Rupee clean-up will do little to purify Indian politics

Indian prime minister Narendra Modi’s unexpected ban on Rs500 and Rs1,000 notes was designed like a game of musical chairs — intended to catch out Indians with stashes of illicit black money, earned through corruption or simply hidden from tax officials.

Until November 8, black money was circulating merrily through the economy, powering purchases of luxury apartments, gold jewellery, foreign holidays, lavish weddings and more. But with New Delhi’s overnight ban on using the high-value bank notes — 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 now face a choice of acknowledging their hidden wealth or losing it — unless they can circumvent the system. Among those hard hit are Indian politicians, who rely on hidden slush funds provided by pliant donors to finance their costly election campaigns. 

It is probably no coincidence that the clampdown on cash comes just as Uttar Pradesh, India’s largest state, is gearing up for important state elections whose outcome could influence Mr Modi’s own re-election prospects in 2019. 

“There is no question in my mind that part of his motive is to choke off funds to the rivals,” says 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 seen as one of the major drivers for Indian businesses to generate — and maintain — large stashes of black money, hidden from tax officials’ eyes. Mr Modi’s own glittering, high-tech 2014 national election campaign is thought to be one of the most expensive ever.

“The political system needs the lubrication of money,” says E Sridharan, academic director of the University of Pennsylvania’s Institute for the Advanced Study of India. “Businesses constantly face demands from political parties for money for elections and in between elections.” 

During upcoming state elections, parties — especially in opposition — will undoubtedly face problems as political funding dries up. Angry rivals of Mr Modi’s ruling Bharatiya Janata party claim it had advance notice of the move that rendered 86 per cent 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 long-term impact because you are just going to regenerate black money,” says Mr Vaishnav. 

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 — a bid to choke funding to her Congress party’s more rightwing, market-oriented rivals. 

“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,” Mr Vaishnav says. “Modi’s calculation is somewhat similar.” 

Though corporate contributions were made legal again in the 1980s, political parties still closely guard the identity of their donors. Even large contributors can technically evade disclosure rules by ensuring no single contribution exceeds Rs19,999 — below the disclosure threshold. 

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, Mr Modi has talked a good game about purging black money from the economy. This week he briefly broached the idea of public funding for elections — an idea often raised by reformers as a means to clean up the system. 

But until political parties, including the BJP, are compelled to lift the veil of secrecy over those pumping money into their coffers — and how those funds are spent — India’s democracy will remain infected by black money regardless of the denomination in which the cash comes.