In 2012 I wrote this paper for an Economics class on Comparative Economic Systems . It looks into the Institution development stagnation in India since Independence that has encouraged and led to corruption within the Indian government machinery.
Introduction
It is well known that India is plagued by rampant corruption in all strata of its society. From the lowest level government official to the highest ministers of government, self-interest seems to be more important for many of these individuals than their pledge to serve the citizens under them. If one was to look at the main topic that is routinely discussed in every Indian news channel, newspaper, and magazine, corruption would be it. Recent developments in the country have shown how much it has penetrated into businesses, and more disturbingly, the political machinery.
This paper tries to understand why corruption has managed to infiltrate and imbed itself so deeply in Indian society. To do that we have to go back to the country’s independence from British rule in 1947 and then move forward in time from there. This paper looks at how the type of government that was set up, particularly post 1965, was inclined to adopt a model of socialism, that resulted in economic production coming largely under the control of the public sector, which in turn led to incredible inefficiency in the economic production process at a national level, causing great shortages in output and thereby making the economic atmosphere ripe for “rent-seeking” which is the more technical term for corruption that is often used by economists. Another reason that this paper points to as a major cause for growth in corruption is the fact of how Indira Gandhi, the first and only woman prime-minister of India, implemented a broad policy of favoring sycophantic and loyal politicians for important positions in government as well as encouraging nepotism. This led to further inefficiency in the government machinery and degradation in democratic institutions, allowing only those who had close political connections with the main ruling party, The Congress; or those who had an ability to pay monumental amounts for services to be successful in private business enterprises. The last reason for the deep seated corruption will be attributed to the failure of the 1991 economic reforms to reform the political structure of India. Finally to sign off, a comment on the future of corruption in light of recent corruption scandals that have come to the public fore in the media will be made.
To reiterate, the structure of this paper is divided into 3 parts:
Part 1: Defining Corruption
• Understanding what corruption is and ,
• Understanding what its implications are on the functioning of government.
Part 2: Understanding the Causes of Corruption in India
• A History of government policies aimed towards large public control of the economy.
• A History of wide-spread nepotism within political parties leading to favoritism and abuse of power.
• No attempt to change in the complex and ambiguous bureaucratic structure of the government even though economic reforms were introduced in 1991 which focused on re-vitalizing the economy.
Part 3: Corruption Today, And What to Expect in the Future
• The future outlook of corruption today given the rising middle class and strongly independent media.
Part 1: Defining Corruption
Here C stands for Corruption, R for rent-seeking, D for discretionary power and A for accountability.
It therefore, stands to reason according to the above equation, that corruption incidence is high when opportunities for economic rent-seeking are high, discretionary powers given to public officials are large and accountability of these same officials, low or absent.
The three conditions that must be present within a government to foster the above factors: rent seeking opportunities, discretionary power and lack of accountability, according to Myint (pg 7), are :-
1. The government has an excessive number of rules and regulations and administrative orders to restrict business and economic activities, creating huge opportunities for generating economic rent, especially if these restrictive measures are complex and opaque and applied in a selective, secretive, inconsistent and non-transparent way.
2. Administrators are granted large discretionary powers with respect to interpreting rules, and given a lot of freedom to decide on how rules are to be applied, to whom and in what matter they are applied, are vested with powers to amend, alter, and rescind the rules, and even to supplement the rules by invoking new restrictive administrative measures and procedures; and,
3. There are no effective mechanisms and institutional arrangements in the country to hold administrators accountable for their actions.
The above quote is attributed to the roman senator and historian Publius Tacitus, and it can certainly be applied to India. With 395 Articles and eight Schedules, the Constitution of India is the longest in the world (Guha, pg 115). Add onto that the incredible number of laws and regulations, and tariffs and you see the legal environment is confusing and on many particular areas, unclearly defined and ambiguous. Take the case of Foreign Direct Investment in India.
The cost of doing business is infamous in the country. If you are a multinational company looking to expand production and sales in the Indian market for the first time because of the potential demand, then it is even worse. The World Bank ranks India as 135th out of 185 countries in the ease of doing business. As can be seen from the table below the per capita cost is more than double that of South Asian countries and 112 times that of OECD countries. Interestingly enough even other south-Asian countries like Pakistan and Bangladesh are ranked much higher than India in their ease of doing business.
The more complicated and difficult it is to follow formal rules of a country, the more individuals will seek alternate ways to get things done (Myint, pg. 5) . That is, the opportunity for rent-seeking increases greatly. So why are the rules of doing business so difficult and complex in India?
New Country, Old Model:
In 1947, like many other contemporary countries that had just been freed from colonial rule, India looked towards its future with great optimism. Sure, the problems that the country was facing were great indeed. But now that the rulers of the country were to be the citizens of India itself, and they were well educated, selfless and extremely devoted to pluralism and democratic government, there was no doubt that India, now free of British rule would begin to make great strides toward economic progress. Unfortunately, that did not happen. Nehru the first prime- minister of India had always been enamored more by socialism in Russia than capitalism in the West, His visit to the Soviet Union in its heyday, in 1927, probably influenced him greatly. Other important members of the Indian national movement such as Lala Rajpath Rai wrote in favor of the Japanese model which had undergone transformation during the early late 19th to early 20th century from an agrarian to industrial society. The role of the state in this transformation had been crucial, and as Rai wrote: “Japan owes its present industrial prosperity to the fore-sight, sagacity and patriotism of her government" (Guha, pg 210). At the same time, the common belief was that the west had begun its Imperialist policies on account of greed. Greed that a capitalist society had brings about on countries.
With such ubiquitous agreement that a push from the government was needed to forward industrialization, it was no surprise that the National Planning Commission was set up to come up with intricate 5-year plans similar to those in the Soviet Union, that laid down short-term goals for various areas of production output in the economy. For example the second five year plan sets a production target of 6 million tons of steel (Guha, pg 219), 445 million rupees of investment in power, and 530 million rupees investment in Agriculture and Community development. The goal of Indian leaders was to become self-reliant. And so "self reliance became the index of development and progress"(Guha, pg 216). All material requirements were to come from Indian land, Indian Labor and Indian technology (Guha, pg 216) In today's world where the importance of globalization and openness in Trade is seen as fundamental factors for a country’s' development, such a model seems like madness. Even in 1955, Milton Friedman believed, “India's economic model was too mathematical: obsessed with capial-output ratios, rather than human capital development”(Guha, pg 229).
In any case, this model led to three main outcomes (Bhagwati, pg 32):-
1. Extensive Bureaucratic controls over production, investment, and trade;
2. Inward looking trade and foreign investment policies
3. A substantial public sector, going well beyond the conventional confines of public utilities and infrastructure.
The above out-comes would lead to severe degradation in institutional reforms and affected potential GDP growth.
Since policy makers favored a model inspired by the Soviet Union model of focusing capital-intensive industrialization. Capital- Intensive industry was believed to be a necessary investment for the long term development of the country (Mukerjee, introduction, Pg 5). In this regard, public intervention was deemed necessary and at the same time the private sector was to be barred from many areas. This was the philosophy given by the National Planning Committee (NPC) in a report where they also said that planned development upheld the principle of “service before Profit.” (Guha, Pg. 213). Guha also states that the NPC:
“Believed that there were large areas of the economy where the private sector could not be trusted, where the aims of planning could be realized only ‘If the matter is handled as a collective Public enterprise’ “.
It would not have come as a surprise to any-one then that in the second five year plan:
“The emphasis on heavy industry in the public sector was a distinct characteristic……The Industrial policy resolution of 1956 brought more areas of industrial activity under regulation. Private investment in organized industry in the First Plan was about twice the level of public investment. This sequence stood reversed, and there was much greater investment in large scale public sector industries than in industries in the private sector in the Second Plan. Even though private capital had some room for man oeuvre, the state’s powers over private capital through licensing and financial controls, rendered the private sector in a position of dependence with respect to the state.” (Mukherjee, introduction Pg 5)
It was from this point onwards that any hope of a liberal economy taking shape where private enterprise would be free enough to be guided by Adam Smith’s “invisible hand” began diminishing. It would become much worse very soon after for economic freedom. For the spread of corruption however, the environment was beginning to become just right.
When Nehru’s daughter Indira Gandhi became prime minister in 1966 the rules and regulations
Began to pile up even more:
“All major banks were nationalized in 1969. The Monopolies and Restrictive Trade Practices Act barred all commercial enterprises valued at greater than Rs. 200 million rupees (around 3.5 million dollars in today terms) from expansion or diversication. The industrial licensing policy was made more stringent. By 1971 the government of India nationalized the coal, copper, general insurance and significant parts of the steel industry. The wheat trade was nationalized. The foreign exchange regulation act of 1974 brought down the permissible level of foreign equity in Indian firms from 51 percent to 40 percent (Mukherjee, pg. 9)”.
The business environment became so toxic during this time that India became to be known as the License Raj. One gets an Idea of the level of red-tape restricting business when they look at the figures. For example the table below shows import tariff rates in 1985 per country:
The reasoning behind such heavy restrictions was the aim of self- sufficiency as stated earlier. But the effects of such a policy were detrimental. The economy virtually shut it-self off from international trade, the cost of labor and other inputs jumped up, and the government enterprises ran with extra ordinary inefficiency. (The economist, tales of the license raj, may 1991).
This high level of restrictions leads to large shortages and therefore opportunities for rent.
According to the May 1991 issue of economist the story of everyday life was plagued with corruption:
“Official favors are for sale at every level of Indian society. Peasant farmers may pay to get water diverted to their rural land from other parts of the system. Rural migrants camped illegally in urban slums bribe the police to avoid eviction; they pay rent to a slum landlord who is himself bribing other officials to stay in business…..Across a broad range of transactions – transferring the ownership of property, obtaining permission to build a new house, having a new telephone installed or electricity connected-bribery is so pervasive that they are often scales of charges, with professional intermediaries to expedite matters.”
An interesting diagram that shows the permeation of corruption within the political system is shown below. It shows a circuit of cash and influence in an Indian state in 1985. The most disturbing flow of cash one can see in the diagram is the flow of cash from the party, and ministers and MLA’s buying votes from the population.
Nepotism and Favoritism
Jawarlal Nehru remained as prime minister up-till his death in 1964. His daughter Indira Gandhi who first joined parliament as Minister of Information and Broadcasting, later becoming Prime Minister in 1966. In 1969, the Congress Party split. Which helped concentrate power in her hands. She was able to place her own chosen candidates in key positions, not based on merit but on the basis of loyalty. A good example is given by Ramchandra Guha where he describes the selection of A.N. Ray as Chief Justice of the Supreme Court in 1973. Usually the senior most members are appointed as Chief Justice after the previous one retires. How-ever in 1973 A.N. Ray was chosen even though three colleagues were senior to him.
This and many other examples show how many key jobs in government began to be assigned to bureaucrats who shared the socialist ideology of Mrs. Gandhi and her advisers (Guha, pg 473)
Essentially Indira Gandhi created a large network of puppets that were ordered about according to her every whim. The consequences of this were that to get any private economic activity done, one had to be close personally to those within the political and bureaucratic structure.
Apart from having a “contact” within the system it was also necessary to provide them with some incentive to oil the wheel so to say, in order to get the licenses and registrations passed so that you could get your Business rolling. Three examples will be used to better illustrate this point.
The first example is that of Dirubhai Ambani, owner of Reliance industries. According to the Economist he was known to have a Knack for “string Pulling”. He came under many controversies in the 1980’s regarding tax heavens illegal smuggling of second-hand equipment for his petrochemical factories, The most serious of which forced him to step down as chairman of Larsen and Toubro after doubts began to arise on how he acquired the chairmanship.
The Economist gives another eye-opening example of favoritism:
“Discretion runs from top to bottom. In Bombay one hears of the well connected businessman who, in Indira Gandhi’s time, had a shipload of prohibited chemicals waiting outside the docks; the ban was lifted for 24 hours. Friends in high places and an ability to manipulate the system, one is constantly told, count for more than mere business skill.”(The Economist, My 1985 issue)
The most damning example relates to Indira Gandhi’s son itself, Sanjay Gandhi. After passing school with difficulty and finishing an apprenticeship with Rolls Royce in England he, according to Guha, wanted to start a car factory. Along with his request for a factory project, there were eighteen other applications that were received by the government of India requesting licenses to make small cars.
Only Sanjay Gandhi’s request was approved even though he had no prior experience (Guha, pg 469).
The above three examples are the essence of two party type of corruption that begin to occur when the central government is openly rent-seeking. The variety of circumstances under which it can occur (as the above three examples illustrate) can be (Myint Pg 3):
1. Government Contracts: When a public project (such as building roads is given to a private contractor, bribes can influence who gets the contract.
2. Government Revenue: Bribes can be used to reduce the amount of taxes, fees, custom duties, electricity and other public utility charges collected from business firms and private individuals.
3. Time saving and regulatory avoidance: bribes often speed up granting of permission licenses and permits to carry out activates that are perfectly legal. This extra monetary incentive, labeled grease money is used to speed up and more often than that, completely avoid legal and commercial processes such as paper-work which have been bogged down by such complex and burdensome rules and regulations that the cost of bribing government officials to avoid them is less than it would be to follow them.
If any Indian were to read the examples given in this paper to illustrate the instances of corruption, they would be forgiven to assume that the examples are taken from present day India. That is because most of what used to happen pre-1991 still occurs today albeit on a slightly lower scale.
By 1991 the Indian Government was in a state of Fiscal Crisis. Because of trying to nurture a closed-economy and rejecting international trade, No Foreign Direct Investment ( FDI) was coming into the economy. Government agencies were riddled with corruption. As a consequence hardly any revenue was being generated.
In 1991 the first and most important liberalization reforms began to be implemented to ease the deficit crisis that the government was facing. But none of them touched upon Political reform. Charan D. Wadhva in his paper India Trying to Liberalize: Economic Reforms Since 1991 mentions two areas these reforms focused on:-
1. Major Macro-economic management reforms which focused primarily on reducing the fiscal deficit and revenue deficit.
2. Structural and sector-specific economic reforms which were sector specific and were carried out in the following areas: Trade Policy, Industrial Policy, Policies for attracting foreign investment and Privatization.
Though these measures have helped vitalize the economy to a great extent, Wadwa also warns (pg. 11) that “the vested interests of groups such as trade unions producers with licenses and holding monopoly interests, and bureaucrats with rent-seeking capabilities” still exist and “have often scuttled or delayed further market-based economic reforms”.
A 2011 report on corruption by KPMG India stated that “it is not about petty bribes anymore but scams to the tune of thousands of crores (hundreds of millions of dollars) that highlight a political/industry nexus which if not checked could [continue] to have a far reaching impact…..There is an urgent need to have a comprehensive framework that would help curtail corruption at higher levels.”
Rajan Mittal, owner of Airtel, One of India’s many Private Telecom companies that bloomed in the 1990’s thanks to implementation of (slightly) more lax rules regarding private enterprises said the following about complicated ministries:
“There are many ministries that should not be here ….If I look at the Industry ministry, there’s a Industry minister, a heavy industry minister, a MSC minister, there should be one Industry Minister”( TehelkaTV, Profit and Prejudice, YouTube, Nov. 9th 2012).
Nepotism still continues to exist, especially when one looks at the political dynasty of the Nehru- Gandhi family which still has a strong hold on the Congress Party. Four generations of the Gandhi family have been in power since 1947. First came Nehru who stood as prime minister from 1947 till his death in 1964. Then his daughter Indira Gandhi who remained in power almost continuously from 1966 till 1984, the year of her assassination. Her son Rajiv Gandhi succeeded her until 1991 when he too was assassinated. Today The Congress Party has been in power since 2004. Members of The Gandhi Family are found in top positions within the government: Sonia Gandhi is the Widow of Rajiv Gandhi and has been President of the Congress Party since 2004. Her son Rahul Gandhi is the General Secretary of the Congress Party. It has long been rumored that though Sonia Gandhi is not prime minister, by being chairperson of the United Progressive Alliance (the ruling coalition headed by the Congress) she in fact is the main person in charge.
Though most of this paper is filled with examples that portray an extremely negative picture when it comes to malpractices within India’s government, there are still some things to be optimistic about.
Firstly, throughout the corruption malaise, the democratic machinery of The State has not been affected. The country has held elections continuously since 1952 and though they have been persistent instances of buying votes, there never has been a case of election fraud. This has given the Indian citizenry immense power. If a large majority of the population in a constituency believes that the leader of their constituency is not up to the mark, they can vote him out. Secondly, and in fact most importantly thanks to the post 1991 economic growth there has been an explosive rise of an increasingly frustrated middle class. A middle class that is demanding more and more from its government. Recently, since 2010, there has been a strong movement against corruption under the leadership of the social activist Anna Hazare. Anna Hazare was one of the pioneers behind the Right to Information act (RTI) (Annahazare.org). According to the RTI website:
“Right to Information Act 2005 mandates timely response to citizen requests for government information. It is an initiative taken by Department of Personnel and Training, Ministry of Personnel, Public Grievances and Pensions to provide a– RTI Portal Gateway to the citizens for quick search of information on the details of first Appellate Authorities, PIOs etc. amongst others, besides access to RTI related information / disclosures published on the web by various Public Authorities under the government of India as well as the State Governments.”
This act has been considered an exceptional step towards creating a more inclusive society and informed citizenry (ndtv.com).
Anna Hazare has also led a strong anti-corruption movement since 2010, which has been able to attract large crowds of people.
This anti- corruption movement,it must be said has a lot to thank the Indian media in helping them to reach a significant audience.
The Indian media has continuously expanded post 1991. In the early 1980’s there was one news channel, the government owned- Doordarshan. At present there are more than twenty in number (Indianetzone.com, November 2012). Print media has been seeing a growth spurt as well. Whereas in the US, the distribution of print media has declined considerably, In India the exact opposite is true. The circulation of print media grew about 17% in 2007 in India. Rising literacy rates combined with the fact that only 7 percent of the Indian population has access to the internet are major factors contributing to this level of growth (ibtimes.com)
The fact that the media is not at all under much government control has had immense implications with regard to the exposure of corruption.
The Indian media has been instrumental in uncovering various government scandals. Some major government scams that the media has uncovered (ndtv.com) in the last decade are:
1. The 2012 Coal scam: worth $33.8 billion
2. The 2010 2G spectrum scam: The auction of communication bandwidth at lower than Market price. worth $ 32 billion
3. The 2003 Food grain scam: Where Food meant to be allocated by the government to the poor was in fact sold in local markets. Worth 6.7 billion dollars
This tight hold that the media has on what politicians continuously do, gives immense power to the population of India. A requirement if a country is to move along towards becoming a more pluralistic society.
References
1. Bhagwati, Jagdish, "What Went Wrong," in Critical Issues in Indian Politics: India’s Economic Transition, the Politics of Reforms. Second ed. (New Delhi: Oxford University Press, 2007). Pp. 27-51.
2. Economist, The, “India Caged” in The Economist Magazine, May 1991 issue
3. Guha, Ramchandra. India After Gandhi: The History of the Worlds Largest Democracy. First ed. (New York: HarperCollins Publishers . 2007).
4. KPMG India, Bribery Survey Report, 2011
5. Mukherji, Rahul, "Introduction: The State and Private Initiative in India," in Critical Issues in Indian Politics:India’s Economic Transition, The Politics of Reforms. Second ed. (New Delhi: Oxford University Press, 2007). Pp. 1-24.
6. Myint, U., "Corruption: Causes, Consequences and Cures," in Asia Pacific Journal. Volume 7, No 2. 2000 Pp. 33-59.
7. Wadwha, Charan , “India Trying to Liberalize: Economic Reforms since 1991” in Economic Reforms in India, Pp. 259-285
8. World Bank, Ease of Doing business 2013 report.
9. "Indian News Channels." Indian News Channels. N.p., n.d. Web. 12 nov. 2012. url: http://www.indianetzone.com/3/indian_news_channels.htm
10. "Newspaper Boom In Asia Defies Trends In West." International Business Times. N.p., n.d. Web. 12 nov. 2012. url: http://www.ibtimes.com/newspaper-boom-asia-defies-trends-west-438358
11. "Transparency? Not Really, Says a Man Who Helped Guard the Right to Information."NDTV.com. N.p., n.d. Web. 12 Aug. 2013. url: http://www.ndtv.com/article/india/transparency-not-really-says-a-man-who-helped-guard-the-right-to-information-240453
12. "Annahazare.org." Annahazare.org. N.p., n.d. Web. 12 Aug. 2013. url: www.annahazare.org
It is well known that India is plagued by rampant corruption in all strata of its society. From the lowest level government official to the highest ministers of government, self-interest seems to be more important for many of these individuals than their pledge to serve the citizens under them. If one was to look at the main topic that is routinely discussed in every Indian news channel, newspaper, and magazine, corruption would be it. Recent developments in the country have shown how much it has penetrated into businesses, and more disturbingly, the political machinery.
This paper tries to understand why corruption has managed to infiltrate and imbed itself so deeply in Indian society. To do that we have to go back to the country’s independence from British rule in 1947 and then move forward in time from there. This paper looks at how the type of government that was set up, particularly post 1965, was inclined to adopt a model of socialism, that resulted in economic production coming largely under the control of the public sector, which in turn led to incredible inefficiency in the economic production process at a national level, causing great shortages in output and thereby making the economic atmosphere ripe for “rent-seeking” which is the more technical term for corruption that is often used by economists. Another reason that this paper points to as a major cause for growth in corruption is the fact of how Indira Gandhi, the first and only woman prime-minister of India, implemented a broad policy of favoring sycophantic and loyal politicians for important positions in government as well as encouraging nepotism. This led to further inefficiency in the government machinery and degradation in democratic institutions, allowing only those who had close political connections with the main ruling party, The Congress; or those who had an ability to pay monumental amounts for services to be successful in private business enterprises. The last reason for the deep seated corruption will be attributed to the failure of the 1991 economic reforms to reform the political structure of India. Finally to sign off, a comment on the future of corruption in light of recent corruption scandals that have come to the public fore in the media will be made.
To reiterate, the structure of this paper is divided into 3 parts:
Part 1: Defining Corruption
• Understanding what corruption is and ,
• Understanding what its implications are on the functioning of government.
Part 2: Understanding the Causes of Corruption in India
• A History of government policies aimed towards large public control of the economy.
• A History of wide-spread nepotism within political parties leading to favoritism and abuse of power.
• No attempt to change in the complex and ambiguous bureaucratic structure of the government even though economic reforms were introduced in 1991 which focused on re-vitalizing the economy.
Part 3: Corruption Today, And What to Expect in the Future
• The future outlook of corruption today given the rising middle class and strongly independent media.
Part 1: Defining Corruption
The Corruption equation
In his paper, Corruption: Causes, Consequences and Cures, U Myint defines corruption as ‘The use of public office for private gain and places the below under that category (Myint, Pg 7): (a) bribery, (b) Fraud, (c) Nepotism, (d) appropriation of public assets and property for private use.
Myint also gives what he calls the corruption equation, which is given as:
In his paper, Corruption: Causes, Consequences and Cures, U Myint defines corruption as ‘The use of public office for private gain and places the below under that category (Myint, Pg 7): (a) bribery, (b) Fraud, (c) Nepotism, (d) appropriation of public assets and property for private use.
Myint also gives what he calls the corruption equation, which is given as:
C = R+D – A
Here C stands for Corruption, R for rent-seeking, D for discretionary power and A for accountability.
It therefore, stands to reason according to the above equation, that corruption incidence is high when opportunities for economic rent-seeking are high, discretionary powers given to public officials are large and accountability of these same officials, low or absent.
The three conditions that must be present within a government to foster the above factors: rent seeking opportunities, discretionary power and lack of accountability, according to Myint (pg 7), are :-
1. The government has an excessive number of rules and regulations and administrative orders to restrict business and economic activities, creating huge opportunities for generating economic rent, especially if these restrictive measures are complex and opaque and applied in a selective, secretive, inconsistent and non-transparent way.
2. Administrators are granted large discretionary powers with respect to interpreting rules, and given a lot of freedom to decide on how rules are to be applied, to whom and in what matter they are applied, are vested with powers to amend, alter, and rescind the rules, and even to supplement the rules by invoking new restrictive administrative measures and procedures; and,
3. There are no effective mechanisms and institutional arrangements in the country to hold administrators accountable for their actions.
Part 2: Root Causes of Corruption in India
Doing Business in India: “The more corrupt the state, the more numerous the laws"The above quote is attributed to the roman senator and historian Publius Tacitus, and it can certainly be applied to India. With 395 Articles and eight Schedules, the Constitution of India is the longest in the world (Guha, pg 115). Add onto that the incredible number of laws and regulations, and tariffs and you see the legal environment is confusing and on many particular areas, unclearly defined and ambiguous. Take the case of Foreign Direct Investment in India.
The cost of doing business is infamous in the country. If you are a multinational company looking to expand production and sales in the Indian market for the first time because of the potential demand, then it is even worse. The World Bank ranks India as 135th out of 185 countries in the ease of doing business. As can be seen from the table below the per capita cost is more than double that of South Asian countries and 112 times that of OECD countries. Interestingly enough even other south-Asian countries like Pakistan and Bangladesh are ranked much higher than India in their ease of doing business.
| Ease
of Doing Business |
||||
Country
|
Rank
|
Procedure
(number)
|
Time
(days)
|
Cost
(% of income per capita)
|
USA
|
4
|
6
|
6
|
1.4
|
Sri-Lanka
|
81
|
5
|
7
|
19
|
Pakistan
|
107
|
10
|
21
|
9.9
|
Nepal
|
108
|
7
|
29
|
33
|
Bhutan
|
148
|
8
|
36
|
6.5
|
Bangladesh
|
129
|
7
|
19
|
25.1
|
India
|
132
|
12
|
27
|
49.8
|
The more complicated and difficult it is to follow formal rules of a country, the more individuals will seek alternate ways to get things done (Myint, pg. 5) . That is, the opportunity for rent-seeking increases greatly. So why are the rules of doing business so difficult and complex in India?
New Country, Old Model:
In 1947, like many other contemporary countries that had just been freed from colonial rule, India looked towards its future with great optimism. Sure, the problems that the country was facing were great indeed. But now that the rulers of the country were to be the citizens of India itself, and they were well educated, selfless and extremely devoted to pluralism and democratic government, there was no doubt that India, now free of British rule would begin to make great strides toward economic progress. Unfortunately, that did not happen. Nehru the first prime- minister of India had always been enamored more by socialism in Russia than capitalism in the West, His visit to the Soviet Union in its heyday, in 1927, probably influenced him greatly. Other important members of the Indian national movement such as Lala Rajpath Rai wrote in favor of the Japanese model which had undergone transformation during the early late 19th to early 20th century from an agrarian to industrial society. The role of the state in this transformation had been crucial, and as Rai wrote: “Japan owes its present industrial prosperity to the fore-sight, sagacity and patriotism of her government" (Guha, pg 210). At the same time, the common belief was that the west had begun its Imperialist policies on account of greed. Greed that a capitalist society had brings about on countries.
With such ubiquitous agreement that a push from the government was needed to forward industrialization, it was no surprise that the National Planning Commission was set up to come up with intricate 5-year plans similar to those in the Soviet Union, that laid down short-term goals for various areas of production output in the economy. For example the second five year plan sets a production target of 6 million tons of steel (Guha, pg 219), 445 million rupees of investment in power, and 530 million rupees investment in Agriculture and Community development. The goal of Indian leaders was to become self-reliant. And so "self reliance became the index of development and progress"(Guha, pg 216). All material requirements were to come from Indian land, Indian Labor and Indian technology (Guha, pg 216) In today's world where the importance of globalization and openness in Trade is seen as fundamental factors for a country’s' development, such a model seems like madness. Even in 1955, Milton Friedman believed, “India's economic model was too mathematical: obsessed with capial-output ratios, rather than human capital development”(Guha, pg 229).
In any case, this model led to three main outcomes (Bhagwati, pg 32):-
1. Extensive Bureaucratic controls over production, investment, and trade;
2. Inward looking trade and foreign investment policies
3. A substantial public sector, going well beyond the conventional confines of public utilities and infrastructure.
The above out-comes would lead to severe degradation in institutional reforms and affected potential GDP growth.
Since policy makers favored a model inspired by the Soviet Union model of focusing capital-intensive industrialization. Capital- Intensive industry was believed to be a necessary investment for the long term development of the country (Mukerjee, introduction, Pg 5). In this regard, public intervention was deemed necessary and at the same time the private sector was to be barred from many areas. This was the philosophy given by the National Planning Committee (NPC) in a report where they also said that planned development upheld the principle of “service before Profit.” (Guha, Pg. 213). Guha also states that the NPC:
“Believed that there were large areas of the economy where the private sector could not be trusted, where the aims of planning could be realized only ‘If the matter is handled as a collective Public enterprise’ “.
It would not have come as a surprise to any-one then that in the second five year plan:
“The emphasis on heavy industry in the public sector was a distinct characteristic……The Industrial policy resolution of 1956 brought more areas of industrial activity under regulation. Private investment in organized industry in the First Plan was about twice the level of public investment. This sequence stood reversed, and there was much greater investment in large scale public sector industries than in industries in the private sector in the Second Plan. Even though private capital had some room for man oeuvre, the state’s powers over private capital through licensing and financial controls, rendered the private sector in a position of dependence with respect to the state.” (Mukherjee, introduction Pg 5)
It was from this point onwards that any hope of a liberal economy taking shape where private enterprise would be free enough to be guided by Adam Smith’s “invisible hand” began diminishing. It would become much worse very soon after for economic freedom. For the spread of corruption however, the environment was beginning to become just right.
When Nehru’s daughter Indira Gandhi became prime minister in 1966 the rules and regulations
Began to pile up even more:
“All major banks were nationalized in 1969. The Monopolies and Restrictive Trade Practices Act barred all commercial enterprises valued at greater than Rs. 200 million rupees (around 3.5 million dollars in today terms) from expansion or diversication. The industrial licensing policy was made more stringent. By 1971 the government of India nationalized the coal, copper, general insurance and significant parts of the steel industry. The wheat trade was nationalized. The foreign exchange regulation act of 1974 brought down the permissible level of foreign equity in Indian firms from 51 percent to 40 percent (Mukherjee, pg. 9)”.
The business environment became so toxic during this time that India became to be known as the License Raj. One gets an Idea of the level of red-tape restricting business when they look at the figures. For example the table below shows import tariff rates in 1985 per country:
Nominal tariff rates, 1985. % of value
|
||||
Country
|
Intermediate
Goods
|
Capital
Goods
|
Consumer
Goods
|
Manufactured
Goods
|
Hungary
|
14.2
|
15
|
22.6
|
20.9
|
Yugoslavia
|
18
|
20.7
|
20
|
19
|
Morocco
|
21.6
|
18.1
|
43
|
27.3
|
Philippines
|
21.8
|
24.5
|
39
|
28
|
Mexico
|
25.5
|
23.5
|
32.2
|
24.7
|
Thailand
|
27.8
|
24.8
|
8.5
|
33.6
|
Turkey
|
29.4
|
54.9
|
55.3
|
37.1
|
Pakistan
|
75
|
73.8
|
127.3
|
89.8
|
China
|
78
|
62.5
|
130.7
|
91.2
|
Bangladesh
|
97.9
|
80.5
|
116.1
|
100.8
|
India
|
146.4
|
107.3
|
140.9
|
137.7
|
Source: The economist, May 4th
1991 issue
The reasoning behind such heavy restrictions was the aim of self- sufficiency as stated earlier. But the effects of such a policy were detrimental. The economy virtually shut it-self off from international trade, the cost of labor and other inputs jumped up, and the government enterprises ran with extra ordinary inefficiency. (The economist, tales of the license raj, may 1991).
This high level of restrictions leads to large shortages and therefore opportunities for rent.
According to the May 1991 issue of economist the story of everyday life was plagued with corruption:
“Official favors are for sale at every level of Indian society. Peasant farmers may pay to get water diverted to their rural land from other parts of the system. Rural migrants camped illegally in urban slums bribe the police to avoid eviction; they pay rent to a slum landlord who is himself bribing other officials to stay in business…..Across a broad range of transactions – transferring the ownership of property, obtaining permission to build a new house, having a new telephone installed or electricity connected-bribery is so pervasive that they are often scales of charges, with professional intermediaries to expedite matters.”
An interesting diagram that shows the permeation of corruption within the political system is shown below. It shows a circuit of cash and influence in an Indian state in 1985. The most disturbing flow of cash one can see in the diagram is the flow of cash from the party, and ministers and MLA’s buying votes from the population.
Nepotism and Favoritism
Jawarlal Nehru remained as prime minister up-till his death in 1964. His daughter Indira Gandhi who first joined parliament as Minister of Information and Broadcasting, later becoming Prime Minister in 1966. In 1969, the Congress Party split. Which helped concentrate power in her hands. She was able to place her own chosen candidates in key positions, not based on merit but on the basis of loyalty. A good example is given by Ramchandra Guha where he describes the selection of A.N. Ray as Chief Justice of the Supreme Court in 1973. Usually the senior most members are appointed as Chief Justice after the previous one retires. How-ever in 1973 A.N. Ray was chosen even though three colleagues were senior to him.
This and many other examples show how many key jobs in government began to be assigned to bureaucrats who shared the socialist ideology of Mrs. Gandhi and her advisers (Guha, pg 473)
Essentially Indira Gandhi created a large network of puppets that were ordered about according to her every whim. The consequences of this were that to get any private economic activity done, one had to be close personally to those within the political and bureaucratic structure.
Apart from having a “contact” within the system it was also necessary to provide them with some incentive to oil the wheel so to say, in order to get the licenses and registrations passed so that you could get your Business rolling. Three examples will be used to better illustrate this point.
The first example is that of Dirubhai Ambani, owner of Reliance industries. According to the Economist he was known to have a Knack for “string Pulling”. He came under many controversies in the 1980’s regarding tax heavens illegal smuggling of second-hand equipment for his petrochemical factories, The most serious of which forced him to step down as chairman of Larsen and Toubro after doubts began to arise on how he acquired the chairmanship.
The Economist gives another eye-opening example of favoritism:
“Discretion runs from top to bottom. In Bombay one hears of the well connected businessman who, in Indira Gandhi’s time, had a shipload of prohibited chemicals waiting outside the docks; the ban was lifted for 24 hours. Friends in high places and an ability to manipulate the system, one is constantly told, count for more than mere business skill.”(The Economist, My 1985 issue)
The most damning example relates to Indira Gandhi’s son itself, Sanjay Gandhi. After passing school with difficulty and finishing an apprenticeship with Rolls Royce in England he, according to Guha, wanted to start a car factory. Along with his request for a factory project, there were eighteen other applications that were received by the government of India requesting licenses to make small cars.
Only Sanjay Gandhi’s request was approved even though he had no prior experience (Guha, pg 469).
The above three examples are the essence of two party type of corruption that begin to occur when the central government is openly rent-seeking. The variety of circumstances under which it can occur (as the above three examples illustrate) can be (Myint Pg 3):
1. Government Contracts: When a public project (such as building roads is given to a private contractor, bribes can influence who gets the contract.
2. Government Revenue: Bribes can be used to reduce the amount of taxes, fees, custom duties, electricity and other public utility charges collected from business firms and private individuals.
3. Time saving and regulatory avoidance: bribes often speed up granting of permission licenses and permits to carry out activates that are perfectly legal. This extra monetary incentive, labeled grease money is used to speed up and more often than that, completely avoid legal and commercial processes such as paper-work which have been bogged down by such complex and burdensome rules and regulations that the cost of bribing government officials to avoid them is less than it would be to follow them.
Part 3: Post-1991: Easier Trade, As Difficult a Government: The struggle of the Indian Political Body to avoid any structural change.
If any Indian were to read the examples given in this paper to illustrate the instances of corruption, they would be forgiven to assume that the examples are taken from present day India. That is because most of what used to happen pre-1991 still occurs today albeit on a slightly lower scale.
By 1991 the Indian Government was in a state of Fiscal Crisis. Because of trying to nurture a closed-economy and rejecting international trade, No Foreign Direct Investment ( FDI) was coming into the economy. Government agencies were riddled with corruption. As a consequence hardly any revenue was being generated.
In 1991 the first and most important liberalization reforms began to be implemented to ease the deficit crisis that the government was facing. But none of them touched upon Political reform. Charan D. Wadhva in his paper India Trying to Liberalize: Economic Reforms Since 1991 mentions two areas these reforms focused on:-
1. Major Macro-economic management reforms which focused primarily on reducing the fiscal deficit and revenue deficit.
2. Structural and sector-specific economic reforms which were sector specific and were carried out in the following areas: Trade Policy, Industrial Policy, Policies for attracting foreign investment and Privatization.
Though these measures have helped vitalize the economy to a great extent, Wadwa also warns (pg. 11) that “the vested interests of groups such as trade unions producers with licenses and holding monopoly interests, and bureaucrats with rent-seeking capabilities” still exist and “have often scuttled or delayed further market-based economic reforms”.
A 2011 report on corruption by KPMG India stated that “it is not about petty bribes anymore but scams to the tune of thousands of crores (hundreds of millions of dollars) that highlight a political/industry nexus which if not checked could [continue] to have a far reaching impact…..There is an urgent need to have a comprehensive framework that would help curtail corruption at higher levels.”
Rajan Mittal, owner of Airtel, One of India’s many Private Telecom companies that bloomed in the 1990’s thanks to implementation of (slightly) more lax rules regarding private enterprises said the following about complicated ministries:
“There are many ministries that should not be here ….If I look at the Industry ministry, there’s a Industry minister, a heavy industry minister, a MSC minister, there should be one Industry Minister”( TehelkaTV, Profit and Prejudice, YouTube, Nov. 9th 2012).
Nepotism still continues to exist, especially when one looks at the political dynasty of the Nehru- Gandhi family which still has a strong hold on the Congress Party. Four generations of the Gandhi family have been in power since 1947. First came Nehru who stood as prime minister from 1947 till his death in 1964. Then his daughter Indira Gandhi who remained in power almost continuously from 1966 till 1984, the year of her assassination. Her son Rajiv Gandhi succeeded her until 1991 when he too was assassinated. Today The Congress Party has been in power since 2004. Members of The Gandhi Family are found in top positions within the government: Sonia Gandhi is the Widow of Rajiv Gandhi and has been President of the Congress Party since 2004. Her son Rahul Gandhi is the General Secretary of the Congress Party. It has long been rumored that though Sonia Gandhi is not prime minister, by being chairperson of the United Progressive Alliance (the ruling coalition headed by the Congress) she in fact is the main person in charge.
Part 4: Looking at the bright side: The rising middle class and the Freer Media
Though most of this paper is filled with examples that portray an extremely negative picture when it comes to malpractices within India’s government, there are still some things to be optimistic about.
Firstly, throughout the corruption malaise, the democratic machinery of The State has not been affected. The country has held elections continuously since 1952 and though they have been persistent instances of buying votes, there never has been a case of election fraud. This has given the Indian citizenry immense power. If a large majority of the population in a constituency believes that the leader of their constituency is not up to the mark, they can vote him out. Secondly, and in fact most importantly thanks to the post 1991 economic growth there has been an explosive rise of an increasingly frustrated middle class. A middle class that is demanding more and more from its government. Recently, since 2010, there has been a strong movement against corruption under the leadership of the social activist Anna Hazare. Anna Hazare was one of the pioneers behind the Right to Information act (RTI) (Annahazare.org). According to the RTI website:
“Right to Information Act 2005 mandates timely response to citizen requests for government information. It is an initiative taken by Department of Personnel and Training, Ministry of Personnel, Public Grievances and Pensions to provide a– RTI Portal Gateway to the citizens for quick search of information on the details of first Appellate Authorities, PIOs etc. amongst others, besides access to RTI related information / disclosures published on the web by various Public Authorities under the government of India as well as the State Governments.”
This act has been considered an exceptional step towards creating a more inclusive society and informed citizenry (ndtv.com).
Anna Hazare has also led a strong anti-corruption movement since 2010, which has been able to attract large crowds of people.
This anti- corruption movement,it must be said has a lot to thank the Indian media in helping them to reach a significant audience.
The Indian media has continuously expanded post 1991. In the early 1980’s there was one news channel, the government owned- Doordarshan. At present there are more than twenty in number (Indianetzone.com, November 2012). Print media has been seeing a growth spurt as well. Whereas in the US, the distribution of print media has declined considerably, In India the exact opposite is true. The circulation of print media grew about 17% in 2007 in India. Rising literacy rates combined with the fact that only 7 percent of the Indian population has access to the internet are major factors contributing to this level of growth (ibtimes.com)
The fact that the media is not at all under much government control has had immense implications with regard to the exposure of corruption.
The Indian media has been instrumental in uncovering various government scandals. Some major government scams that the media has uncovered (ndtv.com) in the last decade are:
1. The 2012 Coal scam: worth $33.8 billion
2. The 2010 2G spectrum scam: The auction of communication bandwidth at lower than Market price. worth $ 32 billion
3. The 2003 Food grain scam: Where Food meant to be allocated by the government to the poor was in fact sold in local markets. Worth 6.7 billion dollars
This tight hold that the media has on what politicians continuously do, gives immense power to the population of India. A requirement if a country is to move along towards becoming a more pluralistic society.
Conclusion
Indian institutions deteriorated considerably under the rule of Indira Gandhi. In the 1970’s and 1980’s when it was time to move away from the notion of “self-sufficiency” the idea was practiced even more strongly. At a time when a number of similarly situated countries in the rest of the world rest of the world (especially a number Asian economies) was opening up to trade and promoting manufacturing and exports, The Indian government was snuffing it out as much as it could. Though it tried to halt any private economic incentives being created , it could not halt the incentive of individuals to look for more economic gains. This lead individuals to seek opportunities for rent-seeking. Also, this over- regulation gave immense discretionary power to public officials who would illegally provide support to those rent-seeking individuals as long as they were given some (monetary) incentive. Thus corruption in this era blossomed. In the post 1991 era, though opportunities for rent-seeking decreased to some extent, The political structure continued to be prone to nepotism and therefore large discretionary power still remained, particularly at the higher end of the political scale. The proof of that comes from the size of recent scandals and scams worth billions of dollars that were uncovered by the media (see previous topic). However, in spite of these facts, I argue that corruption, though it may continue to be present on a relatively large scale, will diminish considerably in the next few years. The fact that such large corruption scandals have been uncovered and many of those responsible have been punished (though, most will argue not enough) , as well as the fact that corruption has once again gained popularity as a topic of discussion and debate, not only in intellectual circles, but among the general public, is all strong evidence to infer that public officials, whether at the high or low end of the political structure will be deterred from now on to look for opportunities of rent-seeking.References
1. Bhagwati, Jagdish, "What Went Wrong," in Critical Issues in Indian Politics: India’s Economic Transition, the Politics of Reforms. Second ed. (New Delhi: Oxford University Press, 2007). Pp. 27-51.
2. Economist, The, “India Caged” in The Economist Magazine, May 1991 issue
3. Guha, Ramchandra. India After Gandhi: The History of the Worlds Largest Democracy. First ed. (New York: HarperCollins Publishers . 2007).
4. KPMG India, Bribery Survey Report, 2011
5. Mukherji, Rahul, "Introduction: The State and Private Initiative in India," in Critical Issues in Indian Politics:India’s Economic Transition, The Politics of Reforms. Second ed. (New Delhi: Oxford University Press, 2007). Pp. 1-24.
6. Myint, U., "Corruption: Causes, Consequences and Cures," in Asia Pacific Journal. Volume 7, No 2. 2000 Pp. 33-59.
7. Wadwha, Charan , “India Trying to Liberalize: Economic Reforms since 1991” in Economic Reforms in India, Pp. 259-285
8. World Bank, Ease of Doing business 2013 report.
9. "Indian News Channels." Indian News Channels. N.p., n.d. Web. 12 nov. 2012. url: http://www.indianetzone.com/3/indian_news_channels.htm
10. "Newspaper Boom In Asia Defies Trends In West." International Business Times. N.p., n.d. Web. 12 nov. 2012. url: http://www.ibtimes.com/newspaper-boom-asia-defies-trends-west-438358
11. "Transparency? Not Really, Says a Man Who Helped Guard the Right to Information."NDTV.com. N.p., n.d. Web. 12 Aug. 2013. url: http://www.ndtv.com/article/india/transparency-not-really-says-a-man-who-helped-guard-the-right-to-information-240453
12. "Annahazare.org." Annahazare.org. N.p., n.d. Web. 12 Aug. 2013. url: www.annahazare.org
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