Who sold a dummy to whom?

On balance, actions after demonetisation are enabling concentration of information and discretionary power in the hands of the government


The government seems to be laying great store by its measures aimed at curbing the use of cash in commercial and financial transactions to curb corruption. Perversely, they increase the scope for corruption. Photo: AFP
The government seems to be laying great store by its measures aimed at curbing the use of cash in commercial and financial transactions to curb corruption. Perversely, they increase the scope for corruption. Photo: AFP

Modern theories assert that states derive their power from their legally sanctioned monopoly on violence. But they also derive their power from the information they possess about individuals and institutions in the country. Even in the world of 24x7 Internet connectivity, with each of us broadcasting ourselves constantly and putting out so much private information in the public domain, the government has a substantial coercive advantage through the financial transactions data it collects. The taxman has coercive powers that private operators don’t. The Indian government seems to have taken this lesson to heart and is systematically moving pieces to arm itself with information. The implications for the nation are troubling.

Recently, the finance minister said the government had no plans of withdrawing the new Rs2,000 currency note. If one were to take him at face value, the wisdom of cancelling the old Rs1,000 note becomes questionable. The government has simply made the store of value function of the currency note more attractive.

The government seems to be laying great store by its measures aimed at curbing the use of cash in commercial and financial transactions to curb corruption. Perversely, they increase the scope for corruption. Broadly, corruption arises out of the abuse of discretionary power by the government and by the quest for special favours by the private sector. Of course, the demand for special favours does arise from political funding too.

Given that abuse of power by the state is an important source of corruption, the digitization of transactions to put more information in the hands of the taxman increases the scope for corruption. Digitization is about the information trail that the taxman can use to collect revenue due to states through legitimate and coercive means. Where they are unaccompanied by tax reforms—for example, enhanced thresholds and reasonable rates, unambiguous and simpler laws with few exemptions, exceptions and distortions—the information and discretionary powers available with the taxman become vehicles for extortion. It is worse if such extortions are for personal enrichment and not for the benefit of state coffers.

Second, the government may have lowered the limit for cash donations to political parties but it has made political funding a lot less transparent than before. Now, there is no limit to the amount of donations companies can make to political parties as long as they are made through account-payee cheques. Earlier, it was restricted to 7.5% of the average profits of the previous three years. Further, companies do not have to disclose the beneficiaries and the amount each of them received. The United Progressive Alliance government had provided for 100% tax deduction on donations made to approved electoral trusts which would act as pass-through vehicles for political parties. It was clarified in 2013 that donations to such trusts did not have to be disclosed under the Companies Act. But donations made directly to political parties did have to be disclosed. Now with the Finance Bill for 2017-18 just passed, this disclosure too has been done away with.

How does it help address corruption and improve governance if it makes public disclosure unnecessary? Further, the taxman will have the details of the political parties that received donations and the amounts of such donations. The information can be used to extract more favours from the donor companies or pursue vindictive action against them. One would not have thought that this was the underlying purpose of seeking to ban cash transactions.

Other aspects of the keen pursuit of digitization, besides the concentration of information power in the hands of the taxman, are also worrisome. Digital infrastructure in the country is primitive. Data security and privacy aspects have not been addressed at all. Spectrum is neither available nor affordable for telecom companies to be able to facilitate the conduct of digital transactions whenever needed and from anywhere. Further, the interest shown by foreign agencies in digitization raises eyebrows. BusinessLine reported on 21 March that the chief executive officer of the Boston Consulting Group was reportedly seeking to meet the Prime Minister to appraise him of his company’s involvement in the digitization process in the country . On 29 March, the US-India Business Council will be hosting a day-long seminar on accelerating digital payments and deepening financial inclusion in India, in collaboration with the ministry of finance.

Some of us expected the “note-ban” decision to be used as a lever to address the Indian economy’s perennial underperformance and its intrinsic vulnerability due to the pervasive and persistent dominance of tiny informal enterprises in the economy. Easing labour and other regulatory burdens, raising tax thresholds and reducing arbitrary application of tax laws would help some of them improve economic efficiency. A vast majority of them require education and skills to get out of subsistence self-employment that does not constitute a viable entrepreneurship model either for the individuals or for the nation.

On balance, actions subsequent to the note-ban exercise are enabling concentration of information and discretionary power in the hands of the government through digitization which, in turn, benefits a few firms. They are less about unshackling Indian entrepreneurship so that it can scale up to serve a country of a billion-plus people.

V. Anantha Nageswaran is the co-author of Economics Of Derivatives and Can India Grow?

Comments are welcome at baretalk@livemint.com. Read Anantha’s previous Mint columns at www.livemint.com/baretalk

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