India’s Demonetization One Year Later: A Failed Tool to Combat Corruption

One year ago, in an unscheduled live televised address, India’s Prime Minister Narendra Modi announced that within weeks the ₹500 and ₹1000 banknotes would become worthless. Prime Minister Modi framed this so-called “demonetization” policy as part of the battle against corruption and illicitly-obtained “black money,” which had “spread their tentacles” through the India economy. The Prime Minister identified two ways that demonetization would combat corruption. First, the surprise devaluing of currency would leave criminals, including corrupt officials, with millions of rupees’ worth of currency that would suddenly become worthless, and those holding large stashes of black money would be unwilling or unable to exchange it without having to explain where the money came from. Second, going forward, demonetization would make it more difficult to hold, transport, or exchange large quantities of cash (particularly since the Indian government was demonetizing the two largest notes in circulation); as the Prime Minister emphasized, “[t]he magnitude of cash in circulation is directly linked to the level of corruption.”

One year out, it is increasingly clear that India’s demonetization experiment imposed tremendous social and economic costs but failed to achieve either of these objectives (see here, here, and here). A closer examination of the reasons for this failure may help us understand both the potential and limits of demonetization as a tool to combat corruption and the underground economy.

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Cash Crunch: How Will India’s Supreme Court Respond to Modi’s Radical Move?

Last November 8th, the same day the United States elected a kleptocrat to its highest office, an executive on the other side of the world—Indian Prime Minister Narendra Modi—launched what Larry Summers called “the most sweeping change in currency policy that has occurred anywhere in the world for decades.” Prime Minister Modi’s surprise “demonetization” drive gave citizens fifty days to exchange all 500 and 1000 rupee notes (valued at about 8 and 15 USD respectively). Modi’s radical move, which will remove approximately 86% of all currency in circulation, is an attempt to combat endemic petty corruption, money laundering, terrorist financing, and tax   evasion (only 2% of Indians pay income tax). Prime Minister Modi was elected on an anticorruption platform in 2014, and pledged during his campaign to target hidden cash (so-called “black money”). Yet the demonetization campaign came as a surprise. Indeed, it probably had to be a surprise, lest those hiding fortunes in cash would have been able to prepare for the policy change.

While the Indian public generally supports aggressive anticorruption efforts, it would be hard to exaggerate the disruption resulting from demonetization. The real estate and wedding industries run largely on cash, as do most small businesses. And the demonetization program has hit regular citizens hard: People have been waiting in lines for hours to exchange their cash, which can be especially difficult for the four-fifths of women who don’t have a bank account. In the short term, consumption, the stock market, and growth forecasts have all plummeted and the agricultural sector is expected to suffer as well. Prime Minister Modi acknowledged the campaign would cause pain for many honest people, but believed it was worth it, stating that black money and “corruption are the biggest obstacles in eradicating poverty.” (Since then, the official justification for the campaign appears to have shifted to an attack on the cash economy as a whole, rather than a campaign against black money specifically.)

The fate of the demonetization program now lies with India’s judiciary: Continue reading

NGOs, Like Ceasar’s Wife, Should Be Above Suspicion: Why Indian Nonprofits Need To Take Transparency More Seriously

Soon after India’s new government assumed power in May 2014 under the leadership of Prime Minister Narendra Modi, the Central Bureau of Investigation (CBI) sought permission for arrest and custodial interrogation of journalist and human rights activist Teesta Setalvad for alleged mismanagement of $576,000 by her organization. In October 2014, the Ministry of Home Affairs (MHA) issued show-cause notices to 10,343 non-profits for not furnishing annual returns, and subsequently cancelled FCRA registrations for around 9,000 of these non-profits, citing “non-response within the stipulated time period.” India’s Foreign Contribution Regulation Act (FCRA) regulates the inflow of foreign contributions to charitable organizations and is expanding its tentacles and grip under each successive government (see here and here). In April 2015, Ford Foundation, the philanthropic organization whose work in India dates back to 1952, was put on a national security watch list and removed from the prior-permission list in January 2016, constraining its funding capacity. Ford is being targeted primarily for channeling funds to Ms. Setalvad’s NGO that was apparently ineligible to receive funds under FCRA.

As many in the Indian media have pointed out, the government’s aggressive actions against non-profits seems selective—more like a political vendetta than a principled stand against misappropriation of funds. It’s hard to ignore the fact that Ms. Setalvad had sought the conviction of Narendra Modi for alleged human rights abuses during his tenure as the Chief Minister of Gujarat, or that the case against Ford is linked to its funding for her non-profit. Moreover, in the same month that MHA canceled the FCRA licenses of 9,000 non-profits, an access-to-information query revealed that 401 of the 545 Members of the Parliament’s Upper House had not declared their assets and liabilities – including the Minister of Home Affairs himself. And the government’s tenacious pursuit of non-profits contrasts awkwardly with the practical impunity of those accused of perpetrating India’s three biggest scams (the $27.8 billion coal scam of 2012, the $26.3 billion 2G spectrum scam of 2013, and multi-million Vyapam scam of 2015).

So, when nonprofits, activists, and their supporters accuse the government of applying a double standard, they have a point. Yet, even as we rightly protest the government’s politically motivated vendetta against civil society, it is equally important for India’s non-profits to take a good hard look in the mirror. India has witnessed an unprecedented civil society mobilization against corruption in 2011 and non-profits have spearheaded numerous successful anticorruption initiatives, such as social audits, citizen report cards, and crowdsourcing platforms like I-Paid-a-Bribe.com. Yet the members of India’s vibrant non-profit sector must be sure that they are applying to themselves the same high standards of transparency and accountability that they advocate in the public sphere. Too often, they fall short. Indeed, the accountability practices within India’s non-profits are alarmingly sketchy. Continue reading

Not Corrupt, Not a Thief, But Not the Answer: Jimmy Morales and Corruption in Guatemala

Last month, Guatemalans went to the presidential runoff polls and elected former comedian Jimmy Morales in a landslide over former first lady Sandra Torres. Morales ran as an anticorruption candidate; his slogan, “not corrupt, not a thief,” says it all. Not being a thief might seem like a low bar for a presidential candidate, but Morales’s election shows that such qualifications are apparently and alarmingly sufficient in Guatemala. Despite never having held public office or having been involved much in politics as a private citizen (unless racism and cultural insensitivity count), Morales was a well-known and available outsider in the right place at the right time. Indeed, Morales seems to have gotten elected not despite but rather because of his lack of experience and prior political involvement—characteristics that were valuable assets against the backdrop of widespread public outcry against corruption in Guatemala over the last several months, culminating in the resignations and arrests of President Otto Perez Molina and Vice President Roxana Baldetti in September.

Many hail Morales’s victory as an indication that the anticorruption movement reached a tipping point and created change in Guatemala. But there are at least three reasons to worry that far from an anticorruption success, electing Morales may be a setback or at least a non-event for anti-corruption and democracy in Guatemala. Continue reading

Friends with Benefits: India’s Crony Capitalism and Conflict of Interest Regulations

In May 2014, when Narendra Modi’s National Democratic Alliance (NDA) ran and won against the incumbent United Progressive Alliance (UPA) Government on a platform of anticorruption and growth, very few were surprised. UPA’s second term was paralyzed by a string of mega-corruption scandals, including the 2G scam and Coal–Gate, pointing to entrenched crony capitalism and raising public fury. A country that had had enough with lackluster economic performance and widespread corruption kicked into survival mode and set aside its deep misgivings about a man with a troubling past. India was desperate for an efficient administrator and an uncorrupted leader—and Modi promised both.

After Modi became Prime Minister, many Indian businessmen grumbled that they had lost access to the Government—a fact hailed by the Indian media as evidence that he was finally cleaning house and cracking down on crony capitalism. However, more recent reports suggest that the Cronyism of Many has simply been replaced by the Cronyism of One. The Indian media is rife with reports hinting at a troublingly close relationship between the Prime Minister and a Gujarat-based industrialist who is one of the latest entrants to the Indian billionaire’s club (See reports here, here, here and here).

To be clear, such allegations do not necessarily imply that the PM himself is corrupt. Nonetheless, in this context even the appearance of corruption can be damaging. High officeholders in a country like India, where endemic corruption and crony capitalism have historically prevented the nation from achieving its full potential, ought to be held to much higher standards of probity.

The PM may be flirting within the permissible boundaries of business-government collaboration and may even get away with it using personal charisma, strong economic performance, and the lack of clarity in laws governing such relations. However, in the interest of keeping the high offices of the country beyond reproach, it is time to have a relook at the laws governing business-government relations in India. A good place to start will be the Conflict of Interest (COI) provisions for India’s Executive and Legislative branches. Unfortunately, the current COI regime for Indian public office holders is weak and ineffectual: Continue reading