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Hugo Dixon & Jeff Glekin: Unravelling India: growth bottlenecks

Fix corruption and the environment

Hugo Dixon & Jeff Glekin 

Unravelling corruption
What’s the best way for India to slay corruption: punish the culprits, or make government so transparent that it is hard for bribery to find places to latch onto in the first place? The answer is — both.

Corruption finds its way into pretty much every nook and cranny of public life. There’s high-level corruption, such as the telecoms scam that cost the government an estimated $39 billion in revenue when mobile licences were awarded to companies too cheaply between 2007 and 2008. There’s the petty corruption, such as middlemen taking a cut as they distribute subsidised food to the poor. And there’s the corruption at the heart of the electoral system: candidates pay voters to attend their rallies and sometimes shower them with cash, often of unknown origin.

Over the past year, India has been transfixed by a campaign led by Anna Hazare to force the government to create an ombudsman which would prosecute corrupt politicians and bureaucrats. Hazare’s initial hunger strikes brought millions of sympathisers out on the streets and forced the government into a series of humiliating U-turns. But “Team Anna” has lost some steam. When 74-year-old Hazare launched his third hunger strike just before the New Year, hardly anybody turned up — and he had to call it off prematurely because he was ill. Team Anna is now taking a pause for reflection, and the legislation creating such an ombudsman has yet to be instituted. One early conclusion is that it will have to find other tactics apart from hunger strikes. (Click here for graphs)

Even if Team Anna fizzles, the broader anti-corruption movement has a life of its own. A more youthful, wealthy, tech-savvy and educated middle class is unsettling the balance of Indian politics. The media is hot on the trail of corruption. Parts of the business community — notably, Azim Premji, chairman of Wipro, the IT services giant, and Deepak Parekh, chairman of banking group HDFC — have campaigned against graft, arguing it is one of the greatest threats to India’s economy.

In the current Uttar Pradesh elections, the powerful incumbent Chief Minister, Mayawati, has just sacked around half her cabinet for corruption. When the opposition BJP which had been supporting the Anna campaign welcomed some of the sacked politicians into its fold, it faced a backlash. What would once have been seen as smart politics is now viewed as hypocrisy.

Some public servants have also taken steps to shine a spotlight on corruption. The Comptroller and Auditor General produced a series of critical reports including one on the telecoms scam. The chief justice has played a big role in pushing for a proper investigation of this case, free from political interference. And the former number two at the Securities and Exchange Board of India (Sebi), the financial watchdog, has alleged that the Finance Ministry exerted undue pressure on Sebi in support of businesses including Reliance Industries, run by multi-billionaire Mukesh Ambani.

There’s no cause for complacency. Even if the chief justice is doing a good job, the overall judiciary has stacks of cases that have been backing up for years. Meanwhile, nobody has acted on the Sebi whistleblower’s allegations. Indeed, the Ministry of Finance removed Sebi’s boss last year, arguably undermining its independence.

India clearly needs a strong ombudsman. When this comes back on the agenda, probably in the next few months, there will be much wrangling over exactly what form the legislation will take. The main dispute will be over whether the Central Bureau of Investigation, which carries out probes, should report to the ombudsman or the government. Team Anna, unsurprisingly, wants the investigators to report to the ombudsman arguing that otherwise the government could interfere with probes into its own corrupt activities.

Let there be sunshine
A strong ombudsman is only part of the answer to India’s corruption problem. The other part is to make the whole system of government more transparent. A big step in this direction was taken with a Right to Information Act in 2005. Journalists and other campaigners have been successfully using this act in pursuing corruption investigations.

Another big step would be the use of electronic auctions to allocate state resources — such as land, minerals and radio spectrum — as advocated by Premji and Parekh. A similar approach could be taken with government procurement. The more things are done in the open, the less chance of bribes changing hands.

Meanwhile, an ambitious scheme to give Indians a biometrically-validated electronic identity could help combat low-level corruption. At present, about half the babies born in north India aren’t even registered. But once it’s clear who everybody is — and fingerprints and images of irises held in a central database aren’t simple to fake — it should be easier to make sure that the right goods and payments get to the right people with less leakage to corrupt middlemen.

The unique identity (UID) scheme could also be the basis for bringing bank accounts and mobile phones to the hundreds of millions of people who don’t have them. And as more people have access to electronic banking, it will then be easier to get rid of universal subsidies such as cheap diesel and replace them with targeted payments to those really in need.

Nearly 200 million Indians have so far registered for a UID. The scheme has got off to a cracking start, in part because the government brought in Nandan Nilekani, ex-chairman of Infosys, the IT services group, to run it rather than rely on the established civil service. Nilekani is used to the IT ecosystem — where application developers, financiers, business partners and other talent are pulled together behind a common enterprise.

But that hasn’t meant things have been plain sailing. The initiative continues to risk being stalled in a long-term turf war with the Home Ministry, which has a rival identity card scheme. If the UID initiative can survive, it won’t just provide a way of cutting low-level corruption. It could also be a model for sorting out other massive problems in the public sector. The gummed-up judiciary would be a good place to start. Why not assign cases unique identity numbers, pop them into a central database and then track how rapidly they are moving through the system?

If Team Anna gets its mojo back, its priority will be to fight for a strong ombudsman. But, after that, it could do a lot worse than turn its attention to the transparency side of the anti-corruption agenda.

Malthus redux

It’s common in India to say that, even if the country suffers from short-term political paralysis, the long-term growth prospects are great. But is that really so?

The bull case relies on two factors: demography and catch-up. Look at demography first. India’s population, currently 1.2 billion, will reach 1.7 billion in 2050. China’s, by contrast, will stay stuck at 1.3 billion. What’s more, China’s population is greying, whereas India’s working-age population is still swelling. By 2040 the average age in China will be 46 whereas in India it will be 34. This means that workers and consumers will be growing faster in India than on the other side of the Himalayas — and that should, all other things being equal, be good for growth.

Now look at catch-up. India’s GDP per capita in 2011 was $1,527 — compared to $5,184 in China and $48,147 in America, according to the International Monetary Fund. If there is adequate investment in both physical and human capital (such as education and health care), there’s no reason why India shouldn’t close the gap on China just as the Middle Kingdom is catching up with America.

So much for the theory. In practice, to achieve such potential, India will need to navigate three bottlenecks. The first of these is actually getting all that investment into the system. Investment has risen from 25 per cent of GDP in 2000 to 35 per cent last year. The current Five-Year Plan, which runs until this March, will virtually hit its target of investing $500 billion in infrastructure. The next plan calls for a doubling to $1 trillion, much in the form of partnerships between the public and private sectors. If that happens, it will be great. But large new investment projects have ground to a halt as a response to the political stasis and the loss of business confidence (See part I of this series). Delhi’s latest effort to kick start investment — forcing cash-rich state-owned firms such a Coal India to invest up to $35 billion in infrastructure this year — may help. But the real challenge is to unlock commercially-motivated private investment.

Go for decentralisation
This brings one to the second bottleneck: politics. The fact that India is a democracy means it is less likely to face a disruptive revolutionary upheaval than China. But India’s democracy is a raucous one. In the 65 years since independence from Britain, power has become increasingly fragmented. Initially, the Congress Party — which led the independence struggle — pretty much dominated political life. There are now multiple opposition parties both at a national and state level.

This is not surprising in such a vast country with 28 states and seven union territories, 22 official languages, six major religions, 645 scheduled tribes and a multiplicity of castes — all of which offer the potential breeding ground for political parties. Coalition government is here to stay. Regional parties may be happy to join national coalitions, but they make difficult bedfellows. Even in times of crisis, their main interest is in seeking spoils for their states. They are prepared to hold the national interest to ransom to get their way.

One silver lining is better governance in some states. Nitish Kumar in Bihar and Narendra Modi in Gujurat are cases in point. In Bihar, Kumar is credited with reversing the fortunes of a failed state of 100 million people by improving law and order and investing in infrastructure, so boosting its growth rate to 14 per cent in 2011. Modi, meanwhile, has fought against corruption, improved efficiency and sucked in investment with the result that Gujarat, always a relatively strong state, now enjoys a per capita income 37 percent above the national average.

Such successes point to a possible solution to India’s chronic political paralysis: decentralise more power from the Centre. It is easier to reach sensible conclusions on what to do in relatively homogenous units with average populations of 40 million than in one sprawling polity of 1.2 billion going on 1.7 billion.

Sustainable growth
The environmental impact of that growing population is the final bottleneck. India is going to struggle to get enough land, water and power to satisfy the increasing consumption of an expanding population.

India already imports more than three-quarters of its oil requirements. And though the country has the world’s fourth largest coal reserves, environmental restrictions mean production is struggling to keep up with demand from coal-hungry power stations. A year ago the then environment minister declared a third of coal reserves “no-go” areas. Although the policy has since been reversed, regulatory clearances for new mining projects remain hard to come by.

There are two main concerns: reserves are predominantly located in densely-forested areas; and these areas are often inhabited by poor tribal communities. A new mining bill, which is yet to be passed, proposes firms share 26 per cent of their earnings with the tribal communities they displace. That may help persuade the local people that development is in their interests but it won’t resolve the question of deforestation.

More generally, India is going to have to strike a balance between development and ecological sustainability. As the prices of resources rise and more of the costs of environmental destruction are borne by business, the country’s potential growth rate is bound to suffer. Sure, the environmental challenge may at the margin spur innovations that allow Indians to live richer lives without consuming lots more stuff. But there is only so much that can be done when 1.7 billion people are crowded on 2.4 per cent of the planet’s land. The population explosion isn’t an unadulterated blessing.

India’s long-term prospects are linked to its current performance. Most of today’s grand projections come off the back of some impressive rates of growth over the past decade.

The problems of today — a decline in investment, a bulging fiscal deficit, rampant corruption and environmental roadblocks — are also the key challenges of the future. And a youthful population is only an asset if it can be employed productively. The economic solutions have been written down many times before but decisive action is in short supply. A change in politics driven by more state-led decision making could be the key that unlocks a sustainable high-growth trajectory. Otherwise, the India Shining story will continue to unravel.


First Published: Tue, January 31 2012. 00:23 IST