Don't revive inspector raj

Giving discretionary powers to officials is avoidable

In theory, the Union government’s declaration of draconian punishment for people attempting to launder black money after the demonetisation of Rs 1,000 and Rs 500 notes on November 8 is unexceptionable. The announcement of search and seizures, income tax notices, and seven-year imprisonment threats certainly play well to elements of the citizenry who make their living in the white money realm. Experience with these punitive intentions, however, raises apprehensions about a return to the infamous “inspector raj” of the past, with all its baleful implications on the political economy. It is ironic that the government is resorting to such threats, which give immense discretionary powers to officials, to contain corruption and black money when there is unanimity that in the past inspector raj encouraged the rise of black money in the first place, without necessarily solving the problem. There is no reason to suppose this will change now.

The “survey operations” (a polite term for raids) by tax officials on jewellers and money changers in major cities a few days after the November 8 announcement are a case in point. It was an open secret that practices such as illegal discounting of old notes and jewellery sales using old notes with backdated receipts were rife almost from the first hours of the prime minister’s announcement. Yet, the Central Board of Direct Taxes did not report any major discoveries of such transactions or significant seizures. In fact, most of the major markets remained officially closed. In the current situation, many people may become hapless victims of these laws merely for depositing money drawn for weddings, festive expenditure, long-term household savings and so on. In an economy that has largely run on cash, it was natural for housewives and the elderly and those without the wherewithal to afford digital banking solutions to keep large sums at home, sometimes saved over years. To suggest that such citizens will come within the ambit of government scrutiny is hardly helpful to the aam aadmi  that is supposed to benefit from this move. On the contrary, the move creates an atmosphere of mistrust. The bottom line is that, far from encouraging compliance, such threats will only end up promoting rent-seeking and test the resourcefulness of evaders to come up with ever more ingenious ways to mask suspicious transactions. 

Moreover, the threat of unleashing inspector raj on the people is disingenuous as well because it is evident that the government lacks the resources to follow it through. As a report in this newspaper highlighted, the income tax department has the capacity to assess 600,000 to 700,000 cases a year, which is just about one per cent of the total number of assessees in the country. So, although the investigative wing of the department says it has sent out hundreds of notices to individuals and firms that have deposited large amounts of old notes in banks, the information has to be passed on to assessment officers who simply do not have the capacity for follow-up. In the end, Prime Minister Narendra Modi may discover that talking eloquently and threatening strong punitive action will advance the drive to curtail black money only so far unless he targets the sources of black wealth in India — real estate transactions and electoral funding.