Recently, Ram Jethmalani, an eminent lawyer, alleged that former Finance Minister, Palaniappan Chidambaram, was the “friend, father and philosopher of black money”. The ‘legal eagle’ said that some of Chidambaram’s “greatest contributions… are his brilliant pioneering initiatives for changing the colour of money from black to white.” While one may not wish to take Jethmalani’s charge at face value, the fact is that most FMs are unable to tackle the menace of the black economy. Ironically, either deliberately or otherwise, their policies boost the quantum of illegal money.
Sadly, this is even true of the current Finance Minister, Arun Jaitley, who, along with his Prime Minister, Narendra Modi, has waged a public and no-holds-barred war against those who own ‘black’ assets, either in India or abroad. To be fair, Jaitley’s decisions are not the only culprits. Some of the most exciting pronouncements by Modi, and scathing judgements by the judiciary and regulators may aid the black marketers. What is unfortunate is that the core philosophy behind these actions was to curb the menace and, if possible, eradicate it from the Indian economy.
Jaitley’s strong law against illegal foreign assets, the one-time amnesty given to declare assets held abroad, court orders against the Sahara Group and its founder, Subrata Roy and Modi’s redefinition of private, public and personal sectors, may help the black economy. All these measures and acts are laden with great intentions. But their impact can be the opposite. Those who generate black money may actually be happy with them. This is the unfortunate and bitter truth about policy-making; what it aims to achieve and what happens in reality can be poles apart.
On his recent US visit, the Prime Minister said that while all the nations focussed on either the private or public sectors, he wished to create a new one – personal sector. According to a press release issued by his office, Modi’s vision about this new sector was to lay emphasis on individual start-ups and entrepreneurs with a new slogan, Start-up India, Stand-Up India’. In a meeting with Modi, Wall Street CEOs expressed serious interest to fund such opportunities. There are two problems with this form of personalising business. The first is that there is no distinction between the personal and private sectors. All businesses that are private in nature are started by individuals, either as proprietors, partners or stockholders. This is also true with start-ups, which are generally corporate entities with a few shareholders. Later, start-ups go public and woo hundreds of thousands of new investors. To differentiate a corporate entity with a start-up, which is also a corporate entity, is a case of splitting hairs in order to create a new economic rhetoric.
Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, the bible of capitalism and private enterprise, talks about individual’s economic motivation that is inherently related to his or her self interests. One of his most oft-quoted lines is: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” In effect, the core of Smith’s arguments equated individuals with private enterprises.
In his book, A History of Economics: the past as the present, John Kenneth Galbraith takes the logic forward. “The person concerned with self-enrichment had hitherto been an object of doubt, suspicion and mistrust, feelings that went back through the Middle Ages to biblical times and the Holy Scripture itself. Now, because of his self-interest (and Smith’s book), he had become a public benefactor,” wrote Galbraith. Observe how he too associates people with the private sector.
The second issue with Modi’s new categorisation is that most of the ‘real’ startups in India are in the unorganised sector, ie they are not part of the mainstream economy. These generally include the self-employed entrepreneurs, who offer services and can be seen in every residential locality, local markets, and commercial centers. While the prime minister is keen to encourage legal start-ups, which offer value-added services, he may inadvertently push the case for the illegals, who deal in cash, hide their incomes (sometimes entirely), and don’t pay any of the legitimate taxes.
A 2012 Report of the Committee on Unorganised Sector Statistics explained the importance of the unorganised private sector in the country. “More than 90 percent of the workforce and 50 percent of the national product are accounted by the informal sector…. The high levels of growth of the Indian economy during the past two decades is accompanied by increasing informalisation,” it said. Obviously, high economic growth in most nations goes hand-in-hand with the size of the unorganised sector. And when the country’s prime minister talks about a booster to ‘personal’ sector, the owners of the informal businesses may view him as their moral champion.
HOARD ASSETS ABROAD
Jaitley’s two major initiatives to bring back the black money stashed abroad came in the form of a carrot and a stick. The blow was the almost-draconian law. Under the new ‘The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act’, a person or entity that wilfully fails to declare the foreign income or assets held abroad may face a maximum punishment of ten years. The sweetener was a one-time amnesty, although Jaitley dubbed it as a “compliance window”.