The Indian demonetisation dummy

Little over a month ago, Wall Street Journal reported the findings of a study that, in the United Kingdom, UK gilt bond futures moved 24 hours before the release of sensitive government data, in the direction that the data suggested. It is possible that some investors had prior knowledge of the data. We will leave that study for more detailed analysis at a later date when we discuss the world of finance. What the story suggests is that the government always has valuable information that others find useful. Information is power.

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 24*7 internet connectivity communicating with remote servers and broadcasting oneself constantly such that considerable private information is available to private providers, 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. Indeed, the government’s actions are so systematic that it puts paid to the notion that governments are slow-moving. Where there is intent, actions follow with alacrity. The implications for the nation, however, are troubling.

Four months after the note-ban exercise was announced and three months after the window for deposit of old currency notes closed, the country has no idea of the amount of currency that did not return to the central bank. In the meantime, the Indian Finance Minister said that the government had no plans of withdrawing the new 2000-Rupee currency note. Of course, the Finance Minister is under no obligation to pre-announce any plans to withdraw it. The government might still do that. But, if one were to take him at face value, the wisdom of cancelling the old 1000-Rupee note becomes questionable. The government has simply made the store of value function of the currency note more attractive, notwithstanding restrictions on cash withdrawal from bank accounts. They are pinpricks that will be easily handled.

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, it can 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 do arise from political funding too. What has the government done about these?

If the abuse of discretionary power is one source of corruption, the digitisation of transactions to put more information in the hands of the taxman increases the scope for corruption immensely. Digitisation is about information trail that the taxman can use to collect the 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 available with the taxman becomes a vehicle for extortion. It is worse if such extortions are not to the benefit of the State coffers but for personal enrichment.

On political funding, the government may have lowered the limit for cash donations but it has made it less transparent than before. Now, there is no limit to the amount of donations that 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. But, the company does not have to disclose the beneficiaries and the amount each of them received. Earlier, in its budget for 2009–10 announced in July 2009, the previous government had provided for 100% tax deduction of 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 need not have to be disclosed, under the Companies Act. But, donations made directly to political parties had 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?

Mind you, the proposed amendments do not affect the information (and may even strengthen it) available to the taxman and the government but it does nothing to improve transparency of funding and hence, transparency of governance. The taxman will have the details of which political party received donations. The information can still be used to threaten or extract more favours from the company or pursue vindictive action against them, as the case may be. One would not have thought that this was the underlying purpose of seeking to ban cash transactions.

Other aspects of digitisation, besides the concentration of information power in the hands of the taxman, are also troubling. 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. The interest shown by foreign agencies in digitisation raises eyebrows.

Some of us expected the ‘note-ban’ decision to be used as a trigger to address the Indian economy’s perennial underperformance and its intrinsic vulnerability due to the pervasive and persistent dominance of informal enterprises that cannot scale up, due to various constraints. Easing labour and other regulatory burdens, raising tax thresholds and reducing arbitrary application of tax lows would help some of them improve economic efficiency. A vast majority of them requires skilling and education to get out of subsistence self-employment that do not constitute a viable entrepreneurship model either for the individuals or for the nation.

The seeds of the note-ban exercise are breeding weeds of information and discretionary power concentration in the hands of the government facilitated by digitisation which, in turn, benefits a few firms. Whatever positive benefits that arise out of this appear marginal and insignificant. The seeds are not sprouting the tree of an unshackled entrepreneurial economy that can scale up to serve a country of a billion plus people. Has the Prime Minister been sold a dummy?

(A shorter version of this article was published in MINT newspaper on March 28)