Excerpt. The big bang effect

People think that corruption is the same as black economy. Definitionally, corruption involves a quid pro quo, either in cash or in kind for work done. The work may be illegal or legal. Someone may encroach on public land and bribe the police and the municipal authorities to keep quiet. I may construct more than I am allowed to and bribe the inspector to overlook it. These are illegal activities, and to get officialdom and the politicians to overlook them I pay a bribe. I make a gain and share that with the state machinery. Alternatively, I may want my legitimate work to be done, such as payment of property tax or income tax, or get a housing clearance or an electricity connection. Because the work is getting delayed and I have to make many trips to the authorities, I may pay a bribe to get the work done.

Sometimes, this kind of bribe is considered as speed money for legitimate work. However, one must understand that first the work is slowed down so as to extract a bribe and then speeded up. Overall, the work is slowed down by creating impediments. Those unable to pay a bribe have to go through endless troubles. Overall, this results in inefficiency in the system. The above examples are of small bribes for small work. For big contracts, such as defence purchases or allotment of resources like coal or spectrum, large bribes are paid. In these cases, the price is inflated, or the work is substandard to account for the bribe to be paid.

Demonetization and the black economy; Arun Kumar; Non-fiction; Penguin; Rs 499

Anyway, the point is not whether the bribes are large or small, but about the quid pro quo. Many activities in the black economy involve no quid pro quo but only an illegality. For instance, in the example of a doctor... she sees 100 patients but only declares twenty, she generates a black income but there is no quid pro quo. I could be a teacher and take tuitions but not declare the income I get from them; I generate a black income, but I do not have to bribe anyone to do so. Most of the cases of black incomes are of this sort and do not involve any quid pro quo.

So, corruption is one aspect of the larger phenomenon of black economy where illegality is committed. No doubt, the two are interlinked. As corruption increases, the black economy increases, and as the black economy grows, corruption grows.

Data show how scams that have come to light (there may be many others that have not been exposed) in India have grown exponentially since the 1950s. The average amount of money involved in the scams also grew exponentially. This is an indication of the growth of the black economy in India.

It is believed that real estate in India is the largest generator of black money. The government in its ‘White Paper on Black Money’ in 2012 also reinforced this view.

Let us understand what happens in a real estate transaction. I buy a property from Ms A. She has already constructed it or she is selling a piece of land to me. In the transaction, no production is involved. Whatever property existed is being transferred to me, and in lieu of that I am paying Ms A the price we settled for. I had also saved money from my past incomes and will transfer that to Ms A. In both directions, it is already existing assets that are changing hands; this is a transfer activity. Any capital gain — what I give Ms A minus what she had paid when she bought or constructed the property — that Ms A earns is a paper gain. The price could have dropped too from what she had paid earlier, and she could have made a loss.

If I pay Ms A a part of the money in white and the rest in black, I have to generate the black somewhere and transfer it to Ms A. So, I am transferring the black part also and there is no generation of black income but a transfer of it. I have to count the black income where it was generated. Otherwise I would be double counting the black incomes.

This distinction between generation of black income and distribution of black incomes needs to be understood. This is the same distinction as in the white economy, where also the capital gains in real estate or in the share markets are not counted in measuring the size of the national income. That is why in my estimation of the size of the black economy, I do not count capital gains in real estate or in the share market.

In the secondary share market, when a share of BHEL is bought, it is not that BHEL gets the money, so production at BHEL is unaffected. The buyer gets the share and transfers his/her savings to the seller. Another exchange has taken place, and capital gain earned is a transfer income.

For the same reason, bribes are transfers and are not to be counted in the estimation of the size of the black economy. In the case of bribes too, I transfer a part of my savings for some work that I want done. The official doing the work has already been paid by the government for the work to be done. She is extracting another amount from me for not harassing me.

The argument that transfer incomes are not to be counted does not mean that they do not have an impact on the economy. They do affect distribution and consumption. An agriculturist getting a big capital gain on the land she has sold on the city periphery may buy cars and refrigerators. The media have run stories of BMWs parked next to the cows in the yard of a farmer. The sellers of such land may invest their money in opening a dhaba or starting a transport company. So transfer incomes do have an economic impact.

There is much talk of remedies for the black economy. Demonetization was thought by the PM to be a remedy. During the Ramdev and Anna Hazare movements in 2011-12 too, people talked about what could be done to control the black economy. A view exists that the problem is economic and can be solved by making markets work and by the use of technology. The government currently believes that demonetization has not worked, but that going ‘cashless’ via use of digital technology will help. Many have proposed that black money can be tackled by some simple steps.

I have often argued that we are like the seven blind men and the elephant. Each blind man touches a part of the elephant and thinks of it as something else — a broom, a hosepipe or a pillar of a building. Since an overview is missing, none thinks it is an elephant he has touched. The problem of the elephant remains unresolved. No solution to controlling the black economy, such a complex and all-encompassing social problem, can emerge from taking a partial view of it.

Threesome: Underlying the black economy is a ‘triad’ consisting of corrupt businessmen, politicians and the executive. A 2012 file image of Members of India Against Corruption (IAC) protesting outside Mukesh Ambani’s residence in Mumbai, after the industrialist was named in a list of Swiss Bank account holders released by current Delhi chief minister Arvind Kejriwal

There have been dozens of committees and commissions since 1948 that have analysed aspects of the problem. They have dissected and explained the problem. They have also suggested many remedies, a large number of which have been implemented. But the problem has only grown, since it is not a narrowly technical or an economic problem.

The problem is, above all, political. I have been arguing that underlying the black economy is a ‘triad’ consisting of corrupt businessmen, politicians and the executive. Unless this is disbanded, the black economy will continue to exist and to grow. This nexus among the corrupt is convenient to the three partners, and since they are the ruling elite they not only do not wish to disrupt it, they do all that they can to protect it. They find ways to circumvent whatever new laws and rules are devised.

To plug loopholes, new rules and laws are devised, and then people find ways of circumventing them. The end result is more and more complex laws, which are in fact easier to violate.

A law is a law in letter and spirit. India has wonderful laws of every kind but most of them are violated. The spirit is not willing. The elite find ways of circumventing all the laws. People jump traffic lights, violate environmental laws or building and zoning bye-laws, industrial laws or food safety norms. All these rules and laws are required at a minimum for a society to function.

I have been arguing that there is no perfect law. If the spirit is not willing, ways can be found to circumvent any law. There have been so many changes in the law to prevent defections from parties. The ‘aya rams and gaya rams’ of the parties were changing loyalties for a consideration. Laws have been promulgated to stop this practice but without much success. Once one has defected in the mind, because one’s only desire is to get to power, nothing can stop that person from defecting.

When payment above ₹20,000 in cash by businesses was disallowed, people started paying ₹19,900 in cash. It caused inconvenience, but that was acceptable. Now the government has announced that payment above ₹2000 to political parties has to be listed. Earlier, this threshold was ₹20,000, and 80 per cent of donations to political parties was in amounts less than this. What stops people from donating in multiples of ₹1900 now. It is an inconvenience, but so what.

The elite are not only feudal but want to get ahead in the race to accumulate capital by any means. The result is a lack of consensus as to how to run society. It is a case of each for themselves — a kind of jungle raj . This missing consensus needs to evolve, and that can only happen politically.

Arun Kumar is currently the Malcolm Adiseshiah chair professor at the Institute of Social Sciences, New Delhi

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