Living with Black Money in Elections

Dr Bharat Jhunjhunwala
Elections are contested with money. Candidates routinely spend five lacs in village pradhan’s election, 50 lacs in that of a MLA and five crores in that of MP. Most of it is black money. One way to have clean elections is to try to end the menace of black money in the economy. Most attempts to control black money have, however, failed. Recently it has been suggested that income tax, excise duties, VAT and local taxes may be scrapped and all these be replaced with a single Bank Transaction Tax (BTT) which will be collected as a small percentage, say 2 percent, of all transactions passing through the banking system. Simultaneously all notes above 100 rupee denomination may be demonetized. This will make it difficult fake large transactions in cash. All transactions will be routed through the banks and BTT could be collected. The question is whether BTT will lead to a reduction- or an increase in corruption.
The assumption underlying the proposal is that businesses will be happy to pay a small transaction tax if they could get peace of mind. I am a Marwari and belong to a business family. I do not think this is the correct reading. Businessmen will always want to avoid paying taxes even if it be small. They would be happy if the present 30-odd percent taxation would be reduced to a 2 percent BTT; but they would continue to try to avoid paying that 2 percent. There are many ways they could take to avoid the BTT. The most likely way would be to institute a system of Promissory Notes or Hundi. Famous banker Rothschild had made a fortune this way. A Jewish History website explains: “In the 18th century, there was a Jew in Frankfurt Am Main by the name of Mayer Amshel Rothschild. He had five sons, so he sent each one to a different country. One went to London, one went to Paris, one went to Vienna, one went to Naples, and one stayed with him in Frankfurt. That created what we today call “international banking.” Because of the trust between the brothers, the Rothschilds created an international banking system.” One could deposit money with the Rothschilds in Vienna and receive an equal amount in Frankfurt. That is precisely how the Hundi and Hawala systems work. Businessmen will start routing their payments through such hundis instead of through the banks. Tatas, Birlas and Premjis will issue hundis which will serve as an alternate currency. Payments will be made across the country without entering the banking system. Any attempt to stamp out this practice will spawn another cat-and-mouse game between the evaders and tax collectors.
The problem will extend to retail outlets. Say there is a TV manufacturer who is presently paying excise duties. The retail shop has to pay VAT because it has purchased excise-duty paid goods in its books. This check at the point of manufacture will be dismantled in the proposed BTT system. The manufacturer will be free to ship TVs to the retailer. He will be only required to pay BTT on monies received through the banks. The retailer can, in turn, sell the TV in cash to the consumer even if that be illegal. The consumer would be mighty happy doing so. He would save BTT of Rs 800 on a purchase of Rs 20k. And the money can be remitted by the retailer to the manufacturer by hundi. Thus a parallel cash economy will be created which will be very difficult to control because it will be very diffused. Presently all retail shops are forced to pay VAT because every piece of TV comes in the white stream. In contrast, evasion of BTT will have to be checked at every retail shop.
Another way to avoid would be to transport truck loads of cash in small denominations. A rough collection indicates that a payment of Rs five crores in cash would require 20 suitcases of notes of 50 rupee denomination. The cost of transporting these 20 suitcases from Delhi to Mumbai with an armoured carrier and guards would be, say, Rs one lac. Against this one would have to pay Rs 10 lacs as BTT. Any attempt to penalize such cash transactions would involve setting up of a police system and, in turn, create a huge source of corruption.
Such was the experience of Ghana in the eighties. A World Bank report tells us that the problems “were compounded by a series of measures which shook the confidence of the public in the banking system. These measures included the demonetization of 50 cedi notes, the freezing of bank deposit accounts in excess of 50,000 cedis and the compulsory payment by checks for all business transactions in excess of 1,000 cedis. The immediate response by firms and individuals was to rechannel their financial resources into the unregulated informal financial sector.” That is what BTT will do to India.
BTT will also deprive the economy of the benefits of trade. Today the goods pass through large number of points-consignment agents, wholesalers and retailer. The goods are evaluated, sorted and distributed at each step. At present this does not involve additional taxation because VAT is collected only on the incremental value. In contrast, BTT will be collected at each point. Five transactions in the chain would lead to an imposition of BTT of 10 percent. Businesses will try to avoid this by selling directly to consumers; or traders may collect cheques from consumers and pass them to the manufacturer to deposit in its account. This will lead to a huge waste of time and energy. BTT is, therefore, simply not going to make life easy. Instead it will create a bigger source of corruption.
BTT will not work and other measures have not worked. We must search for ways of securing cleaner elections within the prevalence of black money. Black money is like cigarette or liquor. We may not like them but we have to per force live with them. The rich and powerful will continue to use money in elections. We should evolve ways of containing their prowess. The way forward then would be to public support cleaner candidates who have less money. ‘AAP’ has established a new paradigm of collecting money from the voters which has potential. But we need to go farther. One possibility is that all candidates may be give a post-election grant of, say, Rs 10 per vote. That would make it possible for clean candidates to take loan and contest election. They could repay the loan with these grants. This will embolden financially weak and socially respectable candidates to contest elections and rein in the antics of money-led contests.
(The author was formerly Professior of Economics at IIM Bengaluru)

LEAVE A REPLY

Please enter your comment!
Please enter your name here