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Friday, December 3, 2004

One year ago, in December 2003, the UN Convention against Corruption was adopted as the first global anti-corruption instrument.   As the Global Corruption Report 2004 of Transparency International (TI) points out, "It sets new standards in domestic and international law, in part by committing its signatories to enhanced cooperation and mutual legal assistance, particularly on the return of assets.  But its success requires political will and a commitment to monitor implementation".

Does corruption really matter?  After all, in TI's Corruption Perception Index 2004 India is ranked 90th in integrity levels among 146 nations surveyed.   The respondents in fifteen surveys, mostly businessmen and investors, gave India an average score of 2.8 on a scale of 1-10, with 10 indicating nil corruption.  And yet Indian growth rate is around 6-7 percent!  Can we not therefore dismiss corruption as 'speed money'  accelerating decision making and greasing the wheels of the creaky state machinery?  Does corruption retard growth?

Let me recount an incident to help us understand the devastating consequences of corruption.  In 2001, the Federation of Andhra Pradesh Small Industries Associations launched a major agitation against corruption in Central Excise department.  The  Central Excise and Customs officials have the powers of both a revenue department and police, and hence can arrest, detain, seize properties, penalize, and in general make life miserable for entrepreneurs.  Naturally, corruption is well-organized and widespread.  This agitation by entrepreneurs was not to eliminate corruption altogether.  All they were seeking was some ‘streamlining’ so that only one agency of the department collects 'reasonable' monthly 'mamools' without harassment! Extortion is common at every level of operation – registration, cancellation, inspection at range/divisional level, inspection by audit wing, revenue intelligence wing, enforcement, raids etc.

Happily, that agitation succeeded, and extortion was curtailed significantly in AP.  


But why were the entrepreneurs forced to go on to the streets, pitch tents, stage dharnas, and resort to hunger strikes? Such a plight was usually reserved to workers in earlier days.

In the earlier license-permit-quota raj, the entrepreneur paid a hefty bribe to the politician and bureaucrat to obtain a license to start a business, or expand capacity. He then paid regular 'mamools' to various regulatory and tax authorities.  At the end, he produced shoddy goods, which he could easily sell at exorbitant prices to consumers, who had no choice – the license raj ensured monopoly to the entrepreneurs.  Supply was never allowed to match or exceed demand, and all competition was stifled.  Shortages were endemic.  Remember the days when consumers paid a 'premium' to buy a motorcar!  Telephone was a luxury!  People queued up to get a permit to buy cement.  Sugar was unavailable in open market.  At one time in 1974, even food grain trade was sought to be nationalized, until wiser counsels prevailed.  Because of these monopolies, the entrepreneur made handsome profits despite all the corruption.

The fiscal compulsions of 1991 forced on us the economic reforms.  The LPQ raj was largely dismantled.  Trade barriers were removed, and import duties were reduced. Suddenly, manufacturers faced real competition from domestic rivals and global producers. The corruption costs, which could no longer be passed on to the consumer, became an unbearable burden. Often, extortionary corruption of central excise and customs officials is the difference between survival and death for an enterprise suddenly exposed to real competition in a buyers' market. It is this desperation, which forced millions of entrepreneurs to defy the might and retributive power of the central excise officials.

Corruption in indirect taxes has horrendous consequences. An honest entrepreneur is harassed, and sometimes expelled from business. But more important, by favoring the tax-evaders, competition is severely distorted.   Let’s consider a manufacturer who evades excise duty by bribing and colluding with tax officials. He then has to conceal his production. That means he has to steal power, as energy consumption cannot be disproportionate to production needs. Theft of power further reduces his cost of production, and leads to massive corruption and crisis in the state power board. Since sale of produce also has to be concealed, sales tax is evaded, leading to further fiscal deficits in the state. Finally, as sales revenues are unrecorded, he has no profits, and therefore can avoid corporate tax, and personal income tax. Now, imagine the genuine taxpayer who declares his full production and ends up paying excise duty, power tariff, sales tax, and extortionary bribes to buy peace. How can he compete with the rival manufacturer who, in collusion with the tax-man, evaded all taxes, and reduced cost of production? And after all this, if he somehow survives and makes a modest profit, he has to pay corporate tax! In this perverse environment, even honest entrepreneurs are forced to resort to dishonest practices for survival, or they close their businesses. The number of small businesses which had to fold up because of their incapacity to deal with corrupt officials is legion.

Clearly, corruption seriously distorts competition and market forces, resulting in loss to the honest entrepreneur, consumer, and state exchequer.  As Secretary General Kofi Annan pointed out in his statement on the adoption of the UN Convention against Corruption, "Corruption is an insidious plague that has wide range of corrosive effects on societies.  It undermines democracy and rule of law, leads to violations of human rights, distorts markets, erodes the quality of life, and allows organized crime, terrorism and other threats to human society to flourish".

Happily, there is nothing in our nature or character, which makes corruption inevitable.  Corruption has declined significantly over the decades.  Wherever new technologies ensured transparency, rent-seeking disappeared. Computerized reservation of railway tickets is one example. Non-discretionary procedures in postal department have always ensured high levels of honesty and service-delivery, even without technology.  Fair competition and dismantling of license raj dramatically eliminated corruption and lowered costs and tariffs in telecom industry.  Consumer goods' prices are lowered, even as quality and choice improved.  There are many such success stories.

Even in government, direct taxes and services like passports are improving significantly.  We need to focus on indirect taxes, public procurement, delivery of basic services, justice delivery, and finally systemic incentives in politics, which create a vicious cycle of corruption.  All these can be addressed effectively.  With will and painstaking attention to detail we can curb corruption and make life bearable to our wealth-creators and consumers. We have the capacity to bring down corruption, and accelerate our economic growth rate to 9% or more.  But mere wailing and breast-beating, or fiery pronouncements and pious proclamations will not do.