Demonetisation: Mr Prime Minister, major step towards cashless society would be cashless political funding

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Updated: December 12, 2016 9:20:49 AM

If indeed the PM practices what he preaches, he should set an example by disclosing his own party fund sources and then strike at the heart of black money by putting an end to briefcase politics

modi-lThe Swachh Bharat logo which proudly features on the new currency notes post demonetisation is a gentle reminder that the most critical aspect of India’s cleanliness drive has just begun.

Prime Minister Modi gave a new mantra of “Na gandagi karenge, na karne denge” to the nation as he himself picked up the broom to clean up the dirt at Mandir Marg police station in New Delhi at the launch of Swachh Bharat Abhiyan on October 2, 2014. The Swachh Bharat logo which proudly features on the new currency notes post demonetisation is a gentle reminder that the most critical aspect of India’s cleanliness drive has just begun. Almost after a month since the Prime Minster announced the ban of Rs 500 and Rs 1,000 notes in an unscheduled live telecast address to the nation on November 8, 2016, a slew of measures have been announced to counter the impact of the ongoing cash crunch. Most of us seem to have accepted the dictate quite gracefully on the premise that this is a “short-term pain for long-term gain”. There have been very few incidents of violence or major protests in the country and queues outside banks and ATMs have reduced.

So what is the extent of this short-term pain? Apart from the inconvenience caused, various “guesstimates” of the impact on economy vary from 0.5-2% decline in FY17 GDP growth. The Indian economy was not really firing on all cylinders prior to the demonetisation. GVA growth of 7.2% in the first half of FY17 was primarily led by private consumption and public spending. Investment demand had been lacklustre and capacity utilisation levels were low. In its monetary policy review on December 7, contrary to expectations, RBI revised down its GVA growth estimates for FY17 from 7.6% to 7.1%. These estimates look optimistic unless there is a sharp recovery in the fourth quarter, which is quite unlikely. The finance ministry, on the other hand, has estimated Q3 GDP growth at 5.5% y-o-y.

India is one of the most cash intensive economies in the world, with a cash-to-GDP ratio of about 12%, almost four times of that of economies like Brazil, Mexico and South Africa. One month after the note ban, the currency in circulation is about a third of what it was prior to demonetisation (around 4% of GDP). Thus, the current situation on the economy is like a patient on a dialysis machine. On the supply side, service sector which accounts for 55% of India’s GDP and has a higher dependence on cash transactions is already facing the heat. The services PMI for November fell to 46.7 (signalling a contraction) from 54.5 in October. On the demand side, private consumption (55% of GDP), a major driver of GDP growth, will take a hit till the situation normalises. Thus, we are left with only one driver of growth—public spending.

Having said that, this “short-term pain” is worth the effort only if demonetisation brings along long-term gains. It is no secret that political funding is one of the biggest sources of black money in India. And the long-term benefits will come only when the process of political funding in India is made completely transparent. As political parties do not fall under the ambit of RTI, their source of funding and details of expenditure cannot be made public. Due to the enormous amount of money spent in elections, India’s political system has been hijacked by the elite.

So, those who feel that poll-bound states like UP and Punjab will be hit due to demonetisation are in for a big surprise. Currently, under the Representation of People’s Act (Section 29C), political parties need to declare the details of all contributions in excess of Rs 20,000 received by them. This clause has been misused by most political parties.

There have been various reports of political parties making back-dated ledgers showing donations less than R20,000 in order to hide the source of their funds. Also, under the Income Tax Act, political parties enjoy complete exemption from income tax from all sources. Thus, a part of this unaccounted cash will simply be converted to legal tender by way of bank deposits. The Election Commission has also noted that unaccounted cash will find its way back into the system in the form of higher denomination Rs 2,000 notes later on.

Seven states go for assembly elections in 2017, including bigger states like Uttar Pradesh, Punjab, and Gujarat. This, in fact, could be the most opportune time to bring in electoral reforms and make political funding more transparent. Thus, a major first step towards a cashless society should start with cashless political funding.

As per a report by the Association of Democratic Reforms, almost 75% of the funds raised by six national parties (Congress (I), BJP, BSP, NCP, CPI and CPI (M)) between 2004-05 and 2011-12 came from unknown sources. Around 9% of the funds came from known sources like electoral trusts. Rest 16% were from known sources like membership fees, bank interest and asset sales. Over the years, a lot of unaccounted cash has flown into political funding and the clause of declaring the details of contributions only in excess of R20,000 explains why almost three-fourths has been from unknown sources. The BSP, for example, did not reveal the sources of its donors, claiming that none of its donations were in excess of Rs 20,000. The Election Commission has, in the past, suggested that this ceiling of R20,000 should be done away with. However, most political parties have resisted this advice vehemently. Ideally, there should also be a limit on cash donations made to political parties if the government is serious about cleaning up this mess.

Many activists have also advocated that political funding should be subject to regular audits by independent auditors. On the issue of disproportionate influence of corporate funding in political parties, the Observer Research Foundation suggests two major solutions—firstly, transparency by disclosing the list of donors and donations from companies, individuals and electoral trusts and second a “shareholder approach”. The donations above a certain threshold should be made public to shareholders of listed companies just like it is done in the UK, and SEBI should be appointed as the regulator to which all corporate donations are reported. These steps can go a long way in curbing the rampant use of black money in politics.

In such a situation, the other big issue is that the powers of the Election Commission in India are fairly limited. The Election Commission doesn’t have powers to scrutinise or take strict action (like disqualification) against political parties who misuse funds during elections. Moreover, even though the Election Commission imposes an upper limit on expenditure by individual candidates during polls, there is no limit on the expenditure by political parties during elections, making the purpose of individual candidate expenditure limit futile. The Election Commission’s suggestions on imposing a limit on expenditure of political parties in the past have also fallen on deaf ears.

If indeed the PM practices what he preaches “na gandagi karenge na karne denge”, he should set an example by disclosing his own party fund sources and then strike at the heart of black money economy by putting an end to briefcase politics. And that will be his biggest masterstroke.

The author is an economist based in Mumbai. Views are personal

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