Home >Opinion >Columns >Opinion | Why Modi 2.0 should proceed carefully on tackling corruption

Even as Nirmala Sitharaman takes over the finance ministry and confronts a whole raft of challenges, one thing she ought to consider advising her boss is de-emphasizing an obsession with corruption and tax-compliance. Not because it’s fine to slide back to the good ol’ days of unethical economic activity, but because it is not going to help the cause of reviving the economy quickly. The fact that two job-creating sectors—real estate and construction—are still gasping for survival underscores this reality.

Reason: there is some correlation between the current slowdown and the combined moves made over the previous five years to reduce cronyism, tax evasion and black-money generation. We had two tax amnesty schemes, followed by demonetization, the Insolvency and Bankruptcy Code and the goods and services tax (GST), and a parallel rewrite of the tax breaks for investors bringing in money via Singapore, Cyprus and Mauritius. The black money amnesty schemes announced in 2015 and 2016 were so extortionate in terms of penalties that few actually chose to disclose their illegal incomes.

An economy is likely to be more buoyant in the short run (and possibly inflation-prone, too) if lots of tax-evaded money and cash are sloshing about, and less so if these flows are constricted. Even election spending, which usually results in a small push to demand as truckloads of money are spent by politicians to lure voters, has probably been more muted this time. While chunks of political funding at the national level have flown into party coffers through electoral bonds, cash has been used largely by candidates at the constituency level.

The late Samuel Huntington, author of The Clash of Civilizations and Political Order In Changing Societies, wrote that both the rich and poor tend to be corrupt in developing countries. While the poor sell their votes to buy economic benefits from the state, the rich provide financing to political parties to tilt policies in their direction. This was, if anything, a perfect description of the United Progressive Alliance period, when massive scams were reported in telecom spectrum and coal mine licensing, not to speak of big-budget projects like the Commonwealth Games.

Modi took over just when the voter was beginning to baulk at such skullduggery, and he stamped hard on such tendencies. But he probably went too fast, and with too tough an agenda. A slowing economy cannot be throttled financially too soon, for it leaves very little time for tax evaders to improve compliance in smaller doses without damaging their businesses. Changes have to be brought in slowly, with the more egregious corruption schemes wound up quickly and the smaller ones phased out by creating systems that steadily reduce incentives for evasion and increase sops for compliance.

However ethical and morally sound these tax-compliance initiatives were, it is inconceivable that these measures did not have a negative impact on investment and consumption demand in the short term.

Former chief economic adviser Kaushik Basu, in a paper titled Why, for a Class of Bribes, The Act of Giving a Bribe Should be Treated as Legal, posited that harassment bribery was a huge problem in India, where the aam aadmi (common man) had to pay small bribes to smoothen his interactions with the state. He was thus a victim rather than a perpetrator of corruption, and thus should not be treated as an equal partner in crime with the bribe-taker.

However attractive this idea sounds, the assumption that the giver is somehow paying only because he is forced to can only be half true. Whether caught for jumping a red signal or trying to speed up the issuance of a driver’s licence, the giver of the bribe is often as willing a participant in this form of small corruption as the bribe receiver.

On the other hand, consider the positive impact of such small acts of corruption on spending. When scores of transaction facilitators or officials obtain cash bribes to get things done, this high-power money, when spent, adds to consumption demand since it won’t be parked in a bank account. It boosts demand, something it would not do if such illegal incomes were to be totally stamped out before the bribe-taker finds alternative and more legitimate forms of employment.

The same applies to big business. When round-tripping of funds and over-invoicing and under-invoicing are crimped, the illegal flows that would have enabled a small businessman to bring in funds for investment when needed now get curtailed. Is it any surprise then that India’s investment cycle is taking so long to revive? Add the impact of the insolvency code, and many businessmen are being forced to sell their best companies to banks and send their worst to insolvency courts.

The moral of the experience of Modi 1.0 is simple: corruption may be immoral, but trying to defeat it too quickly can be counter-productive. Modi needs to ease up to help the economy get back into a trot. Business confidence is low and large segments of the financial sector are still to find stability. The last thing one needs is more uncertainty caused by an overemphasis on fixing ethical deficits as of yesterday.

*R. Jagannathan is editorial director, ‘Swarajya’ magazine

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