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 Economic Freedom
Cleaning up Corruption: An agenda for India
Liberty Institute, India Monday, August 22, 2011

Barun Mitra
The current campaign against corruption provides a golden opportunity to Dr Manmohan Singh to lead from the front. There is an urgent need for speeding up the process of economic, administrative and judicial reforms, not only to push the economy to a higher growth path, but also to help reduce the scope for corruption. Being the Prime Minister of India, he must spell out the options before the country. Then it would be for the people to decide in a democracy, writes Barun Mitra.

An opportunity for the Prime Minister to seize the moment

The current campaign against corruption by Anna Hazare and other civil society activists is unambiguously pitting citizens against government. However, the citizens concerns about corruption, also provides a golden opportunity to Dr Manmohan Singh, to seize the microphone, set the political agenda, and take the lead in this fight against corruption.

Dr Singh recently said that no one possesses any magic wand with which to wipe out corruption from our society. He has also called for speeding up the second generation of reforms, not only to push the economy onto a higher growth path, but also to help reduce the scope for corruption. Any anti-corruption agency has to be a part of this systemic reform in order to be effective.

In 1991, the balance of payment crisis allowed Dr Singh to initiate the economic reforms that laid the foundation for India’s growth path over the two decades. Today, with his government facing a crisis of credibility on the issue of corruption at home, another opportunity beckons Dr Singh.

Standing tall

Even if his image as an honest and sincere person has taken a few knocks in the recent months, Dr Singh is still by far the tallest political leader around. It is hard to imagine another person from either the UPA or the NDA who could easily replace him, particularly at this juncture in Indian politics. It is only Dr Singh’s personal stature that has kept the UPA government afloat despite the extremely choppy political waters that surrounds his government at the moment.

That much is reflected in the rhetorical call for Dr Singh’s resignation from a few political opponents, and the fact that no serious attempt has been made to bring in a no confidence motion in Parliament against the fumbling government. Even the PM’s critics among the Anna Hazare camp have been at pains to point out that they do not want a change in government.

Politically, Dr Singh has no real challenger today. Despite the doom and gloom, no one seems to be in a rush to occupy the PM’s hot seat!

Political economy of reforms

The economist in Dr Singh knows better than most others why corruption is so prevalent in different forms affecting different aspects of our lives. Typically, corruption, or rent- seeking, is a consequence of the gulf that exists between supply and demand for any goods or services due to regulatory interventions. Despite two decades of economic reforms, the regulatory and policy environment in many areas of the economy continues to be quite restrictive, and discretionary powers still prevail. It is particularly in those areas where corruption continues to prevail.

In a similar vein, the plethora of taxes and the maze of exemptions provide a heady cocktail of incentive to escape and evade taxes. The fact that a lot of the tax money is wasted or diverted for private gain has only added to the popular angst against ineffective governance structures. In addition, challenging macroeconomic situation is pushing the price inflation beyond level of tolerance.

Not being a professional politician, Dr Singh may not have the political weight to carry through some of the much-needed changes without the sanction of his party leadership and coalition partners. But everyone understands that he is constrained by political and coalition compulsions. At this point in India’s history, Dr Singh has nothing to lose. As the man who helped India change course with economic reforms in 1991, his place in history is secure.

The other side

Dr Singh’s task has been made simpler by the eclectic bunch of people who are at the forefront of the current anti-corruption campaign. The anti-corruption campaigners disdain for democratic political process is hard to take seriously.

Their economic beliefs are from an era long gone by. Their diagnosis that corruption is the consequence of liberal economic policies is far from reality. Their prescribed medicine, a concoction of a heavy dose of policing, coupled with quick and severe punishment, is a prescription that is worse than the disease.

They hold people to be gullible and prone to corruption. If that is indeed the case, then there is little prospect of finding the perfect Lok Pal to police the people. Secondly, if policing is the answer to corruption, then the police states in the world would figure among the least corrupt countries. Which is clearly not case.

Modesty is usually a virtue, and Dr Singh is a modest man. But the time has come, when Dr Singh as the Prime Minister must set the record straight, not just for his own sake, but to secure the future of the nation itself. Now is the time for Dr Singh to speak to the country, tracing how things have changed for the better in some aspects and, why and how the policy environment needs to change more in order to extend the benefits to more and more people.

Causes and cures

Corruption is mainly an outcome of misguided policies, no matter how well intentioned. When the economic environment bears heavily on the people restricting normal economic relationships, corruption is inevitable. In such an environment, even the best police force will be overwhelmed by the sheer instances of “corrupt” behaviour, at best, and at worst the police too will join in the looting. Then they will develop an interest in protecting the perpetrators and turning a blind eye towards the victims. That is exactly what has happened in so many instances.

Everyone agrees that the end of the “license-permit-quota raj” from vast sectors of Indian economy in 1991, greatly reduced avenues for corruption and political patronage. Once that stranglehold over the economy was loosened, it allowed for a huge spurt of entrepreneurial spirit across India, not only boosting economic growth rate, but opening completely new vistas for a new generation of Indians.

However, this process has not been taken to its logical conclusion. Many areas related to infrastructure, social welfare, land and natural resources have remained under state control, and it is in these areas that corruption has sprouted. As a result, India has remained a difficult place to do business, small or big, for Indians as well as foreigners. India’s low ranks on indices such as the Doing Business Report of the World Bank, and the Corruption Perception Index of Transparency International, attest to that fact.

Virtually every land and property transaction is tainted with shades of corruption, due to heavy burden of taxes and duties, ranging from stamp duties, registration fees, capital gains tax, and many other transactional costs imposed on routine and legitimate deals.

The land use and land ceiling regulations have perpetually stifled the supply of land, inviting the politically connected to reap the harvest. The pathetic state of land records have only burdened the honest, and benefited the dishonest.

In case of mining and minerals, the gross abuse stems from the misguided notion that anything under the ground should necessarily belong to the state. So while agents of the state often turned a blind eye to unauthorised extraction presumably for a consideration, the people who stayed in the vicinity completely lost out. It is not a coincidence that the mineral-rich parts of the country are also among the poorest. Recognising property rights of people on land and extending it to the minerals under the ground is not an unusual way to facilitate extraction as well as benefit the people.

In the case of the allegations of corruption in the 2010 Commonwealth Games associated projects, the delays, cost escalations, bending of procedures, favouritism, are all, unfortunately, regular features of virtually every report produced by the Comptroller & Auditor General of India in the past 60 years. These are systemic issues and needs to be looked as such, rather than case-by-case.

In the case of the electromagnetic spectrum, auction is neither the only way to allocate spectrum, nor necessarily the best option. Allowing a market for spectrum to develop would be an efficient way, too. Registration of spectrum users, rather than focusing on valuation of spectrum could keep the cost of operations low, and improve access. Keeping the policy technological neutral, allowing users to decide how best to harness their scarce resource would be even better, thus eliminating the scope for periodic intervention by government agencies.

Today, with around 700 million mobile phone connections, it is believed that half to one percent of the annual economic growth rate can be attributed to the telecom revolution. By this measure the cost the Indian economy bore for decades, when a telephone was said to be a luxury, would be many times more than the current telecom scam. Phones were available through political patronage, and the line kept alive only by keeping the linesmen happy! With the telecom revolution, not only has the cost of a phone call fallen, the routine corruption which was a daily affair, has also evaporated.

Call to arms

There is a crying need for expanding the scope of reforms to other sectors as well. Two of the sectors where the open door policy is much required are education and health. The galloping demand for primary education and basic health care are in sharp contrast with the availability of legitimate supply of these services. This has created two kinds of India. One that is able to pay or are connected enough to secure these services from the formal service providers. And, those outside who are only able to access these services from the informal providers, at a lower cost, and often lower quality, and who sometimes fall prey to charlatans.

The serious shortage of quality educational facility has led to a situation where, according to employers, an overwhelming number of graduates are not fit to be employed. On the one hand, the sector is dominated by those with enough political clout to set up a school or a college (it is believed that one needs 40 clearances and permissions to start a school in Delhi), and corruption begins the moment a child is old enough to enrol at a school. On the other hand, employers are spending huge resources to retrain potential employees, or they are investing abroad in search of an appropriate workforce. Those students who are able to afford it are seeking admission abroad, with billions of dollars thus flowing out annually, even as students seek a better place under the sun.

Then there are labour laws that protect the already employed at the cost of those trying to enter the job market. The high cost of hiring has meant that businesses have a special incentive to reduce labour cost with capital and technology. Consequently, job-less growth has been the characteristic feature of Indian economy, with barely 10-12% of the 500 million workforce engaged in formal sector. Not surprisingly, many people are willing to pay a commission in the hope of securing a regular job as a teacher, a policeman or a clerk.

Unintended consequence

Almost twenty years after the end of the gold control order, it is today a forgotten chapter of Indian history. But three decades economic tragedy caused by this dreaded order has been immortalized in countless Hindi films which based its plot on smuggling of gold. A whole generation of Indians had been turned in to criminals, because it was almost impossible to stay within the four squares of this draconian law.

This phase also coincided with the idea of self-sufficiency and import substitution. The inevitable difference in quality and price between goods made in the country and those made abroad, meant that almost everything that was restricted was smuggled, from calculators to computers, from perfumes to watches.

This attempt to suppress the popular demand for quality products required a huge army of officials to implement the ‘law’. Consequently, virtually every arm of the law enforcement machinery was compromised and corrupted in this impossible task of reining in demand.

The cataclysmic effect of such systemic corrosion became evident in 1993, when serial blasts rocked Mumbai, killing over 250 people, and injuring thousands. Most of the explosives came through the same channels that were used to smuggle the more innocuous goods.

Outside the law

It was also during this phase of economic control that hawala evolved as a formidable institution, completely outside the law. This was the result of the policy that required the legal financial institutions to severely control access to foreign currency. Virtually any Indian, who travelled abroad before the mid-1990s, would have had some experience with this peculiarly South Asian phenomenon. Today, with economic growth, and a stable foreign exchange reserve, not many need to tap in to the hawala system, except the criminals and the tax evaders.

Ordinary citizens frustrated by their daily encounter with either the local police or the local officials have reason to be very angry. It is believed that each day in a city like Delhi, a few crore of rupees are collected by some agents of the state. The only crime the common man would have committed was to try and eke out a living by engaging in commerce or vending on the streets, or seeking legitimate services such as a driving license, passport or ration card.

Food inflation has been unusually high for over a year now. Yet the price differential for vegetables, between the wholesale and retail market, is often in the range of 50 to 100% higher at the consumer end. This takes care of some of the unnecessary costs that street vendors incur to get the goods to the consumers. At this time, with price rise high on the political agenda, this kind of extortion is completely avoidable. These street markets also provide the only social space where people from every stratum rub shoulders with each other as equals.

What is necessary is to allow legal space for such trading to take place in every community, free from hassles from state agents. This problem is also illustrative of the wider problem of various restrictions on movement of agricultural produce across district and state boundaries, contributing to inefficiency, corruption and wastage of food products. Restriction on movement is one of the most significant factors, which lowers the price for the farmers and at the same time increases prices for the consumers, breeding discontent among all.

Leading the charge

It is tragic that in independent India, hardly any citizen looks to the various arms of law enforcement agencies with any degree of confidence. Effective policing can work only when ordinary citizens do not feel threatened by an over-arching government intervention in his or her routine affairs. Only then can the people and the law enforcement agencies can truly work as partners to identify the real criminals and bring them to justice.

The devil lies in the detail. The current focus on corruption should help us investigate these details and come up with systemic reforms. Any anti-corruption agency has to be a part of this overall architecture, rather than being yet another body to monitor, investigate and prosecute those involved in corrupt practices. Otherwise, the Lok Pal, or any such agency, will inevitably become a Joke Pal, it wouldn’t matter which version of the bill got passed by Parliament.

With his government facing the most serious political crisis ever, his reputation as the honest leader of the government at stake, today, Dr Singh faces the biggest political challenge of his long public life. This need not be his Waterloo, if he seizes this critical moment to turn adversity in to opportunity. He needs to claim ownership of what is his true political legacy, unshackling Indians from the regulatory chains.

In 1991, Dr Singh did not need to take the message of economic liberalisation to the masses. As the finance minister his actions proved more than his words. But today, as the Prime Minister of India, he needs to reach out to the people to share their predicaments. He needs to explain the steps that are necessary to reduce the burden that many government actions impose on every citizen, restricting their legitimate choices, creating artificial scarcities, and breeding corruption.

Being the Prime Minister of India, the least he could do is to spell out the options before his party and country. Then it would be for the people to decide in a democracy.

This article was published in the Liberty Institute on Monday, August 22, 2011.
Author : Mr Barun Mitra is the director of Liberty Institute, an independent public policy think tank in New Delhi.
Tags- Find more articles on - anti-corruption | corruption | economic reforms | Indian economy | Indian politics | Lok Pal | Manmohan Singh

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