Push development to kick corruption

The Radia tapes have exposed the business-politics-media nexus. There are scandals in loans for real estate companies in which PSU banks are implicated, housing allocation, and IPL. One reason for corruption is that there are economic goods—contracts, land deals, permits—available at an administered price that understates their true value. The agent in charge of allocating such goods is in a pivotal position. Corruption is embedded in the democratic political process and the prevailing ideology shared by all parties (conveniently and profitably) that the state must play a large role in economic life, writes Meghnad Desai in The Financial Express.

We have all known about corruption in Indian political and business life. Many of us have had to give bribes to municipal officers, electricity or water suppliers, for telephone connections in the old days or for getting a gas cylinder. Few of us get the chance to take bribes. This is the side of the bargain we only hear about.

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The Radia tapes have exposed the business-politics-media nexus, which oozes corruption. Along with these, there has been a minor scandal of underhand loans for real estate companies in which PSU banks are implicated. The Maharashtra chief minister resigned for a housing allocation scandal and the Karnataka chief minister refused to resign despite a land scandal. Meanwhile, the IPL continues to speed along its own dubious trajectory. Business tycoons, normally reticent, have begun to speak up about the corruption they encounter. And, all this in a space of four weeks.

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Why is there so much corruption? One way to see it is that there are economic goods—contracts, land deals, permits—available at an administered price that understates their true value. The agent in charge of allocating such goods is in a pivotal position. He can grant it to you or deny you; he can delay you if you have a right to it and in the ultimate analysis, he can frustrate you be granting something, but in such a way that you can't use it. Jean Jacques Laffont, a brilliant French economic theorist, who died far too young, advanced the hypothesis that corruption is a principal agent problem.

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Corruption as rent seeking is a familiar idea. The opportunity to exploit the gap between the list price and the market price of controlled goods is obvious. But the need to keep goods under control for allocative purposes also needs to be endogenised. In India, the fashionable argument is that markets cannot be trusted to allocate goods fairly because of market failure. Hence the state has to allocate these goods. But the state is not a person. Its agent is the government, which is represented by politicians in office and their party apparatus. Where governments are honest, there is no need to worry about the gap between the actual and the market price of goods, like the NHS in the UK. I don’t need to bribe my MP to get admitted to a NHS ward for an expensive operation. I don’t need to bribe my local councillor to get planning permission to extend my patio.

So why are governments corrupt in India? They were not always so. In the 1950s, it was known that while there was corruption at lower levels of administration, the top echelons were uncorrupt. The black market, which had begun in the war years, had lasted for a while in the post-war years. Regulations such as prohibition encouraged more such black market, as did custom regulations and tariffs. Black money provided much of the finance for the film industry because the law forbade banks from loaning money to film producers (an anomaly corrected by the NDA government when Sushma Swaraj was the I&B minister). Thus black money did not lie idle; it recycled itself profitably in alcohol, films and often real estate. House purchase remains a black-plus-white payment activity still.

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Political parties are closed private firms in which outsiders cannot easily enter. They also restrict competition since it costs a lot to start a new party. Since independence, many national parties have folded—PSP, Swatantra, and apart from Jan Sangh renaming itself as BJP, there has been a stable number of parties. Congress, BJP and the Left (itself a divided house) are the only three stable actors at the national level. The Left has never been in power at the Centre (except the brief period of 1996-1998 in a coalition), and, even so, it is probably not very corrupt. The two national parties collude in making a show of fighting corruption, but never harm each other. It also does not benefit them to have an effective and independent anti-corruption agency. There are, indeed, no agencies in India—the top judiciary apart—that are independent of political parties in power, neither civil service nor the police. Even the Army has begun to enjoy the fruits of corruption.

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I am sceptical of the notion that corruption in India has a cure. It is too embedded in the democratic political process and the prevailing ideology shared by all parties (conveniently and profitably) that the state must play a large role in economic life. Jean Jacques Laffont in his article showed that corruption has U-curve if plotted against per capita income; development is thus a long-term cure for corruption, but his curve turns a corner very late in the development process. The only exception to this U-curve is the group of Scandinavian countries which are not corrupt at all. But that has to do with their religion, the Lutheran Church, and the discipline of their civic life. Religion does not seem to offer any lesson for non-corruption in India; just read the Mahabharat and you see why. So, the only cure is to wait for development .

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?

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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.

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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.

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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.

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.