India Is Moving to a License-Permit-Inspector Raj on Steroids

Prime Minister Modi has been claiming that one of the top priorities of his government is cleansing the country of the scourges of corruption and black money. The first major step he took towards this end was his demonetisation initiative last November.

Several commentators, including myself, had argued that its economic costs far exceeded its economic benefits, while, at the same time, it had also been argued by some of the critics of this policy that its political benefits to the BJP could be huge. The results of several recent surveys support the first point, while the recent election results support the latter.

Also Read: Demonetisation: Foolhardy Notion of Linking Corruption and Growth

(Photo: The Quint)

Election Results Not a Referendum on Economy

In this context, the recent growth estimate of 7 percent for the third quarter (October-December) of the fiscal year 2016-17 doesn’t mean much.

Firstly, almost half this third quarter was over when the demonetisation initiative was announced, and, secondly, the informal sector is only indirectly factored into GDP estimates, especially the preliminary ones, by effectively imposing historical ratios over some of the formal sector data.

This is especially problematic when a policy has asymmetric impacts on the formal and informal sectors, in the presence of the informal sector accounting for 45 percent of the GDP.

The Chief Statistician, TCA Anant, soon after releasing the third quarter growth figure, clearly said that “Policies such as demonetisation are difficult to assess without a lot of data, a lot of which is still to come in. As of now, we have factored in the third quarter figures of industrial production and only the advance filing corporates.”

Despite these problems, supporters of the demonetisation initiative have run victory laps with this flawed number and the election results.

If election results are a measure of the soundness of economic policies, then there should be no doubt that Brexit is good for the UK as would be Trump’s promised anti-globalisation agenda for the US.

Also Read: RBI’s Problem of Plenty: After Note Ban, Economy Flooded With Cash

Direct Policies for Curbing Corruption

It is clear that the Modi government has been emboldened by the combination of the above growth estimate and the recent election results. Recently, as part of its anti-corruption agenda, the government announced changes in regulations regarding election finance and income-tax inspections.

While criticising demonetisation, Amartya Lahiri and I had argued, in a co-authored article, in favour of much more direct policies to attack corruption and black money. There is no doubt that such policies should include election finance reforms and some types of tax reforms. Some may label the recent changes as “election finance reforms” and “tax reforms,” but that amounts to turning the concept of “reforms” on its head.

Also Read: Has PM Modi Achieved Any of His Stated Aims With Demonetisation?

(Photo: The Quint)

Political Donations Come Under Scanner

The so-called “reforms” have been passed by gaming the current system of checks and balances of the Indian democracy. More specifically, they have been inserted into a “money bill” to by-pass any possible obstacles created by the Rajya Sabha. In the process, they have created further opportunities for political donors also to game the system.

The lowering of the cap on anonymous cash donations from Rs 20,000 to Rs 2,000 is effectively not a change at all due to the limited number of current Rs 2,000-plus contributions (as a fraction of the population), which also means that bigger contributions can be easily broken down into several individual anonymous cash donations, resulting just in a minor inconvenience for these donors.

Note here that the cap on anonymous donations remains at Rs 20,000 if the contribution is made digitally or by cheque, which most successful launderers of black money during the demonetisation period should be able to do.

For corporations, the donation needs to be made digitally and through electoral bonds but the earlier cap of 7.5 percent of last three years’ profits has been done away with, with the anonymity in contributions allowed in this case.

It has been pointed out that firms’ annual reports may end up showing the magnitude of contributions, but not which party they contributed to. The political parties receiving such contributions will also not have to declare those receipts individually.

While the government argues that this anonymity is needed to protect corporations from being unnecessarily targeted by political rivals, don’t the citizens have a right to this information and be aware of any possible “regulatory capture” that is taking place? That is, whether there is any connection between political contributions and policies enacted and implemented by the government?

Also Read: The Big Corporate Takeover of Political Funding

Living Under the Yoke of Regulations

For decades, India’s progress was stifled by regulations that benefited incumbent domestic industrial houses. These regulations included trade barriers to protect these firms from foreign competition as well as entry barriers in a number of industries to protect them from new domestic competition.

With the newly constructed smokescreen to hide regulatory capture, we will be reverting back rapidly to the days of the “license-permit raj”.

The lack of transparency is especially worrying because of India’s history of capture of policy formulation by the moneyed class. Also, such regulations empower bureaucrats and bring back the “inspector raj”, thereby raising the levels of corruption, in sharp contrast to the government’s stated goal of getting rid of that scourge.

Also Read: Ready For the Knock? Taxmen Now Free to Raid Citizens on a Whim

Inspector Raj is Back

Finally, the infinite power given to income tax inspectors who can now conduct raids and searches, without providing any reason for doing so, is a direct assault on democracy. It’s not just the return of the old inspector raj. It is that same inspector raj now on steroids. It provides the tax inspectors incontestable power to harass and extort ordinary citizens.

It also provides the government with a weapon they can use against their critics and opponents. It needs to be noted here that the increase in incursive “babu” power (eg: depositors having to be interviewed by bank officials), as was argued in my co-authored article with Amartya Lahiri, was something that also happened with this government’s demonetisation initiative.

(Photo: The Quint)

The recent policy changes with respect to election finance and income tax are unfortunate, and appear sharply inconsistent with the Right-to-Information Act. If the government is serious about eradicating corruption, I suggest lowering the anonymous cash contributions cap all the way to zero and not stop at Rs 2,000.

In addition, getting rid of the corporate cap on political contributions and not allowing transparency are not good ideas, especially if the government is serious about economic reforms in the near future. With regard to income tax inspections, I suggest constructing and then using an algorithm, that incorporates several criteria to evaluate electronic filings.

Using a computer program based on that algorithm, red flags can be raised when those criteria are not met or there are inconsistencies in any tax returns. Only in such cases, should inspectors be authorised to enter private property.

Also Read: IT Act Passed: Why Even Honest Taxpayers Should Be Really Afraid

(Devashish Mitra is Professor of Economics and Gerald B and Daphna Cramer Professor of Global Affairs at Syracuse University, New York, USA. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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