Through the Looking Glass – A Book Review

I have never reviewed a book on my website, so this is a first.

Recently, I read Akhilesh Tilotia’s Through the Looking Glass. Tilotia is a management graduate who has worked both in the private sector and in the government. He was an officer on special duty to the minister of state for civil aviation, Jayant Sinha, for a period of three years, in the first term of the Narendra Modi government. (On a separate note, an apology to the Lewis Carrol fans who might have been conned into clicking on this link).

In this book, Tilotia offers a clear perspective on what it is like to work for the government as an outsider, why the government does not achieve what it normally sets out to do and what can be done about it.

There are two things I immensely liked about the book. First that it is written in simple English, something that many people who write on public policy and economics cannot seem to do, and second that Tilotia tackles the very tricky issue of how politics impacts public policy in India or why the government operates the way it does.

Running for an election, even at the corporator level, is very expensive. It needs a lot of money. To fight a Member of Parliament election, the expenditure allowed is up to Rs 70 lakh. And on paper that’s what the candidates spend. Of course, the real spending is much more. The question is where does this money comes from.

As Tilotia writes:

“The sources of funds are rarely disclosed or discussed in detail. Local, regional, national or even global entities may have an interest in a particular candidate or a party winning or losing. Who the candidate may be beholden to for his election is not obvious at the time of, or post the election.”

This works at both the state level and the national level. State level politics in India tends to be funded by builders in many cases. Hence, there is always a quid pro quo.

There is a very limited culture of making political donations in India. Corporates don’t like the idea of their employees being politically active. And those who are politically active, either need to hide their affiliation or face its consequences.

In this scenario, the politician is perpetually worried and unsure about where the money to fight the next elections is going to come from. As Tilotia writes: “The politician is ever on the look-out for funding commitments over the course of his political journey, whether as challenger, candidate or elected representative.”

Clearly, the incentives here are misaligned, and politicians, like other human beings, respond to incentives and don’t do the things they should be doing. If this problem can be solved, then politicians in India will be in a much better place to focus on the future than the political funding, Tilotia believes.

Due to this, what we call the system fails to deliver, leading to people who can opt out of the system, doing so at the first possible opportunity. This exit is visible in people cocooning themselves in gated communities, making sure that there are diesel generators which ensure the availability of electricity even when there is a power cut, sending their kids to private schools, buying vehicles to move around because the public transport is not up to the mark and so on.

Tilotia calls this the private cost of India’s public failure. And it just doesn’t lead to exits. It is detrimental on two other counts. First, as Tilotia writes: “The cost being high forces the spending of a large part of India’s wallet on basic necessities keeping Indians tethered on a low quality of life.” And second “public failure hits the poor and the vulnerable the hardest.”

The private cost of public failure has clearly been visible in the last 15 months as the Covid pandemic has spread. The out of pocket health expenses for many families who have had to spend money on treating the disease have gone through the roof.

This is primarily because the health system in many parts of the country is broken and/or virtually non-existent. Of course, this has led to a slowdown in economic activity, given that many families have run out of money, some others have ended up in debt and others having seen what has happened around them, are saving for future Covid waves. In this way, the private cost of India’s public failure, has turned into a public one.

Tilotia’s book is also an excellent ready reckoner for those looking to work for the government in mid to senior level positions and hoping to get some taste of how it is likely to be.

On the flip side, the book barely has any masala in it, though I found the callout feature of comparing the state of Jharkhand with Infosys, very interesting. And so was the small bit about the uncanny resemblance about the accounts of the state of Himachal Pradesh and Air India.

In that sense, the book is not something like Sanjaya Baru’s The Accidental Prime Minister.  Personally, I understand why the writer stuck to saying what he wanted to say in a straightforward accessible manner, but some masala would just have made a good book even better. For starters, Tilotia could have told us about how good the food in the Parliament’s canteen is. Are we really missing out on something?

Mr Jaitley, for war on black money, make political funding digital and through cheques. No cash.

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
By September 30, 2015, those who had black money hidden abroad had to declare it to the government. On this “declared” black money, the government will charge a tax of 30 per cent and a penalty of 30 per cent.

From the numbers that have been put out by the ministry of finance, and the fact that in the last one year the government has spent a huge amount of political capital on it, it’s clear that the effort to unearth black money that has moved abroad has been a complete flop.

During the compliance period offered by the government, 638 declarants declared assets and income amounting to`4,147 crore. There is perhaps more black money hidden just in Lutyens’ Delhi. Given that the government is levying a 30 per cent tax and 30 per cent penalty on this money, the total revenue collected from this effort would be `2,488 crore. This is not even a drop in the ocean of black money in this country.

In response to these poor collections, finance minister Arun Jaitley wrote on his Facebook page: “The bulk of black money is still within India. We thus need a change in national attitude where plastic currency becomes the norm and cash an exception. Being seized of this problem, the government has been working with various authorities in order to incentivise this change. The opening of a large number of payment gateways, Internet banking, payment banks and the emerging reality of e-commerce will prompt the use of banking transactions and plastic money rise significantly.”

With the rise of plastic money, the hope is that the total amount of black money generated in the Indian financial system will go down. With plastic money it is fairly easy to keep track of transactions and hence tax them.  While this may or may not happen, there is a simple thing that Mr Jaitley and the Modi government can do to kickstart their war against domestic black money.

It should be made compulsory for political parties to receive donations only through the plastic money route and in the form of cheques. Given that it is so passionate about unveiling the black money in the country, the Bharatiya Janata Party can take a lead on this and start taking in donations only through the plastic money and cheque route, shunning all cash donations.

One bogey that can be raised against this suggestion is about those who do not have a bank account. How will they donate money to a political party if they want to?

The ministry of finance in a press release dated September 4, 2015, had said: “The achievement under Pradhan Mantri Jan DhanYojana (PMJDY) is heading towards saturation. Initial demand for bank accounts was expected to be around 7.5 crore (75 million). However, so far close to 18 crore accounts have been opened. 15.74 crore Rupay Debit cards have been issued.”

If these numbers are to be believed, then most Indians now have access to a formal banking channel. They also have access to debit cards. And this can be used to make donations to political parties as well.

While everyone who has a debit card may not know how to use them currently, it can be easily taught. Prime Minister Narendra Modi has communicated extensively on asking people to give up their subsidised cooking gas cylinders. He can do the same with Rupay debit cards. The government can run ad campaigns around it as well, explaining how these cards are used.

Once donations made to political parties move away from cash, there will be an audit trail. No black money will go into the funding of political parties, breaking the nexus between politicians and those who have black money (read traders and businessmen). Once black money stops political funding, political parties and the government (the present government and the ones to come) are more likely to crack down on domestic black money. Until then they will only make statements because there is no incentive to crack down on black money.

Also, political parties should be brought under the ambit of the Right to Information (RTI) Act. The current government is against this move. In an affidavit submitted to the Supreme Court in late August 2015, the Modi government had said: “If political parties are held to be public authorities under RTI Act, it would hamper their smooth internal working, which is not the objective of the RTI Act and was not envisaged by Parliament. Further, it is apprehended that political rivals might file RTI applications with malicious intentions, adversely affecting their political functioning.”

I guess the only reason the government is opposing political parties being brought under RTI is because then people can file an RTI and be able to get the funding details of political parties. And that is something no political party is comfortable with.

At the state level, real estate companies are big financiers of political parties. Real estate is where most black money gets invested. Once political parties are brought under RTI, this nexus can start to unravel as well.

The nation has a genuine problem of black money. The problem is well known. The solutions to it are also well known. The question is, will our politicians do something about it or will they just keep talking about it?

My bet is on the latter. Yours?

The column originally appeared in The Asian Age and Deccan Chronicle on Oct 9, 2015

Dear Modi sarkar, what about domestic black money?

The Lok Sabha passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015 or the foreign black money Bill, yesterday. The ministry of finance 2012 white paper on black money defines black money as: “any income on which the taxes imposed by government or public authorities have not been paid.” The wealth that has been accumulated in this way “may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and corruption,” the white paper goes on to suggest.
Of course this wealth that has been accumulated through tax evasion has “neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.”
Some portion of this black money over the years has managed to escape the Indian shores and has been invested abroad. An estimate made by Washington-based research and advocacy group Global Financial Integrity in a report titled Illicit Financial Flows from Developing Countries: 2003-2012, suggests that around $439.6 billion of black money left the Indian shores, between 2003 and 2012. Through the foreign black money Bill the government is attempting to get this money back.
Also, given the penal provisions of the Bill, an attempt is being made to ensure that in the days to come, citizens pay tax on their income, instead of accumulating it as black money and then transferring it abroad.
As the finance minister Arun Jaitley put it yesterday: “All those who keep money outside — time is running out for them as the world is moving to an automatic information exchange and soon, when that is available, they will be penalised for their action.”
And what are these penalties like? The Bill states that undisclosed foreign income as well as assets will be taxed at the rate of 30%, without allowing for any exemptions or deductions which are allowed under the Income-Tax Act, 1961. This will be accompanied by a penalty equal to three times the amount of tax. Hence, the tax and penalty on undisclosed overseas income as well as assets can amount to as much as 120% (30% + 90%). Further, the amount of tax to be paid on foreign assets will be computed on the basis of its current market price and not the price at which it was bought.
Nevertheless, there is a way out of this. After the Bill becomes an Act, the government will offer a short compliance window, which will allow those with undisclosed foreign assets and income to declare them, pay a tax of 30% and a penalty of 30%.
The Bill also has a provision which allows the government to charge a penalty of Rs 10 lakh for the inaccurate disclosure of foreign assets, along with a rigorous imprisonment of six months to seven years, the first time around. Second and subsequent offences are punishable with fines of Rs 25 lakh to Rs 1 crore and a rigorous imprisonment three to 10 years.
On the face of it, the Bill seems like an honest attempt to crack down on black money that has already left the country and that might leave the country in the days to come. But there are several questions that crop up here.
Why is a short compliance window being offered? It makes the taxpayers who have been honestly declaring their foreign income as well as assets till date, look a tad stupid. Just because someone is willing to pay a fine of 30% and declare his foreign assets, does that make his less guilty? Or is this another tax amnesty scheme in disguise being offered by the government?
Further, why is there a distinction being made between domestic and foreign black money? The definition of black money in the ministry of finance white paper does not make any distinction between black money in the country and black money that has left the shores. Ultimately, almost all black money originates in the country, when people earn an income and do not pay a tax on it. So why is this artificial distinction being made? Why couldn’t the government have come up with a law which covered both domestic as well as foreign black money? Its now been in office for close to one year.
The answer perhaps lies in the way political funding works in this country. An analysis carried out by the National Election Watch and Association of Democratic Reforms reveals that during the period 2004-2005 and 2011-12, the total income of the national political parties was Rs. 4,899.46 crores. The Congress party declared the highest income of Rs 2,365.02 crores. It was followed by the Bhartiya Janata Party which declared an income of Rs 1,304.22 crores.
Between 2004-05 and 2011-12, there were two Lok Sabha elections(in 2004 and 2009) and multiple state assembly elections. It doesn’t take rocket science to come to the conclusion that the amount of donations declared by the political parties were clearly not enough to fight so many elections.
Within 90 days of completion of the General Elections, political parties are required to submit their election expenditure to the Election Commission of India. The National Election Watch and Association of Democratic Reforms has analysed this expenditure for the last Lok Sabha election and it makes for a very interesting reading. This expenditure statement contains the “details of the total amount received as funds in the form of cash, cheques and demand drafts and the total amount spent under various heads.”
The total amount of funds collected by national political parties for the 2014 Lok Sabha election was at Rs 1158.59 crores. This was 35.5% higher than the funds collected for the 2009 Lok Sabha elections. The total declared expenditure of the national political parties was Rs 1308.75 crore, up by 49.4% from 2009.
Now compare this to an estimate made by the Centre for Media Studies in March 2014. It estimated that around Rs 30,000 crore would be spent during the 16th Lok Sabha elections which happened in April and May 2014. Of this amount, the government would spend around Rs 7,000-8,000 crore to conduct the elections. The remaining amount of around Rs 22,000-23,000 crore would be spent by the candidates fighting the elections.
Of course, national political parties are not the only parties fighting elections. Nevertheless, the difference between the officially declared expenditure and the ‘real’ expenditure to fight elections, is huge. Where does this money come from? The domestic black money essentially finances political parties and in the process elections in India. And given this, no government(and political party) can really go after it. Meanwhile, they will keep talking about foreign black money.

Moral of the story—You don’t kill the goose that lays golden eggs.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on DailyO on May 12, 2015