Monday, November 29, 2010

Corruption costs business

Parliament has not been functioning for many days, which leads to severe costs and loss of reputation. The fight against corruption is not rhetorical matter.For decades, India has winked at corruption. The political order has fostered it and financed itself out of corruption. We are caught in a vicious circle where the private sector has to bribe ministers and civil servants if they are to carry on business. Unless all co-operate in exposing the corruption, a few will suffer and the rest will free-ride, writes Meghnad Desai in The Financial Express.

Parliament has not been functioning for many days. Leave alone the daily cost of its operation, but does anyone know or care about its effect on India’s reputation? The UPA or at least the Congress trumpets its virtue in forcing the resignation of Ashok Chavan and Kalmadi and then also belatedly Raja, but is that enough?


But leave that aside. The CWG scam was discovered only because the British tax authorities found something dodgy in the tax claims of the company favoured by Kalmadi. This was noticed sharply in the UK. What India does with the CWG scam will affect its chances for winning future sports events contracts. So far, no one has been charged and Kalmadi’s resignation from some footling Congress post is neither here nor there.

And then we have the Raja scandal. Again, the embarrassment at non-action or, at best, delayed action is being taken out on the companies that won the contracts. Trai is threatening to cancel the dubious contracts. Surely, again, that is not only overkill but killing the wrong party. The spectrum allocations were an international event.


The issue is simple. As Obama said, India is no longer emerging. It has emerged. With such status, go get some responsibilities. The fight against corruption is not rhetorical matter. It is not about quoting Gandhiji or claiming virtue against the BJP. For decades, India has winked at corruption. The political order has fostered it and financed itself out of corruption. This is well known. The shock at Ratan Tata’s statement that someone had asked him to bribe the minister to get a licence was not that such things go on. But that even as big an industrialist as Ratan Tata is subject to such squalid behaviour. We note that Tata has not got a licence for his airline business.


The question is who will bell the cat? Politicians will not do it. Many in the NGO community try their best to disseminate the information. But as Tehelka’s example showed, the political system can fight viciously and destroy you. The private sector has to take the initiative. Thus far, the Indian private sector organisations have been too shy or too afraid to raise the issue. Business pays the price either in cash or in missed contracts, as Ratan Tata’s example shows. If the apex bodies such as Ficci and CII were to open up a debate on this issue and if many more businessmen were to come forward as Ratan Tata did and relate their experience, we may get some action. It is not easy to do, of course. We are caught in a vicious circle (or a degenerate equilibrium, if you like a fancy expression) where the private sector has to bribe ministers and civil servants if they are to carry on business. Unless all co-operate in exposing the corruption, a few will suffer and the rest will free-ride.

The rest of the world is watching. Remember that Raju’s scam in Satyam was spotted on the NYSE. India does not have the luxury of time. It is time for the market to work. The state has failed demonstrably.

Saturday, November 20, 2010

The politics of money

The wind is blowing in favour of the ruling coalition in the Bihar Legislative Assembly when the last phase of the Bihar Legislative Assembly polls is drawing to a close. The assets of the JD (U)’s MLA candidates’ average have seen a three fold spike. It could even be that new and richer individuals are being put forward as candidates. Being rich is not a factor of importance in predicting election outcomes. MLAs are truly representative of their states’ progress, writes Nikhila Gill in The Indian Express.

Read the whole article here:

With campaigning for the last phase of the Bihar Legislative Assembly polls drawing to a close today, and the results due on November 24, the wind seems to be blowing strongly in favour of the ruling coalition. In addition to Nitish Kumar’s ‘SSS’ policy of sadak, shiksha, suraksha, the pro-Nitish sentiment can be attributed to the overall clean reputation of the JD (U) government. The fact that the JD (U)’s MLA candidates’ average assets have spiked from Rs 19,71,998 in 2005 to Rs 64,60,088 in 2010, a three-fold increase, does make this claim look a bit hollow. But it doesn’t necessarily imply corruption; a possible explanation for this is that new and richer individuals are being put forward as candidates.

Interestingly, the rise in asset values isn’t restricted to Bihar, with the average assets of MLAs seeing an upward swing in almost all states across India. The hikes range from 141% in Chhattisgarh and 283% in Rajasthan (the states that bring up the lower order) to 1,000% in Haryana and 1,170% in Andhra Pradesh between 2003 and 2009. Not surprisingly, Andhra Pradesh is home to the richest MLAs in the country, with average declared assets worth Rs 22.6 crore per candidate.


Back at the state level, a closer examination reveals the performance of individual states and parties. Haryana has some of the richest MLAs in the country (save for Andhra Pradhesh), whose average assets range from Rs 3.87 crore (for the Congress) to Rs 16.28 crore (for independent candidates). This not surprising, given that Haryana has one of the highest per capita incomes in India (excluding small states and Union territories like Goa and Delhi) and, on average, its MLAs declared assets worth Rs 7.74 crore in the 2009 assembly elections.

Chhattisgarh, where MLA wealth has gone up on average by about two times, from Rs 44 lakh to 1.08 crore between 2003 and 2008, still has one of the lowest average MLA asset bases. This is despite the fact that the state has been one of the fastest growers in GSDP terms, averaging about 20% in the same period. In contrast, although Madhya Pradesh’s per capita GDP is about a fourth less than Chhattisgarh’s and its GSDP growth rate 11.6%, its MLAs are 1.5 times richer than those from Chhattisgarh. Similarly, the assets of the MLAs of Uttar Pradesh—a state notorious for lawlessness and slow growth, with one of the lowest per capita incomes—weigh in at Rs 1.46 crore, about 1.5 times that of Chhattisgarh.


So is being rich a factor of importance in predicting election outcomes? It appears not. In Karnataka, the richer Congress-JD(S) alliance was voted out in the 2008 assembly elections. There are other instances of richer candidates being defeated—in Rajasthan, the BJP lost out to the Congress even though its MLAs were 1.8 times as rich as those belonging to the Congress. In Andhra Pradesh, the TDP candidates were almost 10 times richer than the Congress candidates and still lost out. So money cannot buy all; it’s parties that matter, not their assets.


So, is it fair to say that MLAs are truly representative of their states’ progress? The answer, contrary to popular perception, is yes. For the most part, anyway. The same, however, doesn’t hold true for MPs. By and large, the poorer the state, the richer the MP and vice-versa.


Wednesday, November 17, 2010

Corruption trips India's rise

India's effort to break free of it's socialist past of threatened by its failure to create and enforce private property rights. It started with the Adarsh Housing Society in the mid-90's. It recieved 3,800 square meters of land at 15 % of the market price on the claim that it would provide low cost housing to soldiers and families who made sacrifices for the country. The society includes defense officials and relatives of politicians and bureaucrats.The root of all these ills could be traced back to the lack of private property rights in India, writes Barun Mitra in The Wall Street Journal.

Read the whole article here:

Just a few days ago, U.S. President Barack Obama was in Mumbai applauding India on its economic renaissance. Now his host in India's financial capital, Chief Minister of Maharashtra Ashok Chavan, has resigned due to serious allegations of malpractices concerning an apartment tower in the heart of the city. As well as presenting a startling juxtaposition between the hype over India's development and the rather more sobering reality, this case illustrates how the failure to create and protect property rights threatens the country's best efforts to overcome its socialist past.

It all started with an organization called the Adarsh Housing Society, which started in the mid-1990s with just a few members. The real action started in 1999, when Indian soldiers were fighting valiantly to push back an intrusion by Pakistani forces into the Kargil hills of the Kashmir region. A group of officials, military and civil, strategized to use this incident to lay their hands on a prime piece of real estate in downtown Mumbai.

The society claimed that it would provide low-cost housing to the soldiers and widows of soldiers who had sacrificed so much in the Himalayas. For this noble effort, it received 3,800 square meters of land at 15% of the market price so that it could build a six-storey block. Neither the state government nor the defense ministry was sure about the ownership of the plot.

This is hardly unusual in India, since in most of the country land settlement has not been undertaken since the departure of the British. Land records are in a pathetic state, and so are very easy to manipulate. Hardly any land transactions, particularly in urban areas, take place completely legally. In major cities like Delhi and Mumbai it is believed that typically 60% of the payment for high-end properties is made in cash under the table.

Today, the Adarsh Housing Society oversees a 31-storey tower, with 103 apartments, for which owners have paid between $140,000 and $180,000 for units between 625 and 1000 square feet. Market rates for these apartments are believed to be more than 10 times that value. None of the owners seems to have fought in Kargil or be related to those who did, and in addition to defense officials, the society includes relatives of senior bureaucrats and politicians.

The scandal has been brewing for the past two years, but it really hit the headlines in the past couple of months. Today, every department of the state and central governments, from the defense and environment ministries to land and revenue, are competing to point out the various violations by the society. Yet, the same departments by their acts of omission and commission allowed the tower to be built in the first place.

It is time to recognize that the legal and regulatory framework in India, particularly that surrounding land, is tailor-made to facilitate the wheeling and dealing of the powerful and privileged class, all in the name of providing the poor with affordable housing.

More than anything else, India's poverty can be traced to this single most important factor—the lack of respect for private property rights. This greatly limits the ability of the majority of Indians to harness the potential of the assets under their control. Coupled with arbitrary regulatory regimes, this allows powerful middlemen to extract value from transactions which in a society ruled by law would be routine.

President Obama may have pleased India's political leaders by praising India's rise, but most ordinary Indians will be unable to rise as long as they are weighed down by the systemic corruption of their regulatory regime.