Fighting corruption in India: A bad boom | The Economi t

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Fighting corruption in India

A bad boom
Graft in India is damaging the economy. The country needs to get serious about dealing with it

Mar 15th 2014 | From the print edition

IN THE early hours of February 20th 2010 Uday Vir Singh, an Indian forestry officer, bluffed his ay !ast a !ri"ate #ilitia guarding a dusty !ort called $ele%eri& For #onths sus!icious'loo%ing con"oys of truc%s had been thundering across India to the !ort(s )uays on the country(s est coast, *ust south of the +oan beach here the su!er's!y #ayhe# hich o!ened ,The $ourne Su!re#acy- as fil#ed& .r Singh is no #ore a /ason $ourne than the ne0t ento#ologist1he has a doctorate on #eta#or!hosis in insects1and the infiltration he #ounted ith a fe colleagues led to no gun!lay& $ut it did unco"er a #assi"e sca#, ith hundreds of officials and !oliticians in the state of 2arnata%a in the !oc%ets of an illegal #ining #afia that, o"er fi"e years, had #ade !rofits of 32 billion or #ore shi!!ing illegal iron ore to 4hina& Such scandals ha"e roc%ed 5sia(s third'largest econo#y in the !ast decade& 5 lot of transactions that !ut !ublic resources into !ri"ate hands1allocations of radio s!ectru#, for e0a#!le, and of credit fro# state ban%s1ha"e co#e under sus!icion& 6f the ten biggest fa#ily fir#s by sales, se"en ha"e faced contro"ersies& The brash ne tycoons ho ca#e of age during the boo# years of 2007'10 are under a cloud, too& $efore he beca#e boss of the central ban% last year, 8aghura# 8a*an orried !ublicly that India could start loo%ing li%e an oligarchy along the lines seen in 8ussia9 ,too #any !eo!le ha"e got too rich based on their !ro0i#ity to the go"ern#ent&In a recent !oll :;< of Indians said corru!tion as holding their country bac%, and :2< thought it has got orse in the !ast fi"e years& 6ne senior figure in the ruling 4ongress !arty orries about the feeling that ,the la for the co##on !eo!le doesn(t a!!ly to the !olitical !rincelings and industrialists&In =ece#ber "oters in =elhi(s state elections su!!orted the anti'graft 5a# 5ad#i >arty strongly enough for it to get into !o er& Its leader, 5r"ind 2e*ri al, held his ne *ob only briefly before resigning to fight the national election ta%ing !lace in 5!ril and .ay& Narendra .odi, the $haratiya /anata >arty ?$/>@ candidate for !ri#e #inister ho is currently ahead in the !olls, says he ill !urge India& That said, critics note that his !ersonal ra!!ort ith tycoons, credited for so#e of the industrial success of his ho#e state of +u*arat, #ay not #a%e hi# the #ost thoroughgoing of !urgati"es& For his !art, the outgoing !ri#e #inister, .an#ohan Singh, clai#s history ill absol"e his ad#inistration of its re!utation for graft& The leader of the 4ongress ca#!aign, 8ahul +andhi, a scion of India(s #ost fa#ous !olitical dynasty, says he is a refor#er, though it is hard not to see his fa#ily(s secreti"e habits as !art of the !roble#& India needs its !ri"ate sector to build roads, factories and cities& $ut the relationshi! bet een co#!anies and the state is bro%en& 4orru!tion !roduces bad decisionsA concern o"er corru!tion !roduces indecision& +raft does not function, as so#e clai# that it does else here, as an unsee#ly but e0!edient #ar%et solution to inert bureaucracy, greasing the seiBed'u! heels of industry& It has !ut grit in those heels& Coans to industries ith graft !roble#s ha"e infected the largely state' run ban%ing syste#A at least a tenth of its loans are sour& Ine!t cronies ha"e #essed u! "ital road and !o er !ro*ects& .ines and other assets lie idle as courts dither o"er ho croo%ed their o ners are& >ri"ate !aralysis Faced ith this #ess, !ri"ate fir#s ha"e cut in"est#entsA a fall in in"est#ent fro# 1D< of +=> in 200D to 11< in 2011 is one reason hy +=> gro th has slu#!ed to E<, the lo est le"el for a decade& 5nd ineffecti"e efforts to deal ith corru!tion see# only to ha"e #ade things orse& India(s cran%y legal syste#, its o"erla!!ing in"estigati"e agencies and its raucous #edia ha"e #eant that res!onses to the !roble# #ay ha"e done as #uch to !aralyse business in general as to !unish rongdoers& Fe senior !eo!le go to *ailA but officials fear being accused of #alfeasance, so #any thin% the safest course of action is to #a%e no decisions at all&

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Fighting corruption in India: A bad boom | The Economi t

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To ru#ble the iron'ore sca# .r Singh, the forestry officer, first ent underco"er in a to n called $ellary, the hub of illegal iron'ore #ining in the state of 2arnata%a& The tas% fell to hi# because #any #ines co#e under the re#it of the forestry agency, and or% on a !re"ious !in%'granite scandal had earned hi# a re!utation in the area& 5 day(s dri"e north of the glea#ing technology ca#!uses of $angalore, $ellary felt li%e the ild est& The 8eddy fa#ily, hich had close connections to the state(s $/>'led go"ern#ent, a!!eared to rule the roost& 5 business#an ho "isited a 8eddy associate recalls being escorted by #en ith auto#atic ea!ons to a #ansion ith a $ell helico!ter and a collection of 17 cars& ,They ere li%e Indian arlords,- he says& Each day u! to 2,000 truc%s too% the ore to the !ort at $ele%eri in con"oys as #uch as 2E%# ?1; #iles@ long& 5ccounts and ban% details found on co#!uters ta%en into custody at $ele%eri created a trail to D0 fa#ilies ho had bribed officials and !oliticians effecti"ely enough to cause an ,ad#inistrati"e colla!se-& 2arnata%a(s anti'corru!tion body !re!ared a 2E,000' !age re!ort& The affair is no in the hands of the !olice and the courts& 8u#ours and ru!ees Iron ore is a s#allish !art of the !icture, but ho s#all is hard to sayA )uantifying graft in India is a frustrating affair, and

distracting cons!iracy theories and innuendo abound& $an%ers in .u#bai clai# that the ru!ee, one of the orld(s #ost acti"ely traded currencies, is #ani!ulated by !oliticians for !ersonal gain& The business interests of the !resent cabinet1if you belie"e the ru#ours1include a real'estate e#!ire in Singa!ore and an insider'trading ring run by a #inister(s son& To try to get to gri!s ith the !roble# The Economist has inter"ie ed !oliticians, industrialists, bureaucrats, financiers and in"estigators& Their "ie s, !ro"ided on a basis of anony#ity, !oint to a ell'established syste# of graft, !artly lin%ed to !olitical funding& Fe !eo!le thin% that anyone i#!ortant ill go to *ail, but des!ite this so#e rec%on that the ne0t decade ill be less corru!t than the last one& >etty corru!tion includes sli!!ing ban%notes to the !olice and to officials to get !a!er or% done& 5ccording to Trans!arency International, an organisation that trac%s corru!tion, EF< of Indians say they !aid a bribe in the last year, co#!ared ith FF< in Nigeria and 7;< in Indonesia& /obs ith o!!ortunities for e0tortion are sought after and a slice of the !rofits funnelled u! the ran%s& Fir#s offer ,s!eed #oney- to a"oid red ta!e& ,E"erybody !ays,- ad#its an e0ecuti"e at a fir# %no n for its good go"ernance& 5 billionaire says, ,it is hard for any business to be fully co#!liantGHhen you are dealing ith the ta0 !eo!le or the en"iron#ental !eo!le the conse)uences for the business beco#e "ery se"ere1they can hold #oney in escro or i#!rison you&- $ut it is the boo# in large'scale rent'see%ing1the use of ealth to distort the allocation of resources fro# hich #ore ealth could be !roduced1that has o!ened u! a ne era of corru!tion& In the old days graft as al#ost )uaint& $efore the liberalisation that began in 1::1 fir#s faced the ,licence'!er#it 8a*-, a regi#e of rules and )uotas that as #ore easily na"igated ith the hel! of carefully de!loyed s#allish bribes& 6ccasionally there ere big scandals& In the 1:I0s allegations that a 3E0# %ic%bac% had been !aid on an Indian ar#s deal by the S edish fir# $ofors engulfed the go"ern#ent of 8a*i" +andhi& $ut India(s entry into the global econo#y created un!recedented o!!ortunities for dishonesty& >ro!erty beca#e a #ulti' billion'dollar business go"erned by officials !aid a !ittance& The "alue of #ining licences soared along ith co##odity !rices& >ri"atisations and !ublic'!ri"ate !artnershi!s beca#e co##on, and !rone to #ani!ulation& 5t the sa#e ti#e the elite cadre of the ci"il ser"ice, the Indian 5d#inistrati"e Ser"ice ?I5S@, has decayed& 5 to! officer !uts the clean and #oti"ated !ro!ortion of its E,000 #e#bers at *ust 10<1and adds that at the other end of the s!ectru# 1E< are ,scu#-& The Economist has loo%ed at three ays of )uantifying the !rofits fro# rent'see%ing& The first is to tally the #oney #ade fro# sca#s, based on esti#ates fro# officials and in"estigators& ?6ur calculation uses realised !rofits, or the !resent "alue of antici!ated !rofits& He use the lo end of so#e official

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Fighting corruption in India: A bad boom | The Economi t

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esti#ates&@ The second a!!roach, hich is a!!lied #ore idely in our ne inde0 of cronyis# ?see article

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li%ely'!ros!er'!lanet@ @, #easures the relati"e !erfor#ance of billionaires in industries, such as #ining and !ro!erty, that are !rone to rent'see%ing relati"e to those in other lines of business ?see chart 1@& 5 final #ethod trac%s the relati"e !erfor#ance of an inde0 of !olitically lin%ed listed fir#s constructed by Saurabh .u%her*ea of 5#bit 4a!ital, a bro%er ?see chart 2@& 5n a"erage of the a!!roaches suggests the gains fro# rent'see%ing o"er the !ast decade !ea%ed at about 3I0 billion& That is e)ui"alent to D< of the stoc%#ar%et(s "alue today& It is orth noting, though, that the share of +=> for the rent'see%ing billionaires and the !re#iu# on !olitically connected fir#s are no longer hat they ere in the boo# years& Not all of the gains ere achie"ed through corru!tion& $ut if one ere to assu#e !oliticians and officials got an a"erage cut of E' 1E<1a rate consistent ith the trail in"estigators ha"e found in the iron'ore and teleco#s sca#s, then total bribes !aid ould a#ount to 3F billion'12 billion& .any bribes, li%e #uch else in India, can be !aid for in cash, hich can be de!osited at ban%s using ,$ena#i-, or no#inee, accounts, or accounts in ser"ants( na#es& +old is another !ossibilityA there is a lot of it about, ith India(s bullion i#!orts since 2002 orth 1F< of current +=>& >ro!erty deals are also used to launder cash1e"en legiti#ate deals often ha"e a cash co#!onent&

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Fighting corruption in India: A bad boom | The Economi t

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Funnelling funds 6n big deals the obliging !oliticians and officials #ay get a sta%e in the business& India(s audit agency belie"es land deals near =elhi 5ir!ort in"ol"ed fir#s that ere fronts for !oliticians& $y using layers of legal shells !oliticians can be #ade beneficiaries ithout being easily traced& Ta%ing the trail offshore can add still #ore conceal#ent& In an office in =elhi an anti' corru!tion tsar is loo%ing at a !iece of !a!er& 6n it is the na#e of a fi0er in Singa!ore ho is acti"e in the Indian city of Hyderabad and ho funnels illicit funds offshore& The official says there are about 2E'E0 such indi"iduals, %no n as ,settlers-, ser"ing India, #ainly fro# Singa!ore, =ubai and Condon& The scale of acti"ity is ,i##ense-& $y cross'chec%ing India(s trade statistics ith those of its trading !artners, +lobal Financial Integrity, a research organisation, esti#ates that gross illicit outflo s fro# India ha"e a"eraged 3E2 billion a year since 200D& 6ne ay of transferring bribes offshore is ,#is'in"oicing-& For e0a#!le, a fir# in India controlled by a !olitician ill buy dia#onds or soft are fro# a !arty abroad at inflated !rices before i#!orting the#& The e0cess !rofit boo%ed by that second !arty, also controlled by the !olitician, is !oc%eted outside India1ta0'free and ith little ris% of in"estigation if it is a shell co#!any do#iciled in a free'trade Bone such as =ubai& .r Singh found ides!read #is'in"oicing in the iron'ore sca#& Ho #uch Indian #oney is stashed abroadK India(s ta0 authorities ha"e a database of offshore'account holders gi"en to the# by the +er#an go"ern#ent, but a!!ear to be under !olitical !ressure not to release it& ,They(re sitting on it,- says the anti'graft tsar in =elhi& The e0'#anager of a unit ser"ing Indians at a large S iss ban% says the fir# had 310 billion of assets fro# resident Indians and a #ar%et share of 10'20<& The 8ussian and Far East des%s ere #uch busier& ?This fits ith the finding that Indians buy *ust 7< of ,!ri#e- Condon !ro!erty, a !o!ular in"est#ent ith !lutocrats&@ The ban%er adds that India(s big !olitical clans #ay ha"e been dealt ith by a se!arate ing of the ban%& 5dding in an esti#ate for the#, he calculates that the offshore assets of Indian residents held in all global ban%s as bet een 3100 billion and 31E0 billion& Ho does that fit ith esti#ates of illicit ealth o"erseasK The anti'corru!tion boss says his agency has identified assets of 32&7 billion, #ainly held through trails of offshore shell co#!anies and accounts in ta0 ha"ens, and that his understaffed agency trac%s about E'10< of such acti"ity1suggesting a total !ot of 327 billion'FE billion& $ringing it all bac% ho#e So#e of this co#es bac% to India through #is'in"oicing& $ut ealth is also ,round tri!!ed- bac% under the guise of foreign in"est#ent& 5n insight into round'tri!!ing, in this case of legiti#ate funds, ca#e in a 2012 $ritish legal case in"ol"ing U$S in Condon& Its ban%ers ran a sche#e in hich 32E0# of offshore funds belonging to 8eliance 5=5+, an Indian fir#, ere in"ested in one of its subsidiaries in India "ia a "ehicle in .auritius& The Condon tribunal *udged that this bro%e Indian rules& ?In a 2012 state#ent 8eliance said that no action had been brought against it in Condon and that the #atter had been dealt ith and closed by Indian regulators&@ Ca yers for a ban%er in"ol"ed argued the !ractice as , ides!read-& India(s regulators say they ha"e since crac%ed do n&

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Hhen the bribes co#e ho#e they undoubtedly enrich so#e Indian !oliticians& 5 200I teleco#s scandal sa a #inister allocating s!ectru# on iffy grounds& The go"ern#ent turned a blind eye& ,He %ne so#e of the decisions ta%en by hi# ere blatantly illegalGLandM done to raise large a#ounts of #oney,- says another #inister of that ti#e ho as close to the !ri#e #inister& The #ore !ernicious danger is that the !olitical syste# as a hole de!ends on the bribes& For one thing they see# to !ro"ide a significant source of election fundsA for another the big !arties increasingly need to court s#all !arties in order to rule, and allo ing the# to get rich hen in !o er see#s to be one of the ays that this is done ?it as a factor in the teleco#s case@& To hold a rally at hich Sonia +andhi, the head of 4ongress, a!!ears costs u! to 3770,000& The buses, hats and sound' syste# all ha"e to be !aid for& To run a credible ca#!aign in a seat in a !arlia#entary election costs bet een 3700,000 and 37# !er candidate, de!ending on the i#!ortance of the seat and the co#!etition& 5r#ies of "olunteers ha"e to be !aid, and booBe and SI. cards gi"en out& 5dd in state and local elections and the total cost of !olitics in India bet een 2010 and 201E for all !arties ill be 3E billion, calculates the to! 4ongress !olitician, hich ould or% out as a substantial fraction of the esti#ated bribe !ool& Strict ca#!aign'finance rules #ean #ost of this has to be raised illegally& 5 third of ca#!aign funds are raised centrally by !arties and the rest locally& >arties ha"e ar#s'length treasurers ho act as their ban%ers& Those handling bribes ta%e a cut for the#sel"es& Illegal !arty funding is at the heart of corru!tion& $ut !oliticians are in denial, says the 4ongress big ig& ,Nobody ants to

ad#it that they ha"e ta%en #oney& It is a co#!letely hy!ocritical syste#&- Ne la s, for e0a#!le a Co%!al 5ct !assed in =ece#ber to create a ne anti'graft agency, *ust add to the huge eight of legislation dating bac% to the 1:I0s that is cynically !assed and not enforced& There is certainly a lac% of ill to enforce rules& 5 second anti'graft boss cheerfully ad#its that !rosecutions ta%e at least a decadeA in the !ast three years only 2E to! ci"il ser"ants ha"e been in"estigated and none has lost his *ob& 8egulators say that if they act against the interests of industrialists they can get an earful fro# !oliticians& $ut there is a #ore o!ti#istic "ie & Hhen it co#es to lo 'le"el graft, refor#ers ho!e that technology can eli#inate the #iddle#en ho see% to benefit& >utting train reser"ations online has re#o"ed a lot of o!!ortunities for bribery& Then there are chun%s of the econo#y that are already !retty free of graft, such as consu#er goods and the technology businessA in the !ast fe years it is largely in those sectors, #ore than in the rent'see%ing ones, that billionaires ha"e #ade hay& So#e institutions are clean, too& They include the central ban% and the Su!re#e 4ourt, hich on .arch 10th introduced rules to s!eed u! trials of !oliticians& The ban%ing syste#, des!ite its bad debts, has not been ca!tured by tycoons as ere those in South'East 5sia and 8ussia in the 1::0s& In February a chun% of radio s!ectru# !rocess that #a%es i#!ro!riety harder& 5nd the #essy res!onse to a decade of graft, though inefficient, has started to change financial incenti"es& S!oradic court actions1#ining sus!ended in so#e areas, so#e s!ectru# allocations being cancelled1ha"e #ade rent'see%ing less !rofitable, and foreign in"estors ha"e begun to shun such sectors& 5#bit(s inde0 of !olitically lin%ed fir#s, hich did ell in the late 2000s, has under!erfor#ed badly since& India has only a #iddling ran% on our cronyis# inde0& >erha!s #ar%et forces and a bac%lash fro# "oters ill turn the tide& $ut e"en if they don(t, citiBens li%e .r Singh, the insect' e0!ert turned #afia'buster, ill fight on& He doesn(t carry a !hone lest it betrays his locationA he has a bodyguard, and !olice guard his ho#e& $ut in an office decorated ith !osters of !lants the ferocity he brought to his fight can still boil o"er& The iron'ore sca# #ade hi# feel ,so angry that I told #yself either you do so#ething or you die,- he says& ,Hhat ill I be doing in three years( ti#eK I a# going to !ursue this& I a# going to bring it to a logical end&as auctioned off s#oothly, a

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