In order to tackle the black economy, the triad of corrupt politicians, businessmen, and the executive has to be dismantled. Even if one of these three wings is undermined, the triad will collapse. This can only be done via changes in the politics of the land. It cannot be achieved by the good intentions of someone or by some technical devices. One needs to think of the remedies in the long, medium, and short term.
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Short-term
Right to information
The black economy functions in secrecy. Hence the most important tool that we have, to bring it out into the open is the RTI provision. It is required to bring about transparency and accountability at all levels of societal functioning. It is crucial to bring under RTI all political parties, the judiciary, the prime minister, and chief minister’s offices. If it is extended to them, it would make the politician and the executive accountable and their functioning transparent so that, unlike at present, they cannot subvert the law deliberately.
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Action needed on available information and existing laws
The government collects a vast amount of information on all kinds of activities of the members of the triad but it is usually kept secret and not acted upon. At times this information is used to politically blackmail or take political advantage. That is why the opposition cries foul when the government acts against the corrupt. The general public also becomes sceptical of such action. For instance, information is collected on hawala operators and banking operations but it is not acted on. Recent cases highlighting the misuse of banking secrecy laws have come to light; this has to be stopped… Currently, at the initial stage of investigation, many cases against the powerful are deliberately mismanaged with the result that they go scot-free in the courts.
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Autonomy to institutions
The selection of the head of the regulatory authorities and the watchdog agencies—CVC, Central Bureau of Investigation, Enforcement Directorate, Intelligence Bureau, Research and Analysis Wing, etc.—public sector undertakings and banks should be made independent of political bosses and specific ministries. Their accountability should be to Parliament and its committees, as in the case of CAG.
Medium-term
Changes in the structure of taxes
The tax structure needs simplification and modification. In a document brought out in 1994, I suggested many changes which remain valid till date. For example, there should be wealth taxation on all forms of wealth, gift tax, and estate duty. This is like the tail wagging the dog. It would force individuals to reveal their income to pay taxes. Corporation tax should be on gross profit and not net so that the costs incurred cannot be manipulated to show lower incomes. Property taxation, which is currently manipulated by fudging the value declared, should be based on site and services valuation. Above all, there is need for simplification of taxation by the elimination of deductions and concessions. Indirect taxes too need to be simplified by levying them only on final and luxury goods… In the case of taxation of services, incomes are manipulated since norms are difficult to establish. For instance, how much fees should a doctor or a lawyer charge? Such manipulation of income by those in the services sector needs to be checked via what is called a presumptive tax. Such a tax would be based on the norms of incomes earned by such businesses/professionals.
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Changes in laws
Many laws are relics of the colonial era and need to be changed to suit the requirements of an independent country. Such analysis of various laws needs to continue but with speed and urgency so as to curb new forms of illegality that are constantly emerging—for instance, with respect to the adoption of new technologies in the financial sector or with regard to internet fraud. There is also the need to plug loopholes wherever they are found. But, as in the case of taxation, they should be simplified for easier implementation and also so that the public can understand them and demand their stricter implementation.
Reform of the executive
The executive, consisting of the bureaucracy, the police and the judiciary, is in urgent need of reform so that its members truly become public servants rather than lording it over the public. They should be answerable not only to their political bosses but also held accountable to the masses. All public dealings, including in the justice system, need to be time-bound. The citizen should know in how much time action will be forthcoming and there should be accountability for delays. Special favours to those in power will need to be checked since that leads to manipulation by the powerful and delays for ordinary citizens.
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India should push for meaningful global action
There is pressure globally to check corruption. After 9/11, the US has been pushing to curb terrorist financing and hawala. Post the global financial crisis the US realised that it was losing $100 billion of taxes via base erosion profit shifting (BEPS) and tax havens. So, along with the Organisation for Economic Co-operation and Development (OECD) it has been battling these features of the global financial architecture. However, the fight remains incomplete because many of the OECD countries are either tax havens or have a part of their territory as tax havens. For instance, Delaware in the US and London in the UK provide facilities to financial institutions, which enable them to manipulate the financial system to their advantage. The global financial architecture is to blame for much of the flight of capital from the developing world, including India. This is in need of urgent reform.
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Technology-related aspects
Technology can help in solving the problem of the black economy provided the human element is honest. However, technology has also led to the emergence of new problems by creating new avenues of illegality—today, there is data theft from banks, the hacking of accounts, hacking of ATMs, phishing, etc. These need to be plugged by thinking ahead.
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Long-term
Political change needed
I have been in favour of half of the legislators facing elections every two and a half years so that the government can potentially change and will have to show to the public that it has delivered what it had promised. To make representation effective, there has to be a bottom-up approach. Leaders have to rise from the grassroots and not drop from the skies in helicopters as is the case at present. They should have served the people through grassroots activity and representation at the primary level (local bodies) before they can stand for any election at the higher levels…Similarly, they should not be allowed to stand from wherever they like and should have served a term in that constituency.
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A major reform required is that political parties function democratically. There is need for internal democracy. Many of today’s leaders come up without serving the people and take over parties. Parties and constituencies are often passed on by political leaders to relatives like property. Such leaders are often contemptuous of the people and represent mostly the interest of society’s upper crust…State funding of elections will not help since it only gives additional funds to the corrupt.
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Reform of the corporates
Accountability of corporates means accountability to the shareholders and society at large. This is only possible if the board of governors and company auditors are accountable. There have to be independent directors on the boards of the companies to serve as public watchdogs. Such directors should be chosen from outside the triad…Directors should be made to pay for the wrong actions of companies they are associated with…
Role of movements
Political change is only possible with a change in the consciousness of the public. This requires the fostering of social movements for change. Such movements also make the public more aware of its rights… Only then will it be possible to dismantle the black economy.
Excerpted with permission from Arun Kumar’s book Understanding the Black Economy and Black Money in India: An Enquiry into Causes, Consequences & Remedies published by Aleph Book Company. We welcome your comments at ideas.india@qz.com.