Modi’s cash crunch chokes political rivals

INDIAN Prime Minister Narendra Modi’s surprise ban on 500 rupee (about R100) and 1 000 rupee notes is a game of musical chairs intended to catch out Indians with stashes of illicit black money, earned through corruption or hidden from tax officials.

Until November 8, black money was powering purchases of luxury apartments, gold jewellery, foreign holidays, lavish weddings, and more. But with Delhi’s overnight ban on using the high-value banknotes — and its proclamation that notes not turned in to banks by December 30 will be “worthless pieces of paper” — the music abruptly stopped.

Indians with illicit cash squirrelled away must acknowledge their hidden wealth or lose it — unless they can circumvent the system.

Among those hard hit are Indian politicians who rely on hidden slush funds provided by donors to finance their costly election campaigns.

It is probably no coincidence that the clampdown comes just as Uttar Pradesh, India’s largest state, is gearing up for state elections, whose outcome could influence Modi’s reelection prospects in 2019.

“There is no question that part of his motive is to choke off funds to rivals,” said Milan Vaishnav, a senior associate at the Carnegie Endowment and author of a forthcoming book on the criminalisation of Indian politics.

Political parties’ rapacious demand for cash for electioneering has long been one of the major drivers for Indian businesses to generate — and maintain — large stashes of black money, hidden from tax officials. Modi’s glittering, hi-tech 2014 election campaign is thought to be one of the most expensive.

“The political system needs the lubrication of money,” said Eswaran Sridharan, academic director of the University of Pennsylvania’s Institute for the Advanced Study of India.

During forthcoming state elections, parties — especially in opposition — will undoubtedly face problems as political funding dries up. Furious rivals of Modi’s Bharatiya Janata Party claim the party had advance notice of the move that rendered 86% of India’s cash supply virtually useless.

But the cash crunch is unlikely to purify India’s democracy without substantive reforms to bring transparency and accountability to its opaque campaign finance system.

“It will make a one-time dent in election spending, but it’s not going to have any longterm impact because you are just going to regenerate black money,” Vaishnav said.

India’s political parties have been hooked on secret donations since the decades after independence, when extensive state control over the economy encouraged businessmen to foster strong ties with political elites.

Political funding grew more opaque in 1969, when then prime minister Indira Gandhi banned corporate donations to political parties.

“As the incumbent with all that power, the Congress would find ways of twisting people into giving below the table, but others wouldn’t have those benefits,” Vaishnav said. “Modi’s calculation is somewhat similar.”

Although corporate

You are just going to regenerate black money

contributions were made legal again in the ’80s, political parties still closely guard the identity of their donors.

India ostensibly has strict and, many argue, unrealistically low campaign spending limits, but they, too, are riddled with loopholes, applying only to individual candidates, and not to parties. Parties’ financial accounts are not subjected to any independent auditing either.

Amid the disruption unleashed by his currency ban, Modi has talked a good game about purging black money from the economy. But until political parties, including the BJP, are compelled to lift the veil of secrecy over those pumping money into their coffers, India’s democracy will remain infected by black money. — © The Financial Times Ltd