Corruption Slows Growth

By Sanjay Kumar

Once upon a time, God's work wasn't supposed to involve taking bribes

Widespread graft takes its toll on businesses and the economy.

If recent news headlines are any guide, people might well be forgiven for believing that India is a land of corruption scandals. But the problem of corruption goes way beyond the few major cases that make the headlines, such as the recent arrest of former prime minister PV Narsimha Rao.

Rampant, endemic corruption in India is putting a brake on economic development - and more often than not, it's business that bears the brunt of paying out for the 'special favours' that get things done.

'Countrywide corruption is increasing at all levels,' says a top executive at industrial giant Larsen & Toubro (L&T), who, like other executives that Asian Business contacted, doesn't wish to be identified.

Worse still for the business community is that it's the government that is the fountainhead of corruption. This is particularly serious in view of the huge importance of the government sector in India's economy.

Businessmen say that this state of affairs, known as the 'licence-quota raj', was put in place by former prime minister Indira Gandhi during the 1970s: corruption and bribery were the real agenda hidden behind the facade of socialism. It was during this period that politicians and government officials acquired almost unlimited powers to issue licences - and the Indian economy is totally dependent on licences for permission to produce almost anything, in whatever quantities, using whichever raw materials. For those businesses that were willing to pay hefty bribes to get licences, officially allotted quotas were quietly relaxed.

Many businesses relished the licence-quota raj: a protected domestic market meant Indian companies never needed to spend on research and development (R&D) or improve the quality of goods and services to stay competitive. Paying bribes worked out cheaper than R&D spending or facing the rigours of an open market.

That corruption has become ubiquitous at all levels is accepted by everyone. 'Earlier, people were shy of asking [for bribes]. But not any more. They feel there's nothing wrong with it,' says the L&T executive.

'Today government officials demand bribes for anything as a matter of right,' says lawyer R Avasthi, legal manager in a leading private sector company. 'From settling electricity bills [when officials can be bribed to record a lower meter reading], getting telephones connected to setting up an industry - which means getting many clearances or seeking facilities [such as electricity and water connections, or bank loans] - you have to pay bribes.'

D Singh, vice-president of a leading rice exporting firm, says that in all the government departments businessmen have to deal with - sales tax, income tax, excise, customs, land and quality control - not even the slightest progress is possible without greasing officials'' palms. The price of resistance is infinite delay or massive harassment as, for example, in the case of Kentucky Fried Chicken (Asian Business, December 1995, page 67).

'Bribes alone speed up the work, and you're assured that your file in the department does exist and that it will be presented to the official at the right time,' says Singh. 'At a higher level, ministers demand [business] partnerships in the names of trusted [nominees], and civil servants demand cuts.'

That society at large is made to pay a heavy price for corruption is admitted candidly only by some. 'Ultimately we end up in paying almost 15% in graft,' says Singh. 'Obviously, I compromise on quality as well as quantity. In such cases, we supply rice with a higher moisture content.'

Former prime minister Rajiv Gandhi estimated that of all the government money allocated for development - which came second only to the defence budget - only 17% reached the intended beneficiaries, with the rest eaten up on the way by officials and contractors. Some estimates put the figure as low as 10%.


Massive political corruption

That the corridors of political power are knee-deep in corruption is common knowledge. The revelations regarding corruption in high places contained in the famous 'Jain diaries', seized in 1991 by the Central Bureau of Investigation (CBI), and the ensuing legal battle spearheaded by an active section of the judiciary have put the issue on the national agenda. A whole series of court cases involving corruption is now underway.

The two Jain brothers' diaries allegedly document a trail of bribes paid to leading politicians and bureaucrats since 1988. They identify 114 recipients of graft - much of it from multinationals, totalling several billion rupees - these being by top politicians in all the major political parties (ruling as well as opposition) except the communists.

Several members of Rao's former cabinet are alleged to figure in the dairies. Rao himself was named as a recipient of bribes in a confessional statement by SK Jain to the CBI - something the CBI, functioning directly under the prime minister's office, chose to play down, with Rao still prime minister at the time. With so many political big-wigs in the net, including the late Rajiv Gandhi, many wanted to give the Jain case a speedy burial. But the Supreme Court entered the fray in October 1993, alerted by a public interest writ, and has since been whipping the CBI to act. In November 1995, the CBI charged eight bureaucrats, and in January this year seven politicians - four members of opposition parties and three ministers.

Many Indian businessmen feel that liberalisation of the economy will have no impact on reducing the corruption that has become so well entrenched. 'Bureaucrats and politicians have both tasted blood. It's foolish to expect them to change,' says Singh.

Some Indian businessmen feel that the influx of foreign companies is already unleashing a new wave of even greater corruption. 'Foreign companies give big cuts, and they do it in a big way and the attraction is very high,' says the official at L&T.

Although officials of foreign companies are wary of talking about corruption openly, a survey of 183 US firms conducted by the US embassy in 1995 revealed that US investors rated corruption in India as the third worst problem they faced after red tape and a lack of electric power. A document issued by the US embassy in Delhi titled Investment Climate Statement 1996 says that 'US firms have identified corruption as an obstacle to foreign direct investment... The government procurement area has been particularly subject to allegations of corruption. In terms of sectors, telecom and power seem especially prone to charges of corruption'.

Indian businessmen say red tape directly provides a pretext to extort money. 'The more speedbreakers they put [in], the more money they can make,' says Singh.

'Without paying, your file won't be traceable and even your business card won't reach the official you've gone to see.'

In a survey of 54 economies released in October, Transparency International, a multinational organisation headquartered in Berlin and dedicated to reducing corruption in business, placed India as the ninth most corrupt country in its Corruption Perception Index, followed by Indonesia and the Philippines; China ranked fifth.

Businessmen say the blame for the deluge of corruption in India lies in the lack of transparency in the rules of governance, extremely cumbersome official procedures, excessive and unregulated discretionary power in the hands of politicians and bureaucrats, who are prone to abuse it, and a lax judiciary.

Singh says many impediments are created by politicians and bureaucrats to make investors cough up cash: 'Kentucky Fried Chicken was literally made to chase around the courts for a single fly on its premises [in Delhi]. Name any Indian outfit where you don't find dozens of flies, but would you dream of seeing them prosecuted?'

Critics point out that other major instances of corruption belong to the era of liberalisation. In August, the CBI raided properties belonging to Sukh Ram, minister of communications for three years under Rao. Unaccounted for money to the tune of Rs361 million (US$10.1 million) was seized along with other unaccounted for wealth.

It was under Ram that the controversial privatisation of telecoms was begun. The process lacked transparency and provoked loud protests. Rules were changed midway through to suit favoured parties. A centralised purchasing system was created, bypassing all the established ministerial norms and every purchase was routed through the minister. In some cases, it is alleged that the minister used discretionary powers to place orders without even inviting tenders.

Insiders believe that during Ram's tenure between Rs10 billion and Rs15 billion were extorted as kickbacks in nationwide telecom deals. Half was distributed among officials and touts, with politicians pocketing the other half. The exchequer lost some 20 to 30 times these amounts in licence fees.

That economic and political corruption go hand in glove has been further illustrated by the prosecution of three members of Parliament belonging to the Jharkhand Mukti Morcha party, together with former prime minister Rao, who allegedly bribed these MPs to win a crucial vote of confidence in 1993. Rao is also embroiled in another case involving a non-resident Indian, Lakhubhai Pathak, who alleges that he was swindled of US$100,000 a decade ago by Rao's crony Chandraswamy - a religious charlatan - on Rao's assurance of awarding a contract.

With the old systems and culture still in place, there is cynicism about the containment of corruption. 'It is not possible to do business completely honestly in India and make money,' says DS Mehta, a newspaper columnist and veteran business observer. His view is typical of those of other people involved in business.

Despite the tremendous cynicism, the Indian business community sees some hope in the active role being played by the Supreme Court and other echelons of the judiciary in hauling up errant politicians and bureaucrats, and bolstering faith in the rule of law and fair play.

One example is that the Supreme Court last month ordered former petroleum minister Satish Sharma to pay damages of Rs5 million to the government for causing loss to the exchequer by his 'illegal and arbitrary' allotment of petrol pump licences from his discretionary quota. The Court has urged the CBI to prosecute him for any criminal breach of trust.

Progress against corruption is likely to be slow, but successful prosecutions of high-profile officials and politicians are crucial to its success. 'Unless exemplary action is taken against erring individuals, it is impossible to think of any positive change,' says Singh.