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Friday, July 15, 2005

The Prime Minister stated recently that corruption has declined on account of the economic reform process. Is it possible to substantiate this argument? Let us examine.

Fortunately, we can measure corruption and come to definitive conclusions. In certain sectors, our collective experience and common sense help us understand the impact of economic reform. Let us take the telecom sector. Only about a decade ago, getting a telephone connection was a herculean task. State monopolies and a system based on licenses and quotas created an economy of scarcities, demand far outstripping supply.

In the desperate scramble for scarce goods and services, corruption was inevitable. Telephone connections, cement permits, sugar quotas, steel controls and a host of other licenses bred phenomenal corruption all over India. The economic freedom of citizens was eroded to a point where Indians were reduced to mendicancy and serfdom. Competition, choice and new technologies enhanced production, reduced costs, improved quality, and dramatically reduced corruption. Youngsters of today will not believe that a generation ago a hefty premium had to be paid to buy a motor car!

Even where direct competition has not been introduced, technology and transparency did improve things. Railway reservation is a good example. There was a time when you had to grease the palms of a bureaucrat to get a berth. With the introduction of online computerized reservation, most corruption ceased.

Similarly, with computerization in many states obtaining birth and death certificates or land records is increasingly easy and corruption-free. In Income Tax, introduction of PAN, and simplification of tax procedures have seen significant reduction in corruption. Perhaps the most dramatic improvement is seen in issuing passports. Now, in most parts of India, passport is available for the asking within a reasonable period. Fast track procedures, easy access of application forms, and online monitoring have greatly helped reduce corruption and delays.

All these are positive developments which can be related to economic liberalization and a spirit of openness and freedom it has spawned. Clearly, corruption in certain areas has visibly declined, and things are improving.

Indian society is like any other, and people respond to institutional mechanisms and incentives. There is nothing which makes us inherently noble or corrupt; we respond to risks and rewards, and competition and choice. With more safeguards in place, we are going to see greater integrity in public life. Administration of indirect taxes will surely be better with introduction of VAT, simplified and more transparent procedures, and online computerization. Decentralization of power will establish greater links between authority and accountability, and minimize corruption. Right to Information, which has recently been given teeth with the enactment of a sound law will surely help promote transparency and make arbitrary exercise of power and rent-seeking far more difficult.

But just as there is no cause for cynicism and despair, there is no room for complacency either. India still ranks abysmally low in global rankings of Transparency International (TI). The recent TI India survey conducted by Center for Media Studies reveals significant corruption in many sectors. The survey covers six need-based services (rural financial institutions, income tax, municipalities, judiciary, land administration and police), and five basic services (schools, water supply, public distribution, electricity, and government hospitals). The findings of this survey are revealing.

First, the need-based service delivery is far more corrupt than basic services. This is no surprise, because government enjoys a natural monopoly in services like municipalities, judiciary, land administration and police. In the absence of an alternative, corruption is much more prevalent and virulent in these sectors. Not surprisingly, rural financial institutions, which do not enjoy a monopoly, are less corrupt. Basic services like schools, water supply, public distribution and hospitals are increasingly shunned by the bulk of the population. Almost anyone who can afford to pay is patronizing the private sector. Therefore, corruption is bound to be less. The one exception is electricity, which is a state-monopoly sector, and corruption continues merrily. Health care is another sector where the poor are fleeced in public as well as private hospitals, and even now nearly 50% of inpatients are in public hospitals. Therefore, corruption in hospitals is the highest among basic services. A parent with a sick child at doctor’s mercy is helpless in resisting corruption.

Second, there is phenomenal variation among states. Kerala, HP and Gujarat are the least corrupt, and Bihar and Jammu & Kashmir are the most corrupt. While rankings in corruption cannot be very accurate, the broad patterns clearly indicate the correlation between the quality of governance and corruption. Decentralization of power, penetration of media, a culture of citizen assertion, strong anti-corruption mechanisms, and enlightened leadership clearly curb corruption, while centralization, break down of rule of law, poor local media coverage, and kleptocratic regimes promote corruption.

Third, the amount of money raked in by corrupt public servants is considerable. TI–CMS study estimates the petty corruption proceeds at retail level (from citizens to low level functionaries) in the eleven services covered at Rs.21,000 crore. The actual corruption in all sectors in India is probably close to ten times this figure. Indirect taxes – sales tax and excise in states, and central excise and customs at the Union level – are huge sources of corruption, and the citizen is completely uninvolved except as a consumer paying higher price because of the hidden costs. The three million trucks ferrying goods in India pay about Rs. 200 each per day as bribes – thanks to check posts, octroi and entry tax. This sector alone contributes Rs.20,000 crore to the corruption kitty. The proceeds of grand and collusive corruption related to transfer of officials, public procurement, infrastructure projects, and arbitrary exercise of power are mind-boggling.

From this evidence, two broad conclusions emerge. First, corruption is declining wherever competition, choice, technology and transparency are introduced. But this corruption is increasingly shifting to sovereign areas of state functioning, where state monopoly cannot be removed. That is why police and judiciary are now at the top of corruption list now. Second, this shift in corruption is a consequence of the inexhaustible demand for illegitimate funds in our political system.

As liberalization closed avenues of corruption in economic sphere, more dangerous channels are opened up because the demand continues unabated. This demand is politically-driven, and can only be addressed by political reform which dramatically changes incentives in politics. The message is clear. Corruption can be substantially eradicated; but it needs painstaking efforts and will, and most of all, far-reaching political reform.