition. Vodafone has taken advantage of this judgment to successfully argue against having to pay capital gains tax in India on transfer of a company in a tax haven which owned the Indian assets. Mr. Mukherji was trying to recover lost ground.

Indian policies have been subject to foreign pressures since the days of the cold war in the 1950s. But until the mid 1980s the decisions were accepted as being in the `long term national interest’. There were accusations in the procurement of the Jaguar aircraft also but these did not create the furor that the Bofors scam did. Since the late 1980s, as in the case of Bofors or the New Economic Policies in 1991 or the Indo-US nuclear deal, sectional or individual interests have become dominant. These have played havoc with national politics. Pressures and counter pressures are mounted through political parties and their leaders and big business.

Some Congressmen feel that they cannot spare Pranabda since he is crucial to the functioning of their party and the government. So, Mr. Mukherji becoming the President may be a destabilizing event. The lesson is that foreign pressures tend to damage the political processes which national politics cannot undo. The public is left bewildered by the goings on, as in the present case of selection of the presidential candidate.

arunkumar1000@hotmail.com

                                               

For drafting an ideal Lokpal Bill

For drafting an ideal Lokpal Bill

Arun Kumar

CESP, SSS, JNU
The Hindu, May 31, 2011

The drafting of the Lokpal bill is back in the news after the Assembly elections. The co-chairperson of the high powered committee has said that progress is slow and the deadline of June 30 is likely to be missed. Some civil society groups have made suggestions on what the Bill should contain. The Chairperson of the Drafting Committee has responded with alacrity sensing an opportunity to get the government’s way by claiming division in civil society. Apparently, important differences remain unresolved between the representatives of civil society and the government, especially, with regard to the inclusion of the Prime Minister and the higher judiciary under the purview of the Lokpal. Two issues arise, how important is the inclusion of these two and whether missing the deadline of June 30 by a few months to get a good Bill in place makes a big difference given that the Bill has been pending for 42 years.
If it is the magic wand that would eliminate corruption right away then it is urgently needed. Those in favour of the Lokpal suggest that it would check the vested interests who are spreading corruption in society. But, they are not able to convince the doubting Thomases who argue that it can neither be the panacea for all ills nor can it root out the endemic corruption in society at one go. The skeptics, who have often been in the forefront of the fight against corruption, need to be differentiated from the vested interests who have been stalling the Bill for their narrow ends. The skeptics are not for needless delay but only want prioritization of the steps to fight corruption.
Lokpal is presented as a watchdog over the corrupt system. What has our experience been with the many watchdogs we have? There is the CVC to oversee the functioning of the investigative agencies but we know that it has been largely ineffective. We have the election commission to see that fair elections are conducted and it is seen to be successful but the political system seems to be getting more corrupt. There are the legislatures which are to be accountable to the citizens and oversee the functioning of the nation but we are witness to their growing criminalization and penetration by money power. The judiciary is supposed to see that justice is done which is another form of accountability. But, increasingly, judges at all levels have been accused of corruption. There are the lesser watchdogs, like, the intelligence agencies and the regulatory bodies but they too have been accused of growing corruption. Given all this, can there be a perfect Bill which will somehow insulate the Lokpal against the corruption in society?
Today, illegality in society is widespread. It affects almost all social, political and economic aspects of the nation’s life. Tackling the growing illegality is then the most urgent task. Thus, while the Lokpal may not be the one thing on which all attention needs to be focused, it is perhaps the most important step in the drive against corruption.
It is not that the nation does not know what should be done to deal with the black economy and the associated illegality. Since the Fifties, there have been dozens of committees and commissions that have gone into various aspects of the problem. For instance, the Kaldor Report (1956), Santhanam Committee (1964), Wanchoo Committee (1971), Dagli Committee (1979), NIPFP Report (1985), Kelkar Committee (2002) and so on. Then there are the Estimates Committee, CAG and the PAC reports of various kinds.
The Reports contain thousands of suggestions and hundreds of them have been implemented. Like, reduction of income tax rates (from 97.5% in 1971 to the present 30%), elimination of many controls (MRTP, FERA, licensing, trade controls, etc.), demonetization of currency, voluntary disclosure of incomes (VDIS), Bearer Bonds, acquisition of undervalued property, foreign exchange controls, introduction of VAT and so on. Yet, the size of the black economy has continued to grow.
The various movements against corruption (like, Nav Nirman movement in 1972) or changes in the laws (like, the introduction of RTI) and the corresponding steps to fight corruption have been repeatedly thwarted/diluted by the corrupt. People have often been disappointed by these failures and become cynical. Yet, they have periodically reacted with positive outcomes, like, in the Jessica Lal case. The subversion of the steps to curb the black economy and the associated corruption is engineered by the ruling elite consisting of the Triad between the corrupt politicians, the businessmen and the executive. Since they make huge additional incomes through the black economy, they have little incentive to curb their own illegality by checking the black economy.
Can there be a perfect law that cannot be subverted? Experience tells us that this has never been the case. No Bill has fully solved the problem it set out to resolve. Our Constitution is often praised but has had to be repeatedly amended and we continue to run into problems. A law in practice has seldom turned out to be as it was drafted on paper. Human ingenuity is such that it finds loopholes to subvert the law because the spirit is not willing. Would the same fate meet the Lokpal Bill?
Take Section 138 meant to prevent the crooked from deliberately bouncing their cheques? Another instance is Section 12(6) which allows for summary trial of cases where a signed lease exists and where the tenant does not vacate the property automatically when the lease ends. Today, lakhs of cases relating to these provisions are pending in courts because the courts allow delays. The crooked then cock a snoot at the law while the honest go on the back foot. This occurs because there is lack of accountability of the judges - if a case drags on, who are they answerable to? The party that suffers due to delays cannot take a tough stance lest it antagonizes the judge and they have to suffer.
How can accountability be built into the system? Either the judges can be accountable to their conscience or to a higher authority. Today, greed and decline of morals have made the former rare. In the case of the latter, the chain ends with the Chief Justice. If she demands accountability, it would percolate down to the lowest levels. Similarly, in the government, if the PM and the CM demand accountability, the entire administration would follow suit.
Conversely, even if the PM or a Chief Justice are honest but they practice non accountability and arbitrariness, that spreads downwards and corruption grows. Information about wrongdoings in high places is collected by the intelligence agencies through phone tapping and other means but this is not acted upon. Such inaction would no more be feasible if the Lokpal Bill brings the PM and the CJI under its ambit.
But, can it bring about accountability in the political process, something elections have failed to do?  Some doubt it, since the appointment of other constitutional authorities, like, the Election Commissioners, CVC, Judges in HC and CIC have run into controversies and that could also happen in the case of the Lokpal. How can the honest get to the top when corruption is endemic, except by accident?
Be that as it may, the surest way to subvert the Lokpal is to make it widely applicable to all manner of corruption. It would get embroiled in all kinds of wranglings and become like our courts; choked with cases. We have enough laws to curb corruption at various levels provided there is implementation and only accountability can ensure that. Thus, it is critical that those above demand accountability from those under them. The buck would only stop end at the top – with the PM and the CJI at the Centre and the CM and the Chief Justices in the states. That is what the focus of the Lokpal (and Lokayukta) should be. Even then without public pressure through movements the Lokpal can get subverted.
In brief, in the last six decades many steps have been taken to curb the growing illegality but they have not delivered due to lack of accountability in the system and decline of self regulation since greed has been placed on a new high pedestal. It is argued that setting up of a Lokpal is not a magic wand to eliminate corruption but important. However, its success would depend on limiting its scope to the very top which would make it manageable and lead to accountability all down the line. Then only would laws be followed both in letter and spirit and become meaningful.

arunkumar1000@hotmail.com

Black Economy, Havala and India

Black Economy, Havala and India

Arun Kumar

CESP, SSS, JNU

Fatehali caught at Delhi airport trying to leave India with a large sum of dollar currency notes has focused attention on Havala. It is also in the news because of Mr. Hasan Ali of Pune against whom the Income tax department has a placed a demand of Rs.40,000 crores. The billions of dollars in his foreign accounts were most likely not his but of clients using his services.

These are pointers to the huge hoards of black money lying abroad in tax havens. They are estimated to be between 33% and 200% of India’s GDP. This is flight of capital and havala aids it. A poor country has been exporting capital and experiencing shortage of capital for industry, employment, education, rural development, and infrastructure.

The part of the black economy that goes out of the nation maybe $ 100 billion annually, not counting the return on the money lying outside. Apart from havala, mis-invoicing of trade is used to spirit funds out of the country. Businesses in foreign trade use the latter while others use havala.

Havala is a banking channel parallel to the legal regulated banking system. Hence illegal transactions can be routed through it with little fear of detection and prosecution. Thus, movements of kickbacks, drug money, speculative financing or terrorist funding is routed through these channels.

Havala is also used for moving funds within the country. India has a large informal money market fuelled by the black savings and the informal sector. Unfortunately, all this strengthens the black economy, illegality and criminalization and thereby slows down development.

In havala, like, in legal banking, money does not have to move physically. Funds move in both directions so that havala operators need only make book entries and square them up periodically. If a NRI wants to send money to his family in India, he deposits the dollars with the operator A in the country he is in. The corresponding havala operator B in India gives the rupees to the Indian family. Someone in India wanting to send his funds abroad gives his rupees to B and he gets dollars from A in the other country. Cash hardly moves. Such transactions result in loss of foreign exchange to the country and impact money supply.

Why was Fatehali carrying dollars and not using the havala channels to transfer his funds without cash movements? Was he a courier for havala operators? Entertainment industry is active in the black economy. It receives finance from mafia, smugglers and drug traffickers. Since it is based on large cash payments and receipts, it is easy for such illegal money to circulate and often control the industry. Its international links have expanded over the last 40 years so it is easy for it to transfer funds across borders and provide havala services.

Illegal money going out of the country is routed into shell companies in tax havens. It is transferred from one to the other shell company and the previous company closed so that the money is hard to trace and then it can legitimize itself and even return to India through, say, the PN route. This is money laundering - cleaning the dirty money.

Many reputed MNC banks also act as conduits for transfer of funds. They have managers who service the accounts of HNI clients and offer advice and support. These banks have opened a large number of subsidiaries in tax havens for this purpose.

From time to time the enforcement agencies catch havala operators. Earlier they were prosecuted under FERA and now under the weaker FEMA and Money Laundering Act. The Jain Havala case of 1991 became famous due to the top politicians named. Eventually, no one was prosecuted since the agencies spoilt the case. It emerged that the Jains only counted cash and did not distinguish between the politician’s dirty kickback money or the dirtier terrorist funds. So, it prefers to operate in the nether world.

Businessmen, politicians, bureaucrats, professionals and so on use havala to transfer their funds but this private knowledge is not used officially to close this channel because of its usefulness to them. Tackling it is then a question of political will.

arunkumar1000@hotmail.com