Excerpts from Com. P.V. Raju Memorial Lecture

Demonetisation, corruption and black money

Print edition : November 24, 2017

At an SBI branch in Hyderabad exactly a month after demonetisation was announced. Photo: G. RAMAKRISHNA

Prime Minister Narendra Modi addressing the nation from the ramparts of the Red Fort on August 15, 2017. Photo: R.V. Moorthy

Customers waiting outside a State Bank of Mysore branch in Anchetty in Krishnagiri district, Tamil Nadu, in December 2016, to exchange demonetised notes. Photo: N. BASHKARAN

Raghuram Rajan, former RBI Governor. Photo: Ramesh Sharma

An analysis of the unfolding dangers of opportunistic politics in the era of post-truth.

ON the evening of November 8, 2016, Prime Minister Narendra Modi went on all media channels to announce that his government had decided to demonetise 500-rupee and 1,000-rupee currency notes “to break the grip of corruption and black money”, and announced that the “five-hundred and thousand-rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper”. It is not that demonetisation as a monetary measure is not resorted to by other countries. In fact, the Economic Survey 2015-16 does refer to over 20 countries resorting to demonetisation with different purposes and different rationales, with varying results. But the manner in which Prime Minister Modi made the announcement brought a certain sensationalism to this measure of the government. “Demonetisation” is a financial or monetary measure, and normally involves the central bank or the Finance Ministry. But in this case, neither the RBI Governor nor the Finance Minister came to announce it, raising serious doubts whether they were involved at all in the decision-making. The Prime Minister took it upon himself to personally announce the decision for almost 40 minutes in Hindi, and another 40 minutes in English. The speech did not stop with the policy decision and soliciting the people’s support for it but went on to list over 20 points of procedural detail which would normally be part of any government notification. But the choice of such a method of announcement was obviously a well-designed strategy to make people believe the priority that the Prime Minister was according to wiping out the past evils. As many behavioural psychologists or even behavioural economists would know, the less one knows about the reality behind the numbers or the procedures, the more awe and respect people would develop for them and for those using them. Such political strategies are increasingly in evidence across the world. There was no sign of any financial or economic crisis. On the contrary, the Prime Minister began his speech by describing how, when he took over, there was a feeling that “I” in the BRICS was shaky, and how, under the new government, India became strong and emerged as an economy with the highest GDP growth. True, the magnitude of the measure of withdrawing almost 86 per cent of currency in circulation was an extraordinary measure that needed convincing the people. But more than that, much of the speech was devoted to whipping up people’s anger against corruption and black money, and building on people’s imagined notion of black money stashed in cash that could be wiped out. There was an emphasis that whatever “pain” people were likely to face would be short-lived, and wiped out by the gains of unearthing black money and wiping out corruption.

Several questions

Demonetisation did more harm to the economy, and certainly did not make a big dent on corruption or black money. This leaves us with several questions: Why did Prime Minister Modi choose demonetisation as an instrument to demonstrate his commitment to flush out black money and control corruption? What made him decide on demonetisation as a measure that would shore up his image as a leader with a will to deliver his promises? Or was he totally oblivious of the ineffectiveness of demonetisation and the adverse consequences it was likely to bring about?

It is difficult to believe that Prime Minister Modi was not aware of the limitations of demonetisation in dealing with corruption and black money or its adverse effects on the economy and the people at large. The available evidence shows that he was aware of these consequences. For instance, the former RBI Governor has broken his silence, and informs us in his latest book I Do What I Do that in February 2016 he was orally consulted on the advisability of demonetisation to rein in black money. But his advice was that demonetisation was not an appropriate measure, and that whatever its long-term benefits, they would not outweigh short-term economic costs, and that there were potentially better alternatives to achieve these goals. A written note was asked by the government. The RBI put together these views and also outlined the preparations needed and the time it would take. Besides, the RBI note also flagged what would happen if the preparation was inadequate. He also writes that the government (possibly the PMO) subsequently set up a committee to consider the issue and a deputy governor of the RBI also attended the meetings of the committee. It is clear that the Prime Minister’s decision was taken with the full knowledge of the limited impact that demonetisation would have on black money and corruption and the adverse consequences it would have on the economy and people. Of course, there was also wide speculation in the media that the Prime Minister also lent his time to a Pune-based group of chartered accountants passing as economic advisors with special knowledge of the Indian economy in contrast to “Western” knowledge.

This raises a critical question: Why did the Prime Minister, with such an awareness, choose demonetisation to demonstrate his commitment to handle black money and corruption? To answer this question one may have to pay more attention to the nature of transformation in the public imagination about the notions of black money and corruption. Somehow, the enormous intellectual energies spent on critically debating demonetisation did not pay adequate attention to contextualising the images constructed around black money and corruption, and the effective way in which these images were put to political use by Prime Minister Modi.

One explanation is that the critics were overly obsessed with the financial and economic impact of demonetisation and neglected to pay adequate attention to the political design underlying it. And the other explanation is that just as the larger public was mesmerised to believe, the critics also were trapped in the belief that the Prime Minister was setting an agenda to unearth black money and check corruption through demonetisation.

The following sections attempt to contextualise corruption and black money and then understand how the changing images of these phenomena have been congenially turned to serve the political ambitions of the Prime Minister.

Neoliberal regimes and corruption

What follows is the proposition that the emergence of neoliberal regimes across the world is not only at the root of the widespread eruption of corruption and black money, but also instrumental in raising them to phenomenal magnitudes, so as to shift public attention and imagination of these transactions to “scam” scale that is associated with piles of cash stashed away. For the public, unearthing this cash also requires a strong and determined leadership of virtue against the forces that perpetuated the evil. Riding on this public imagination needs a strategy that appeals to their imagination and could rouse their emotions along with building up of a self-image of leadership of virtue and unwavering strength to cleanse [society of] the evil.

Let us first have a quick overview of the metamorphosis of the concept of corruption and the shifts in the imagery and in the popular imagination. Corruption has an antiquity dating back to ancient times, and Kautilya’s Arthasastra indeed discusses its pervasiveness extensively as a social aberration with a long history even by that time. Notwithstanding the history, for quite some time even after the Second World War, it was not politically correct or not fashionable in social science research to work on corruption. But all that has changed. By the mid 1980s there was a surge in “corruption studies” in social sciences. This surge is not accidental but rooted in the developments that followed the unfolding of the effects of the “Washington Consensus”.

It was not a mere coincidence that “liberalisation, privatisation and globalisation” and the global interest in corruption research emerge from the mid 1980s. In 1986, a separate international research journal called Corruption and Reforms was launched. By the mid 1990s three reputed social science journals, the International Social Science Journal (149, September 1996), the IDS Bulletin (Vol. 27, No. 2, 1996) and the Third World Quarterly (Vol. 20, No. 3) had brought out special issues on the subject of corruption.

Nearer home, “…research on corruption in the Asia-Pacific countries has mushroomed into a growth industry since the 1990s. Indeed, globalisation of corruption has generated tremendous interest among many international organisations on finding effective measures to curb corruption in Asia-Pacific region and other parts of the world.”

The World Bank established an Anti-Corruption Knowledge Centre. The UN Convention Against Corruption (UNCAC) was adopted in October 2003 and its provisions have legally binding international anti-corruption instruments for countries that ratify the convention. It was signed by 140 countries. India signed the convention in 2005 and ratified the same in 2011.

Broadly, corruption is understood and defined in two ways. One is in the narrow sense of the term, viz. corruption that is “petty”, “street-level”, “day-to-day”, or “retail”. It is widely associated with “bribes”. The other is “grand” corruption associated with large monetary sums or transfer of resources generally involving high-level political leaders, bureaucrats and big business. The widely used definition of corruption—“misuse of public office for private gain”—has been largely associated with a narrow sense of corruption that is familiar since the times of Arthasastra, which shows its pervasiveness even in those times: “Just as it is impossible not to taste the honey (or the poison) that finds itself at the tip of the tongue, so it is impossible for a government servant not to eat up, at least, a bit of the king’s revenue. Just as fish moving under water cannot possibly be found out either as drinking or not drinking water, so government servants employed in the government work cannot be found out (while) taking money (for themselves).”

It is in this “narrow” sense that corruption was understood for a long time, and most of the time, and when people talked about corruption, it related to the bribes associated with departments like police, revenue, commercial taxes and forest and public utilities like water, electricity, etc.

But during the past three decades there has been a gradual change in the corruption perception of the public from concerns of “petty” corruption to that of “grand” corruption. The push and spread of structural adjustment programmes rolled out across the countries at the behest of the “Washington Consensus” and the resulting restructuring of development strategies from state-led process to corporate-driven agenda that ripped open the natural resources and the key industrial and infrastructural sectors to privatisation is at the root of this “gestalt” in corruption from what people encountered as “petty”, “day-to-day”, “retail”, “street-level” notion to that of “grand” scams. In the name of “competition” and “efficiency”, liberalisation and privatisation were extensively pursued as the core of economic reforms. It is ironical that what emerged out of the economic reforms was neither competition nor efficiency but “crony capitalism”, which could acquire hugely valuable natural resources dirt cheap in the name of priority allotments and access to contracts for infrastructure projects like highways, airports, and ports, and privatisation of public utilities like power projects including hydroelectric projects and telecommunications. Socially critical public goods like education and health became the most sought after avenues for private profit. It may sound paradoxical that the entire theoretical foundation for liberalisation and privatisation was based on the proposition that the commanding heights of the state or public sector in the economy results in excessive regulation and controls like licensing that lead to “rent seeking”, i.e. corruption in the form of bribes to get licenses, permissions and clearances, resulting in “directly unproductive profit seeking”, and hence, it was argued, the state should withdraw from direct economic activities and create a regulatory system that would govern the private sector.

But in reality, neoliberal reforms gave birth to extensive “crony capitalism” with powerful self-interested actors gaining control over the state to their advantage, a process that has come to be known as “state capture” or “regulatory capture”. The capital can create policy strategies like “special economic zones”. “Crony capitalism” gains the ability to get the laws consciously “adjusted” to its advantage and to the detriment of the public good. When business interests succeed in shaping the legal, political or regulatory environment to suit their own interests and distort public policies, it would provide unlimited opportunities for corruption. Thus, economic reforms and the resulting “crony capitalism” are at the root of the eruption of corruption as “grand scams” that has come to occupy the public notion of corruption, and revulsion to those associated with it.

It is very difficult to objectively measure corruption. Most corrupt transactions transpire out of public view and the parties involved have incentives to keep it that way. But the “grand” scams are often hard to hide, and the media often, to sensationalise, focus on scams involving billions of rupees worth of sleaze. In the post-liberalisation era many such scams did come out in public in India. One inventory of the biggest public corruption scandals covered from the beginning of the 21st century includes 28 scams involving hundreds of thousands of crores of rupees. The average value of these scams was Rs.36,000 crore and the median value Rs.12,000 crore. Of course, these scams include the ones at both the State and the Union government levels, and also involve different political parties in power. But one regime that was in power at the centre for the longest time during this period was the United Progressive Alliance (UPA). Perhaps, never in the recent history of neoliberal regime, corruption scandals reached such a meteoric peak nor was there such an amount of media attention that provoked extensive public revulsion against the Congress party that headed the UPA regime.

Here are a few select scams under the UPA which could be seen as textbook cases of the unfolding of economic reforms that unveiled the emergence of “crony capitalism”. It was shocking to the conscience of the nation to be a witness to the blatant mortgage of the primordial natural resources like earth (land and coal), water (hydroelectric projects), air (2G) and sea (offshore oil) as the sources of amassing wealth by corporate and political interests. With the coal scam (2012), the government was estimated to have suffered a loss of Rs. 1.86 lakh crore. The CAG presented a report and stated the irregularities involved in the auctioning of 194 coal blocks. The government decided not to auction coal blocks between 2004 and 2011. The coal blocks were then sold to different firms. Many of these firms were owned by or closely linked with sitting politicians. This decision led to huge losses in terms of revenue.

In the name of development of hydroelectric power in Arunachal Pradesh, about 160 MoUs were undertaken in 2013-15 between the Union and State governments and big capital in the form of public-private partnerships (PPP). Clearances were obtained flouting all reports from feasibility, environmental impact and public hearing through the collusion between political leaders, big business and bureaucrats.

The 2G spectrum scam of 2008 was one of the biggest scams in India in which the Telecom Minister was charged for issuing 2G licences to private telecom players at very cheap rates. No rules and regulations were followed but only favouritism was preferred while issuing the licences. The Comptroller and Auditor General (CAG) estimated that the scam caused a loss of 1.76 lakh crore to the government.

The offshore allotment of oil blocks and the manipulation of payments due from Reliance Offshore has been a continuing saga of several hundred crores of rupees of loss to the government, often caught up in unending litigation. Even international sports events to boost the image of the regime were turned into a source of “grand” misappropriation. The Commonwealth Games Scam (2010) involved an estimated amount of several thousand crores of rupees, involving Congress politicians, bureaucrats and corporate bigwigs. The charges involved payments made to non-existent parties and inflated prices while purchasing equipment. By the end of the UPA regime in 2014, the “gestalt” or steep shift in the public perception of corruption being seen in narrow, day-to-day retail, local bribes to that of “grand” scams got crystallised. The shift from “retail” bribes-based corruption to “grand” kickbacks was not confined to the parties in power at the national level but spread to the States as well.

And in this spread, what is noteworthy is that the more reform-oriented the State, the more seems to be the progress in the direction of scams. The model is that parties in power would avoid extraction of rents from government programmes, especially welfare programmes. They would also go a step further and introduce more populist welfare programmes with better vigilance, but go all out for mega projects, land allotments and big contracts that would spin more money.

“For instance, one hypothesis about why retail corruption has declined in States such as Andhra Pradesh and Tamil Nadu compared to Bihar is that in the former States, the ‘bribes’ politicians (and bureaucrats) used to extract from service delivery or entitlement programmes have been replaced with kickbacks (often larger in magnitude and less cumbersome to collect) from infrastructure projects or contracts.” The authors of this observation were aware that such hypotheses were difficult to test, but confirm that this view of shift in corruption was backed up by multiple conversations the authors had with bureaucrats, politicians, and academics. (The reference to Andhra Pradesh here is to the “AP land scam” in which the CAG alleged that the allotment of almost 90,000 acres of land, valued at Rs.1,784 crore, by the A.P. government during 2006-11 was characterised by grave irregularities involving allotment in an ad hoc, arbitrary and discretionary manner to private persons and entities at very low rates in exchange for investments in companies owned by the son of the then Chief Minister. The T.N. case refers to the amassing of wealth by former Chief Minister Jayalalithaa.)

It is not that “retail” corruption had vanished from the daily experience of the larger public. On the contrary, there are estimates that suggest that the total extent of bribes forced from the public continues to be as large or even more than the total sum involved in “grand” corruption. But the public anger and revulsion has turned entirely against the latter with far-reaching political implications. The mobilisation against corruption was largely based on the reaction of the middle class and the poor against the scams. The India Against Corruption (IAC) movement, launched by Anna Hazare, Arvind Kejriwal and their colleagues and supporters, shot to prominence in 2010 following revelations of massive corruption scandals in the final years of the UPA-II government.

This extensive anti-corruption mood of the nation was an opportune moment for the prime parties like the Bharatiya Janata Party (BJP) to capitalise in the political arena. It needed a political leader who could capture this public imagination by creating a belief that he or she could clean the nation of the scourge of corruption. There is an element of remarkable political magic in this whole design of constructing the weapon of demonetisation to destroy corruption and black money. The magical deception is in keeping the public at large in the dark on the root cause, viz., economic reforms, since the launch of which corruption has exploded, and making them believe that all corruption was the deed of a political party and all proceeds of corruption were in black money stashed up in cash. And this in spite of all evidence to the contrary.

How are corruption spoils held? For example, let us look at a real life case of monumental amassing of wealth through corruption by a political leader and how the illegal wealth was held by him. The former Chief Minister of Jharkhand, Madhu Koda, was arrested in 2009 and successfully prosecuted. The case revealed that his ill-gotten wealth was invested in 700 shell companies, in mines, in an island offshore of India, in real estate, sponge iron plants, private colleges in his constituency, transport and trucking as far away as Punjab and Haryana, hotels in New Delhi and Puri, a theme park, distilleries, print media and TV channels. Much of the corrupt black money amassed thus flows out as white. And where is the cash for the demonetisation to unearth?

Myth of seeing flow as stock

Let us turn to the basic known facts about the nature of black money, the sources of its generation, the forms in which it is held and the means of mitigating it. In simple terms, “black money” is that which escapes taxation. An equally important simple fact is that black money is a flow, not a stock, meaning that it cannot be captured, accounted and eliminated in one stroke. The existence of “black money” in the Indian economy is not a new phenomenon, but the magnitude of it has reached phenomenal proportions with the unfolding of the economic reforms since the 1990s. There have been estimates of the black economy and the “black money” generated in the country from time to time. Like the national income, the estimates of “black money” refer to the sum generated in an accounting year. Since it is not a stock, black money generated in one year may find ways of investment or use as white money in the successive transactions. Since accounting of all the shadow activities is by certain attributed values, the estimates could vary widely.

According to the World Bank, India’s “black money” in 2007 was about 23 per cent of its gross domestic product (GDP). Since there were no “reliable” estimates of “black money” generated in India and held within and outside the country, the UPA government commissioned the National Institute of Public Finance and Policy (NIPFP) to estimate “black money”. Though its report was submitted to the Finance Ministry in December 2013, the then Finance Minister did not place it in Parliament. Nor has his successor, Arun Jaitley, done so. But unofficial sources reveal that the estimated “black money” in 2012 was of the magnitude of 75 per cent of the GDP. And much of it is held in the form of gold, real estate, land, shares and stocks and offshore accounts.

According to some estimates, only about 6 per cent of the “black money” is held in the form of cash. “Black money” is a continuous flow as a part of the illegal and legal activities that are part of the socio-economic system. Illegal sources of black money that escape the tax network include smuggling, bootlegging, trafficking in drugs and sex- and crime-related extortions. Estimates suggest that criminal and illegal sources account for only a fraction of the total black money flow in the economy, while almost three-fourths are generated from the legal production, service, financial and trade activities.

Cost manipulation, manipulation of wage data and under-reporting of production lead to unreported income or profits from privatised public goods like education and health services, which have emerged as a large source of “black money” flow through unreported capitation and other charges. Corruption in State services like revenue, police, forest, etc., are the familiar sources of the so-called bribes. Apart from these retail types of corruption, there has been, as observed earlier, a growing “grand” corruption through allotment of access to natural resources like land, mines and infrastructure contracts. But relatively less known in the popular perception is the “black money” generated through international trade and financial transactions. These transactions are not only the largest channel for capital flight of the “black money” generated in this sector but also the main conduit for outflow of “black money” abroad.

‘Misinvoicing’ and black money

Since in the debate following the demonetisation, the international trade as the major source of black money and also as the mechanism for siphoning of resources abroad, and often to offshore tax havens, did not receive as much attention as it deserved, I spend some time in placing before you some academically and administratively well-known facts. Besides “hawala” transactions and illicit “hot money” through balance of payments, deliberate trade “misinvoicing” (or transfer pricing) constitutes almost 80 per cent of the “illicit financial flows” from developing countries. For quite some time, because of the complexity in obtaining the data on the comparable actual and reported prices of thousands of goods traded, estimating the “black money” generated through mispricing (over-invoicing of imports and under-invoicing of exports) was rather difficult. But more detailed data flowing from the International Monetary Fund on trade transactions has enabled Global Financial Integrity (GFI) [a U.S.-based think tank] to come out with fairly reliable estimates of “illicit financial flows” from developing countries since 2003.

“Illicit financial flows” refers to the movement of money that is illegally earned, transferred or utilised. This encompasses a broad range of activities: official corruption, laundering of criminal proceeds, terrorist financing and tax evasion. “trade misinvoicing” or over-invoicing of imports and under-invoicing of exports, involves falsifying the values listed on commercial invoices. This is an extraordinarily common tool by which corporations and individuals in developing countries avoid import or export tariffs, alter their income tax positions, evade foreign exchange controls or simply move their wealth to developed countries or tax havens. “Trade misinvoicing” is also a common method of shifting the proceeds of crime or corruption and is typically referred to in these cases as trade-based money laundering.

Deliberate “mispricing” or “misinvoicing” takes two forms, viz., “under-invoicing of exports”, which hides part of the export earnings which are retained in undisclosed foreign accounts; in addition, under-reporting of export earnings shows lower profits, resulting in tax avoidance in the domestic country. Similarly, “over-invoicing of imports” would show an inflated domestic cost of production and reduced profits in the balance sheet, evading domestic taxes to that extent. In addition, inflated payments shown for imports are retained in undisclosed foreign accounts. According to one report, in 2014 India accounted for half of global “mispricing” disputes.

The available estimates by GFI show that between 2003 and 2012, in a matter of 10 years, developing countries lost $6.6 lakh crore in illicit outflows. The top five exporters of illicit capital over this period were China, Russia, Mexico, India and Malaysia. There was a surge from India in 2009 and the country moved from fifth to fourth rank in this activity. India, during this period, accounted for a cumulative illicit outflow of about $440 billion or about Rs.30 lakh crore, which works out to an average annual outflow of about $44 billion or Rs.3 lakh crore. All this is what is described as “black money” and none of it is in Indian currency or in Indian accounts.

To understand the transactions in trade “mispricing”, even at the risk of sounding as an academic exercise, it may be useful to exemplify the process by an actual case under investigation. A typical case of “mispricing”, in this instance over-invoicing of imports, as a means of generating abnormal margin of profits that escape the tax network and end up as black money in offshore accounts of the corporate entities, could be illustrated by a live case of the Adani group of companies. This is about the contract to develop two electricity transmission networks in Maharashtra. This could also be used as a textbook case to illustrate as to how as a part of a structural adjustment programme in the name of reforms in the public utilities, the power sector faced liberalisation in the form of unbundling into segments of generation, transmission and distribution, and privatisation of these segments ending up as fertile sources of black money.

But, for the present, let us confine to this story of the contract for development of transmission network to illustrate “transfer pricing” or over-invoicing of imports. Based on a 97-page file of the Directorate of Revenue Intelligence’s (DRI) investigation, which it could access, The Guardian (August 15, 2017) reported in all forensic detail the process of generating profits through over-invoicing that escape taxation and end up as “black money”.

Here is the simplified version of the case. In 2010, an Adani company (AC) was awarded a contract to develop two electricity transmission networks in the northeastern parts of Maharashtra. This company (AC) used another Adani subsidiary (PMC projects) to source equipment it needed to build the network. PMC, in turn, sub-contracted the work to a company in Dubai (EIF). EIF procured equipment from South Korea and China and sold it to PMC in India. EIF placed about 26 orders from Hyundai Heavy Industries and procured equipment paying $65 million and sold the same to PMC for $260 million, with a clear mark-up of more than 400 per cent. EIF also purchased equipment from three Chinese companies and sold them to PMC with a mark-up of 860 per cent. The total assessable value of the marked-up invoices at which EIF sold to PMC was estimated at Rs.1,500 crore.

All this was paid by the Indian company through huge borrowings from Indian banks. Possibly this forms part of the stressed accounts of banks in India. While this will end up as a clear profit for the company in Dubai, where profits are nominally taxed, the cost of the transmission project in Maharashtra gets inflated and to that extent people end up paying inflated charges for electricity. Well, what does AC in India get? EIF was directly controlled by the Adani Group since it was owned by EIH, another group company, which, in turn, was owned by Asankya Resources Family Trust based in Mauritius and headed by one of the Adani brothers.

What is important to note here is that those involved in illicit financial outflows that get parked abroad are not content with the “black money” that hardly earns any returns in the tax havens. They would like to “round route” it as white money for making profits in the domestic financial markets or stock exchanges. In 1983, the Government of India entered into a double taxation avoidance agreement (DTAA) with Mauritius, by which if a registered company in Mauritius pays taxes in that country on profit or capital gains from investments in India, it need not pay taxes in India.

In the early 1980s, the financial markets or stock exchanges in India were hardly open for foreign investments, and the profits earned on these transactions were insignificant. But with the launch of liberalisation and economic reforms, the Government of India opened up the financial markets (stock exchanges) for foreign institutional investors (FIIs) and the economy for foreign direct investment (FDI) on liberal terms.

As part of promoting the FIIs in the stock market, the government in the 1990s extended the Mauritius-type DTAA to Singapore and Cyprus. With the opening up of financial markets, opening of offshore accounts and shell companies of those trading in the Indian stock markets boomed. Round routing of the spoils of illicit financial earnings made by “misinvoicing”, hawala or other routes of money laundering found the Indian financial markets as “white money” through shell companies in several tax havens including Mauritius, Singapore and Cyprus.

The 1990s also saw the invention of the Participatory Note (PN). PNs were not registered to trade in Indian domestic capital markets, and the nature of beneficial ownership or identity of the investor remains unknown. The result is no one can identify the ultimate holder of the PN. Unlike the stringent know your customer (KYC) norms that applied to domestic investors, the KYC norms for PNs were criminally lax. Those pushing their illegal wealth back into India took huge advantage of the PN tool. Most of the money was funnelled through the PN route by opening sub-accounts with FIIs.

Much of the black money held abroad was round routed into the Indian stock exchanges through PNs bought in Mauritius through front shell companies. According to certain estimates, a substantial proportion of FII investments were made through the PN route. And that almost all FIIs were running sub-accounts for dubious clients was well known, but repeated RBI warnings against it were ignored. In all this, there is hardly any hard cash involved, nor is the accumulation in the Indian banks but in offshore. Well, what does demonetisation do to curb this?

Since trade “misinvoicing” accounts for a substantial part of illicit financial flows, curbing it should be the major focus of measures of controlling black money. It requires cooperation between trading countries in sharing information on country-specific information on goods trades and their prices. Much more important is to boost customs enforcement by equipping and training officers to better detect the international “misinvoicing” of trade transactions. Trade transactions involving tax havens should receive highest scrutiny by customs, income tax and law enforcement departments.

Politics of the era of post-truth

As shown earlier, it is difficult to believe that the Prime Minister was not fully aware of the limited effect of demonetisation on corruption and black money and about the adverse effects on the people and the economy. The criticism against demonetisation is not based on any special knowledge but that which could have been available as advice to the Prime Minister, and there is evidence that he did get such advice. Possibly there might have been some overestimation of the extent of demonetised currency not reaching the banks and certain underestimation of the adverse impact. But it is certain that the Prime Minister had adequate information on the possible impact to a substantial extent. But then, why did he venture into this demonetisation measure that, as some people feel, has taken some shine out of his image? For an answer to this question we may have to go beyond conventional economic explanations to the nature of politics in this era of post-truth.

The Oxford English Dictionary comes out every year with its ‘International Word of the Year’, and its choice for 2016 was “post-truth”. “Post-truth” is defined as “…relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief”. In this context, truth, meaning a description of the world as it really is, has ceased to be important. Once corruption has evolved in the imagination of the people as big scams, and once people are made to believe corrupt accumulations of black money are hidden in piles of currency, the truth of describing that spurt in corruption scams were sparked by the neoliberal reforms and that much of what is accumulated as black money is hardly kept in cash does not seem to matter much to the people at large. It is on this post-truth “reality” that Prime Minister Modi has built up his political strategy of the grand narrative of destroying corruption and black money with demonetisation.

Ever since the big corruption scams occupied the political space and mobilisation of public opinion against the corrupt regime by movements like IAC offered ideal conditions for exploiting people’s images by whipping up their emotions, Modi saw a great political opportunity in building up a grand narrative against corruption and black money from the early days of the campaign for the 2014 Lok Sabha election.

The BJP Election Manifesto 2014 made corruption and black money the prime part of the “imminent” agenda. It began with the accusation: “All pervasive corruption under the Congress-led UPA has become a ‘National Crisis’.” It went on to add that by “minimising the scope for corruption, we will ensure minimisation of the generation of black money”. It also stated that the BJP was “committed to tracking down and bringing back black money stashed in foreign banks and offshore accounts. We will set up a task force for the purpose and recommend amendments to existing laws or enact new laws”.

The space and priority accorded to corruption and black money in the manifesto was to match the anger of the people against these issues. Narendra Modi launched a nationwide campaign trail on the plank of fighting corruption. It was a different matter that his whirlwind campaign by chartered planes and helicopters across the country was supposed to have been funded by the likes of Adani; his major theme of campaign was telling people that the Congress stood for the “ABCD of corruption”—A for Adarsh, B for Bofors, C for Commonwealth Games, and D for “demand ka karobar”. He wanted to demonstrate that the fight against corruption was on top of his government’s agenda, and on the very first day of his office, May 28, 2014, he announced the constitution of a Special Investigation Team (SIT) headed by a retired judge of the Supreme Court to probe “black money” abroad.

It was rather pathetic and also the reality of the post-truth era that the Congress’ manifesto 2014, which carried a long list of “landmark legislations” of the UPA-II (2009-2014) that included issues ranging from food security, land acquisition, sexual harassment, Lok Pal and Lok Ayukta, RTE, NGT, street vendors and abolition of manual scavenging, was overwhelmed by the deadweight of the corruption image. The corruption narrative was designed to keep alive people’s anger against the previous regime, as much as their hopes on salvation in the present regime.

As the months passed, the party agenda gradually took the shape of a one man-agenda: that of Prime Minister Modi. On August 15, 2015, from the ramparts of the Red Fort, the Prime Minister announced: “I want to reaffirm that this nation will get rid of corruption.…we have to start from the top.…corruption is like termite, it spreads slowly, reaches everywhere but it can be beaten with timely injection. …there is work to be done. …with your support, I pledge a corruption-free India.” There were also measures like a new black money Act with provisions for strict penalties and a new income disclosure scheme for domestic black money. As part of the 2015 Budget, the Prevention of Money Laundering Act was amended with provisions for confiscation of domestic assets if illegal assets are located abroad, and renegotiation and revision of DTAAs with Mauritius, Singapore, Cyprus and Switzerland were initiated. Even the notorious PNs through FIIs were regulated through SEBI intervention.

Although these measures in themselves were important steps, none of them got as much public attention as to raise the intensity of the feeling among the public that the government was doing something that would effectively bring the corrupt to book and “black money” to confiscation. Added to this was the growing public feeling that the government drew a near-blank in bringing back “black money” hoarded abroad. If these feelings were allowed to pass, all the political gains that were designed on the wave of anti-corruption were in danger of vanishing. It was to stem this danger of popularity downswing that the demonetisation measure came, with all the mythological refurbishments to bolster the grand narrative of fighting corruption and “black money”.

When the Prime Minister went on to personally announce the demonetisation decision on November 8, 2016, he was trying to build moral binaries by painting the previous regime as all evil, and that the task of the present regime was to cleanse [society of] it. In the process, what unfolds is not as much as the regime or the government, but Modi himself with a sacred mission. In this, full advantage was taken not only of the corruption syndrome associated with the UPA but also its images of indecision, weak leadership and “policy paralysis”. Modi began by saying that “there comes a time in the history of a country’s development when a need is felt for a strong and decisive step”, and that step was demonetisation, to break the grip of corruption and “black money”.

He went on to say that “time and again, I have seen that when the average citizen has to choose between accepting dishonesty and bearing inconvenience, they always choose to put up with inconvenience. They will not support dishonesty”. Even as he appealed to their image of “black money” as cash, he turned rhetorical: “Which honest citizen would not be pained by reports of crores worth of currency notes stashed under the beds of government officers? Or by reports of cash found in gunny bags? … So, in this fight against corruption, black money, fake notes and terrorism, in this movement for purifying our country, will our people not put up with difficulties for some days? I have full confidence that every citizen will stand up and participate in this ‘mahayagna’.”

He went on to appeal: “…after the festivity of Diwali, now join the nation and extend your hand in this imandari ka utsav, this pramanikata ka parv, the celebration of integrity, this festival of credibility.” The entire speech was also replete with morality binaries, with him as honest, clean, credible and of unimpeachable integrity, while the previous regime was all indecisive, immoral and dishonest. Within weeks, as the adverse effects of demonetisation unfolded and even as people were complaining about the inconveniences suffered, instead of addressing them, he tried to show that the criticism was by evil forces against him. “I know what kind of forces and what kind of people are against me now ...They will not leave me alive. They will destroy me.”

He was alluding to his earlier narrative “…those who looted the country for 70 years” and to contrast, he claimed: “I am a fakir they are out to destroy.” And went on to add: “They thought if they pull my hair, I will stop and do nothing. I will not stop doing these things, even if you burn me alive.”

The rhetoric seemed to have worked, emotions roused, beliefs both in the leader and his determination to do “shuddhi”, or cleansing, of the nation strengthened. What puzzled many was that even as they suffered, people chose to be carried away by his rhetoric rather than look at the factual analysis of the critics.

A group of cultural anthropologists raised the question: “Why did the experience of suffering across the nation not manifest in mass protests or mobilisation but in fact brought BJP back to power in 2017 in Uttar Pradesh?” The suggested answer is that in the wake of economic liberalisation since 1991, there has been “erosion and slow death of civil society” and the resulting “passive conditions of citizenship”. Perhaps not. The truth may be close to the “post-truth” era in politics which is also a product of neoliberalism which brought a great divide among the people—with the vast majority being “left behinds” of the economic liberalisation, while a few including those in scams and those outside in the corporate world, had most of the share of growing wealth.

For the people at large, what counted was their own perception and imagined “reality” that was perpetuated by the popular media and exploited by opportunist politics, rather than laboured intellectual analysis. It was, to repeat post-truth, objective facts which were less influential in shaping their opinion than appeals to emotion and personal belief. It has been happening to the imagination of “left behind people” elsewhere—in the United States and in the United Kingdom during Brexit. And it happened for Modi. Even if a superior narrative called him a failure, in popular perception he was acceptable because he tried. Even if he failed he won the hearts of the “left behind people” (who were often the butt of ridicule as people waiting for Jan Dhan accounts to be filled by the “black money” unearthed) because of the sick venality all around.

As a perceptive political commentator pointed out, there are three significant aspects one can observe in the Modi political narrative. The first is moralisation of politics, the second is the infusion of emotion into policy debates, and the third is the reduction of all debate to a single question: whether one is in support of him or not?

Any policy criticism is likely to be brushed aside as criticism of the leader, the emerging strong, determined leader. Ironically, it is this success by perpetuating false belief and rousing that is a great threat to the democratic fabric of the country exposing it to the dangers of a tendency towards fascism. The vulnerability lies in the possible parallel that the “demonetisation story” holds to the ongoing “nationality story” of the present regime. It may be instructive to recall what the incisive political commentator, G. Sampath, had drawn attention to. To see whether the nationalist ideology espoused by the present regime has anything in common with the ideology of fascism, he suggested going back to Benito Mussolini and his seminal work, The Doctrine of Fascism, published in 1935, which identifies five central principles of fascist ideology.

The first and most fundamental is the primacy of the state’s interest over an individual’s interest. (In the present context, let us read state and leader interchangeably.) “The fascist conception of life stresses the importance of the state and accepts the individual only in so far as his interests coincide with those of the state.” To understand what it means under the present regime, we cannot have a better authority than Amit Shah, who recently stated that “… NDA regime believed in taking decisions that were good for people, not those that people would like”. Those who know better, like Arun Shourie, call it a “pyramidical mafia state”.

The second principle of fascism is the primacy of state over nation: “It is not the nation which generates the state …rather it is the state which creates the nation.” Since we are reading state and leader interchangeably, this does not require any authority to explain.

The third is the rejection of democracy. “In rejecting democracy, fascism rejects the absurd conventional lie of political equalitarianism.” Although it is heard that some of the supporters of the present regime think that the Indian Constitution is based on Western ideas, the discourse has not yet reached the heights of denying democracy, certainly, but systematically denigrating it to clientilism. After all, our democracy is already as hollow as the proverbial “carrot plant” that Arundhati Roy talks about. It appears when going to school, she along with friends would steal carrots from an old lady’s garden, eat the carrots and plant the leaves back in their place so that the old lady by seeing the leaves would feel the carrots were safe. Already there are several descriptions of the Indian democracy as “authoritarian populism”, “oligarchical democracy”, etc.

The fourth principle of fascism is the state’s non-secular character: “The fascist state sees in religion one of the deepest of spiritual manifestations and for this reason it not only respects religion but defends and protects it.” And which religion, by what means and with what effect the present regime promotes, needs no explanation. The fifth principle is a combination of all the four: that the state as the repository of all virtue, and the state (here the leader) is “the conscience of the nation”.

There is no greater political danger than constructing an image, making the people believe in it and ride on those beliefs—nothing short of reducing citizens to subjects. One is reminded of the proverbial Telangana leader Kaloji’s apt description of make-believe politics. He used to say that it was like the sheep’s belief that the wool on their skin was from the shepherd’s woollen rug due to his generosity. So much for citizenship.

The looming danger is more imminent, particularly with the opposition parties almost without any promise of a leadership that could challenge the present regime nor with strategies to capture the imagination and confidence of the people.

The moral bankruptcy of the main opposition party was exposed when it failed to link corruption and “black money” to economic reforms, since it was its own sin. The opposition parties together have failed to provide any comprehensive agenda for the eradication of corruption and “black money”. Nor are they ready for electoral reforms, one of the main causes perpetuating corruption and “black money”.

I would like to close by recalling one of the perceptive observations on what the “demonetisation” episode has thrown as a challenge before us. “History will tell if demonetisation proves to be the thin edge of the wedge that sets back India’s institutions, creates a brotherhood of elite ‘experts’, who feel compelled to validate post-truth policies, and which bypass the citizen while pretending to minister to his or her true needs.”

(The announcement of the action of demonetisation by the Prime Minister of India on November 8, 2016, brought extensive response or reaction in both popular press and academic writings from all over the country, and even from abroad. Also, there has been extensive literature on corruption and black money over the last several decades. I have benefited from these writings and also made use of many of them. I am grateful to all of them, and also sorry for not referencing them here.)

(Excerpts from the Com. P.V. Raju Memorial Lecture titled "Demonetisation, Corruption and Black Money: The Unfolding Dangers of Opportunistic Politics in the Era of Post-Truth" delivered by Prof. D. Narasimha Reddy, Professor of Economics (retd), University of Hyderabad, in Vijayawada on September 22, 2017.)

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