Renu Pokharna

Archive for August, 2011|Monthly archive page

Chasing Black Money: In search of red herrings

In Bizarre Laws, Bureaucratic Delays, Civil Services Reforms, Corruption, Red Tape on August 20, 2011 at 12:16 pm

This is a discussion paper from the Liberty Institute, New Delhi. Comments are welcome.

In the past few months, the black money debate has also been stoked by some citizens’ groups, and even by a popular yoga teacher. The activists and the government have been at loggerheads over the scope and structure of a new anti-corruption authority being proposed. There have been claims ranging from tens of billions of dollars to over a trillion dollar, money that may have been illegally acquired or wealth that evaded taxation, and deposited in banks in various tax havens.

One side is accusing the government of being insensitive to the popular concerns over widespread corruption. The politicians are accusing the activists of seeking to denigrate parliamentary democratic procedures. The 24-hour news media, as usual, is stoking the fire in search of TRPs. What is getting lost is the fact that corruption is the consequence of the distortions in the normal economic functioning caused by legal and regulatory interventions. The resultant mismatch between supply and demand for goods and services are then attempted to be mitigated through the discretionary powers in the hands of various government agencies and ministers. This opens the door for patronage for a consideration, that is corruption.

A study by the Global Financial Integrity estimated black money stashed abroad at $462 billion. On the other hand, the Swiss National Bank (SNB) has estimated that the total deposits of Indian individuals and companies with all the Swiss banks put together stood at about $2.5 billion (Rs 11,100 crore) at the end of 2010. And all of that can’t be illegal.

The government has been reiterating its intent to bring the black moneyhome, even as easily excited people’s groups say such money should be declared a national asset. The Supreme Court, taking note of the matter, has asked for the appointment of a Special Investigating Team (SIT), to bring black money back.

The government has offered to strengthen the money laundering law. Dual Tax Avoidance Treaties are being negotiated with over 80countries, including Switzerland, in an attempt to share information about financial transactions and taxation. At home, the government has also proposed amendments to the Benami Transactions (Prohibition) Act 1988 to make it easier to seize and auction property, whose ownership is fraudulent, pass on the proceeds to States, where the property is located, for development activities.

In the past two years, the Indian income tax department had collected some 7,700 pieces of information from treaty countries on payments received by Indian citizens in various countries and on bank accounts. “We have made more than 175 requests to our treaty partners in cases of specific taxpayers in the last financial year,” claimed Mr Pranab Mukherjee, India’s Finance Minister recently.

A slew of initiatives are also being proposed to tackle corruption. The Lok Pal Bill, pending for over two decades, has been introduced to inquire and investigate corruption among political leaders and senior bureaucracy, at the national level. Another new law, the Judicial Accountability bill is on the anvil to check corruption in the higher echelons of the judiciary. To encourage people to expose instances of corruption, a law to protect the whistleblower is under discussion. A more structured public grievance redressal mechanism is also being proposed.

While the list measures may be impressive, and the intent of the political and civic leaders may be genuine, we believe these developments are naïve at best. However, far worse is the prospect that the plethora of initiatives just turn out to be red herrings to detract from the underlying problems.

The problem of corruption and black money originate in bad public policy, rather than poor policing. Let us begin with trying to define black money, generally held to be income on which taxes are not paid. We believe there are 3 constituents of black money.

legally earned income on which taxes have not been paid
illegally earned funds, such as bribes, and contracts whose face value does not reflect the transaction value,
earnings from criminal activities

As far as the first category is concerned, this is primarily the tax collector’s problem, and strengthening the mechanisms we already have in place is an on-going exercise. As more and more of our economy moves into the formal sector, and data collection systems are strengthened and cross-linked, this will be less and less of an issue. According to Dr Surjit S. Bhalla, a prominent economist, and who heads an investment company, the total amount of income tax evaded annually could be in the range of Rs 100,000 crore (i.e., Rs1,trillion or USD 22 billion), or about 1.5% of India’s GDP. A portion of it may find its way to foreign tax havens.

In the financial year 2010-11 (April to March), the official estimate of income tax collected is Rs 446,000 crore, which is around 46 per cent of the revenue for the Union Government treasury and 6.13 % of the GDP.

As far as the third category is concerned, this is primarily the remit of criminals and police agencies. The money being generated from such activity is not the most serious of the problems it creates and in any case fighting crime is the primary task of any government. But bad laws criminalise what should be legitimate economic activity. For instance, India restricted jewellery to 14 carat, with the infamous Gold Control Order of 1962, and then banned gold imports. Not surprisingly, for a people who consume the highest volume of gold in the world, the prohibition made gold smuggling a very lucrative proposition in India. In the 1980s, less than 4 tons of gold were being mined domestically, but it is estimated that about 150 tons were being smuggled in each year to meet the demand.

Inevitably, gold smuggling turned into a major source of income generation for gangsters which subsequently diversified into becoming guns for hire, international terrorists, and drug runners, corrupting almost every institution of the state. In addition, this opportunity acted as a catalyst for the money laundering phenomenon, known as the Hawala. It was only in 1992, that the restrictions on imports of gold were lifted, and smuggling has mostly evaporated.

Let us focus, then, on the second category. Begin with contracts where there is a divergence between the real value of the transaction, and that stated on paper. Ask any Indian, and they will tell you that the largest category of such transactions is real estate. In the Delhi and the surrounding region, our estimate is that the average property deal reflects only 50% of the value on paper (in the case of ‘farm-houses’, less than 25% of the property value is typically declared; for condominiums in the suburbs, it may be as much as 80%. A 100% ‘white’ money deal in property transactional is a rarity.) Over the last 5 years, property and real estate have generated almost 25% of the GDP of this region, one of the nation’s most prosperous. This means that, this single area of untruth leads to 12.5% of regional GDP going underground. Nationally, the most conservative estimate is that property transactions generate black money worth about 1 to 2% of India’s GDP, annually.

From a policy point of view, it becomes important to ask why real estate deals generate so much black money. We believe that the primary cause is extremely high government fees for registration of land sale, between 5 and 10%of the value of the transaction. The desire to evade this levy is the starting point of evasion. Over time, real estate has become the parking lot for black money of all sorts: this includes such money generated from sale of property, a self-reinforcing cycle; as well as speed money and slush funds, garnered from all manner of favours granted by powerful administrators and politicians.

The World Bank’s “Doing Business Report 2010”, ranks India at 134 among 183 countries. India is one of the most trouble some places for dealing with public authorities. Such frictions inevitably leads to the payment of ‘speed money’, whether for the tiniest of transactions, such as a driving licence or hawker’s permit; or for major resources over which politicians have control, such as awarding telecom spectrum, mining and exploration rights, or large infrastructure contracts.

The higher transaction cost of carrying out normal economic activity in India, not only adds to inefficiency, but also raises the cost of doing business. This also explains, at least partly, the fact that anything between 25 to 40% of Indian economic activity takes place in the informal sector, mostly under the official radar.

Corruption is not rocket science, and India is not an exception. Globally, countries that rigidly regulate their economies, and restrict the economic freedom enjoyed by their people, also tend to be also among the more corrupt ones, and generally poorer. While India has improved its standing in the Economic Freedom of the World Index, over the past two decades, its has not changed fast enough, and the low rank on the Doing Business Report indicate that the changes have not been deep enough to make substantive impact on corruption.
This is a discussion paper from the Liberty Institute, New Delhi. Comments are welcome.

In the past few months, the black money debate has also been stoked by some citizens’ groups, and even by a popular yoga teacher. The activists and the government have been at loggerheads over the scope and structure of a new anti-corruption authority being proposed. There have been claims ranging from tens of billions of dollars to over a trillion dollar, money that may have been illegally acquired or wealth that evaded taxation, and deposited in banks in various tax havens.

One side is accusing the government of being insensitive to the popular concerns over widespread corruption. The politicians are accusing the activists of seeking to denigrate parliamentary democratic procedures. The 24-hour news media, as usual, is stoking the fire in search of TRPs. What is getting lost is the fact that corruption is the consequence of the distortions in the normal economic functioning caused by legal and regulatory interventions. The resultant mismatch between supply and demand for goods and services are then attempted to be mitigated through the discretionary powers in the hands of various government agencies and ministers. This opens the door for patronage for a consideration, that is corruption.

A study by the Global Financial Integrity estimated black money stashed abroad at $462 billion. On the other hand, the Swiss National Bank (SNB) has estimated that the total deposits of Indian individuals and companies with all the Swiss banks put together stood at about $2.5 billion (Rs 11,100 crore) at the end of 2010. And all of that can’t be illegal.

The government has been reiterating its intent to bring the black moneyhome, even as easily excited people’s groups say such money should be declared a national asset. The Supreme Court, taking note of the matter, has asked for the appointment of a Special Investigating Team (SIT), to bring black money back.

The government has offered to strengthen the money laundering law. Dual Tax Avoidance Treaties are being negotiated with over 80countries, including Switzerland, in an attempt to share information about financial transactions and taxation. At home, the government has also proposed amendments to the Benami Transactions (Prohibition) Act 1988 to make it easier to seize and auction property, whose ownership is fraudulent, pass on the proceeds to States, where the property is located, for development activities.

In the past two years, the Indian income tax department had collected some 7,700 pieces of information from treaty countries on payments received by Indian citizens in various countries and on bank accounts. “We have made more than 175 requests to our treaty partners in cases of specific taxpayers in the last financial year,” claimed Mr Pranab Mukherjee, India’s Finance Minister recently.

A slew of initiatives are also being proposed to tackle corruption. The Lok Pal Bill, pending for over two decades, has been introduced to inquire and investigate corruption among political leaders and senior bureaucracy, at the national level. Another new law, the Judicial Accountability bill is on the anvil to check corruption in the higher echelons of the judiciary. To encourage people to expose instances of corruption, a law to protect the whistleblower is under discussion. A more structured public grievance redressal mechanism is also being proposed.

While the list measures may be impressive, and the intent of the political and civic leaders may be genuine, we believe these developments are naïve at best. However, far worse is the prospect that the plethora of initiatives just turn out to be red herrings to detract from the underlying problems.

The problem of corruption and black money originate in bad public policy, rather than poor policing. Let us begin with trying to define black money, generally held to be income on which taxes are not paid. We believe there are 3 constituents of black money.

legally earned income on which taxes have not been paid
illegally earned funds, such as bribes, and contracts whose face value does not reflect the transaction value,
earnings from criminal activities

As far as the first category is concerned, this is primarily the tax collector’s problem, and strengthening the mechanisms we already have in place is an on-going exercise. As more and more of our economy moves into the formal sector, and data collection systems are strengthened and cross-linked, this will be less and less of an issue. According to Dr Surjit S. Bhalla, a prominent economist, and who heads an investment company, the total amount of income tax evaded annually could be in the range of Rs 100,000 crore (i.e., Rs1,trillion or USD 22 billion), or about 1.5% of India’s GDP. A portion of it may find its way to foreign tax havens.

In the financial year 2010-11 (April to March), the official estimate of income tax collected is Rs 446,000 crore, which is around 46 per cent of the revenue for the Union Government treasury and 6.13 % of the GDP.

As far as the third category is concerned, this is primarily the remit of criminals and police agencies. The money being generated from such activity is not the most serious of the problems it creates and in any case fighting crime is the primary task of any government. But bad laws criminalise what should be legitimate economic activity. For instance, India restricted jewellery to 14 carat, with the infamous Gold Control Order of 1962, and then banned gold imports. Not surprisingly, for a people who consume the highest volume of gold in the world, the prohibition made gold smuggling a very lucrative proposition in India. In the 1980s, less than 4 tons of gold were being mined domestically, but it is estimated that about 150 tons were being smuggled in each year to meet the demand.

Inevitably, gold smuggling turned into a major source of income generation for gangsters which subsequently diversified into becoming guns for hire, international terrorists, and drug runners, corrupting almost every institution of the state. In addition, this opportunity acted as a catalyst for the money laundering phenomenon, known as the Hawala. It was only in 1992, that the restrictions on imports of gold were lifted, and smuggling has mostly evaporated.

Let us focus, then, on the second category. Begin with contracts where there is a divergence between the real value of the transaction, and that stated on paper. Ask any Indian, and they will tell you that the largest category of such transactions is real estate. In the Delhi and the surrounding region, our estimate is that the average property deal reflects only 50% of the value on paper (in the case of ‘farm-houses’, less than 25% of the property value is typically declared; for condominiums in the suburbs, it may be as much as 80%. A 100% ‘white’ money deal in property transactional is a rarity.) Over the last 5 years, property and real estate have generated almost 25% of the GDP of this region, one of the nation’s most prosperous. This means that, this single area of untruth leads to 12.5% of regional GDP going underground. Nationally, the most conservative estimate is that property transactions generate black money worth about 1 to 2% of India’s GDP, annually.

From a policy point of view, it becomes important to ask why real estate deals generate so much black money. We believe that the primary cause is extremely high government fees for registration of land sale, between 5 and 10%of the value of the transaction. The desire to evade this levy is the starting point of evasion. Over time, real estate has become the parking lot for black money of all sorts: this includes such money generated from sale of property, a self-reinforcing cycle; as well as speed money and slush funds, garnered from all manner of favours granted by powerful administrators and politicians.

The World Bank’s “Doing Business Report 2010”, ranks India at 134 among 183 countries. India is one of the most trouble some places for dealing with public authorities. Such frictions inevitably leads to the payment of ‘speed money’, whether for the tiniest of transactions, such as a driving licence or hawker’s permit; or for major resources over which politicians have control, such as awarding telecom spectrum, mining and exploration rights, or large infrastructure contracts.

The higher transaction cost of carrying out normal economic activity in India, not only adds to inefficiency, but also raises the cost of doing business. This also explains, at least partly, the fact that anything between 25 to 40% of Indian economic activity takes place in the informal sector, mostly under the official radar.

Corruption is not rocket science, and India is not an exception. Globally, countries that rigidly regulate their economies, and restrict the economic freedom enjoyed by their people, also tend to be also among the more corrupt ones, and generally poorer. While India has improved its standing in the Economic Freedom of the World Index, over the past two decades, its has not changed fast enough, and the low rank on the Doing Business Report indicate that the changes have not been deep enough to make substantive impact on corruption.

Liberty Institute, 16 Aug 2011

Column: Is India a Brazil or a South Korea?

In Macroeconomic Policy, Malnutrition, Microeconomic Policy, Uncategorized on August 16, 2011 at 7:40 am

No power can stop an idea whose time has come, Manmohan Singh said 20 years ago, as he unleashed India onto the global stage. There have been the expected ups and downs, but India’s rise has been a compelling story—we’re in a down right now, and still looking at a GDP growth of upwards of 7.5%.

The economy is a lot bigger as evidenced from the fact that in constant prices, GDP is up 8.2 times between 1991-92 and 2010-11; naturally enough, sales of consumer goods are up dramatically—annual car sales are up 13.3 times and two-wheelers 7.3 times, while the number of telephone connections is up 172 times, from around 5 mn then to about 862 mn today … Call it irrational exuberance if you will, but earlier this month, the market capitalisation of pizza company Domino’s India operations nearly equalled that of its global parent even though sales were around a tenth, a sign of what the Indian market thought of the future versus what the US market thought.

The economy is a lot more open and while the export-to-GDP ratio is up from 7% to 14%, the import-to-GDP ratio is up from 8% to 23% and peak import duties are down from 160% to 10%. If despite this, investment levels are up hugely, from 26% of GDP to around 36%, it tells you that India is dramatically more competitive than it ever was before.

That’s why, while foreign direct investment is up from a negligible $129 mn in 1991-92 to $33 bn in 2009-10, outward investment by Indian firms also rose from nothing in 1991-92 to $16.7 bn in 2010-11 (it’s an even higher $44 bn if you include the value of guarantees issued by Indian firms on behalf of the overseas firms they bought). The number of Indian firms in the Fortune 500 is up from one in 1991 to 8, the Boston Consulting Group has 20 Indian firms in its list of new global challengers …

Of course, as applies to everything about India, there are as many negatives as there are positives. There are the obviously low literacy rates and even these are exaggerated—a study by NGO Pratham found that just half the kids in 5th standard in rural India could read a 2nd standard text. Another study, by India’s largest temping firm TeamLease, finds that just a small fraction of those coming out of colleges is, in fact, employable. Though it was dismissed as a typo, there’s more than a grain of truth to the finance minister’s budget speech which, a few years ago, said the government would aim to provide rural amenities to urban India—the Isher Ahluwalia committee found that 4,861 out of 5,161 cities/towns in India don’t even have a partial sewerage network (hence The Economist’s dig that in coming years more Indians will be connected to a biometric ID system than to sewers). Add to this various human development indicators and the picture gets even more depressing—there’s progress of course, but even poorer countries have done better.

The answer to why India is moving ahead despite all the negatives is that, for each problem, Indians have worked out a jugaad, a temporary solution. Government policy limits the growth of universities and colleges, so most of the big tech firms like Wipro and Infosys run large parallel quasi-universities where they retool those they hire from the B- and C- and D-grade colleges. The government doesn’t allow for-profit schools, so private schools give out management and other contracts to affiliated concerns that are valued high enough for the school to run on a no-profit basis; labour laws make it difficult to shut down large units, so firms divide themselves up into lots of tiny units. The new Right to Education Act, which mandates that even private schools have to reserve a fourth of seats for SC/ST/OBC students, will deal a killer blow, but it remains to be seen how private schools find a way around this.

Jugaad works, but only up to a point. So the number of patents India gets is up—from 379 in 1991 to 3,173 in 2008—but this is a fraction of what China gets each year, a result of the fact that India is the only country in the World Bank’s Knowledge Assessment Methodology Index whose score has fallen against even itself in the last few decades. That’s why India isn’t celebrating the conclusion of 20 years of reforms—she’s made great strides, but it could just as well go the other way.

It’s called the middle-income trap, and the latest ADB report has a good description of it—if Asia grows well, its GDP will be $148 tn in 2050 but if it falls in the middle-income trap, this will be just $61 tn! A lovely graph shows how Brazil and South Korea had roughly the same income from the mid-1970s to the mid-1980s, but while Brazil floundered, South Korea took off.

The way it works is simple. As a country begins to do well the way India is right now, wage levels begin to rise (at around 9.5% per year in rural India over the past two decades) and the currency begins to appreciate. Both make its products less competitive. Obviously, we need wage rates to rise if people are to move out of poverty, but if this wage rate hike is not accompanied by greater productivity, you pretty much get priced out of the market—that’s why India’s textile industry has been comprehensively beaten by that from other countries. Some studies suggest India’s productivity is rising, but the large unorganised sector (think of several tiny textile units instead of one large one) keeps the pace down—an ongoing study by Icrier finds that while productivity rose 0.8% a year in the organised textile sector between 1980 and 2004, it fell 4.5% in the unorganised sector, leading to an overall fall in textile industry productivity. House painters in Delhi (I got my house painted a few weeks ago) charge around R450 per day—that’s around $3.30 an hour on a PPP basis as compared to $8 in the US. Without even a fraction of the US productivity, that’s asking for trouble.

Without a huge jump in education levels, actually skilling levels at this point in India’s development stage, India’s headed straight for the middle-income trap. The government has ambitious policies to help avoid it—one such is the two-year-old National Skills Development Corporation that hopes to skill/upskill 500 mn Indians by 2022. It has equally important policies, the education and labour policies topping the list, that are aimed at making sure India hits the trap. Which way will India head? As a wit put it, the plans are man’s, the odds are God’s.

 

Financial Express, 25 July 2011

No freedom for farmers

In Agriculture, Property Rights on August 16, 2011 at 7:37 am

Jairam Ramesh, the new minister for rural development, has put the draft of the National Land Acquisition and Rehabilitation and Resettlement Bill, 2011(LARR) online. According to the draft, land acquisition can be done for any public purpose, including development of industry, development of infrastructure, special economic zones and so on.

The fact is that most recent problems relating to industrialisation and development of infrastructure could have been resolved at the dawn of Independence itself, had not Jawaharlal Nehru brought Soviet-brand socialism into independent India. Nehru, with a marked animus towards agriculture, sought to demolish the rural leadership — for example, by replacing moneylenders with a network of cooperative institutions that permitted the draining away of rural savings to the urban populace. At the same time, he deliberately followed a policy calculated to depress agricultural prices. Had it not been for these Soviet-type policies, the problems listed by Jairam Ramesh in the draft would not have arisen in the first place.

Japan is an example. It followed, from as early as 1921, a policy calculated to give its farmers a price for their paddy that was as high as four times the international price. This created the primary capital in the hands of farmers, which they promptly used for developing the cottage industries that Japan is justly famous for.

These cottage industries, little by little, developed assembly plants to put together the parts they produced. The consequence was that most of Japan’s major industries developed in the countryside, with the capital owned mostly by farmers, the primary producers. There was no question of any land being arbitrarily taken away from farmers for the development of industry, infrastructure and urbanisation. There would have been no rehabilitation and resettlement (R&R) problem either.

The legislation Nehru brought in to abolish zamindari was rejected by most courts in the country as being violative of the fundamental right to property, including its acquisition, maintenance and disposal. Undaunted, Nehru moved the very first amendment to the Constitution — to abridge the fundamental right to property. His daughter, Indira Gandhi, gave that right a final burial. This established here the principle of eminence juris, copied from the British system, broadly meaning that the land belongs to the monarch and can be taken away only through due legal processes. This was unknown in the Indian system, where the land was considered to be the property of the village. Jairam Ramesh, had he done his homework properly, would have found that he is now grappling with a problem created by Jawaharlal Nehru and Indira Gandhi, both near-deities to the Congress.

The LARR draft proposes the creation of a network of regulations so comprehensive that it will please bureaucrats, who will find their opportunities for corruption greatly expanded. The bill offers a package that is in no way better than the package that was offered to the Narmada Project displacees. The payment of an initial lump-sum calculated in terms of the stamp value of the land to be acquired; a cash payment for transport cost; a built house to each family displaced; and the establishment of community organisations like schools, hospitals and so on are all there. To these are added the offer of a share in equity; the offer of a job in the acquiring company; a subsistence allowance for 12 months and annuity for 20 years for each family, landholder or landless — and the offer of 20 per cent of the developed land in case of acquisition for urbanisation.

But the stipulations for the distribution of these benefits, by treating a family as one unit, will only result in further fragmentation of holdings, and create a large number of disputes which the present judicial system cannot even begin to cope with. It is lucky that the bill has not committed Medha Patkar’s mistake, too — she, at one stage, proposed a “land for land” formula. This had permitted the bureaucracy to make money at both the purchasing and the disposal ends. The new draft does not even seek to give land for land, fortunately realising that agriculture is a losing proposition and that most farmers want to quit it in any case.

There is no remedy in Jairam Ramesh’s draft to the problem of food security. If land acquisition proceeds at anything like the present rate, and the government continues to create hurdles in the path of the farmers — like cutting power, non-availability of credit, fuel prices inflation, and measures that further encourage the fragmentation of land — food security will become a pipe dream.

Problems of industrial and infrastructure development, as also the problems relating to food security would have been easily resolved by following the Japanese model, and allowing Indian farmers a price for their produce that is attractive. The ideal solution lies in allowing farmers to continue unhindered in agricultural cultivation, if they so wish, but also permitting them the full liberty to dispose of their land — like the freedom that was given to the textile mill owners of Mumbai after the mills went bankrupt, permitting them to dispose of their land to any person, at any time, and at a price that suited them. Jairam Ramesh’s magnanimity in stipulating that multi-cropped irrigated lands will not be acquired under any circumstances like saying that invading marauders should not take away your prettier daughters, only the less attractive ones.

Jairam Ramesh has honestly admitted that, so far, in most cases R&R has not kept pace with acquisition. In many cases, the time gap has exceeded several decades. He would do well to start from scratch and examine the genesis of the problem caused by the Land Acquisition Act, 1894, and the tinkering that was done to it, particularly at the time of introduction of Schedule IX to the Constitution.


Indian Express 16 Aug 2011

Economy | Open sesame

In Bureaucratic Delays, Civil Services Reforms, Corruption, Poverty Eradication on August 16, 2011 at 7:33 am

A dozen years after the end of World War II​ and near the high noon of European social democracy, British prime minister Harold Macmillan​ famously announced, “Let us be frank about it: most of our people have never had it so good.”

Curiously, despite a wonderful opportunity to infuse some cheer into the dark national mood, our political leaders expressed no such optimism this July, exactly 20 years after the unlikely combination of Narasimha Rao and Manmohan Singh​ finally liberated the Indian economy from overwhelming government control. A rotting edifice based on institutionalized scarcity, price controls, shoddy products, protectionism and endemic underperformance was swiftly demolished in 100 days of inspired action.

It takes utter cussedness to deny the obvious achievements of greater economic freedom. Forget the bragging rights that come with being one of the most dynamic economies in the world or the hope of membership at the global high table as an emerging superpower. Ordinary lives have been changed beyond recognition thanks to the opportunities provided by economic reforms.

Average real incomes have quadrupled since 1991, providing ordinary Indians a rare opportunity to improve their lot. Ownership of consumer goods has spread. Most homes have access to electricity. School attendance rates have soared, a sign of new aspirations. India accounted for 25% of the world’s out-of-school population in 2001; that is now down to less than 10%. Indians are eating better, with consumption of fresh produce such as vegetables, eggs and fruit becoming more common. Higher consumption of meat and fish could also indicate that caste rules are weaweakening in many parts of the country.

India has an appalling record on social indicators such as malnutrition or underweight children, but there is no doubt that the direction of change is right. Few realize that data from the United Nations Development Programme (UNDP) shows how human development accelerated in the past 10 years and that India is on course to meet most of the millennium development goals by 2015. UNDP said in its Human Development Report 2010 that India is sixth in the list of countries that have rapidly improved its human development indicators since 1980. Poverty rates, however measured, have dropped by at least 10 percentage points. Most Indians have never had it so good.

To be sure, it has not been all smooth sailing. The 250 million people stagnating at the bottom fifth of the income pyramid continue to live in abject poverty. Inequality is rising, though there is too little public discussion about the reasons. Are millions being left behind because of social factors such as caste, or the fact that they do not have the capital and skills to participate in the more dynamic parts of the economy, or because they are trapped in regions that do not have adequate links to markets? Each reason demands a different response from policymakers. However, a complicated problem has been reduced to eloquent but vacuous sermons.

Politics can be transformed as voters get the freedom to finally look beyond the daily struggle for survival and think about the future. “India is witness finally to what I have called the Revolution of Perceived Possibilities,” economist Jagdish Bhagwati​ told parliamentarians in December, when he delivered the third Hiren Mukherjee lecture. “Aroused economic aspirations for betterment have led to political demands for the politicians to deliver yet more. This suggests, as my Columbia University colleague Arvind Panagariya​ and I have hypothesized, that voters will look to vote for the politicians who can deliver growth, so that we would expect growth before the vote to be correlated with vote now.”

Building on the gains of the past two decades and addressing the failures will require political imagination from various groups over the next decade.

The Left needs to realize that the poor can move into higher-paying jobs in modern sectors and the government can fund an effective welfare state only if the Indian economy continues to grow at close to double-digit rates, which will require a further dose of economic reforms that the Left instinctively distrusts. One possible model is Brazil under Luiz Inácio Lula, a man of the Left and perhaps the most successful political leader in the past 10 years, with a winning combination of free-market economics and a well-funded welfare state that has reduced poverty and inequality.

The Right has its own sets of challenges. It hopes that India will be able to strut more confidently on the global stage but refuses to accept the multilateral compromises that go with being a global player, even on key issues such as extinguishing the Pakistani military-jihadi complex. The cultural conservatives will have to live with the fact that greater global trade and investment is needed for prosperity but that such linkages will naturally undercut many social arrangements. The conservative philosopher Michael Oakeshott​ pointed out many years ago that change is always a threat to identity.

The biggest challenge before the business class is to ensure that the current concerns about the rise of crony capitalism do not eventually lead to a full-blown legitimacy crisis for Indian capitalism. Engaging with the rest of society is essential. The angry response by influential businessmen, after some of their peers were arrested on corruption charges, reveals a shocking degree of myopia, almost on a par with the opposition of the Bombay Club to the 1991 reforms. Economic researchers have shown that liberal capitalism has little resonance in many countries because the vast majority believes that fortunes have been made through favours rather than hard work and innovation.

The middle class faces its own set of paradoxes. It has done well since 1991 but has withdrawn into a shell as far as public participation goes. The very people who have gained from greater economic freedom have little faith in the institutions of political freedom, rarely even bothering to vote during elections and at other times either banking on charlatans or on single-issue movements that have no respect for the inherent trade-offs in politics and policy. In contrast, the poor, who have little economic freedom, are the backbone of our system of political freedom. More generally, the middle class has moved into the sanitized world of gated communities, private schools, private hospitals and air-conditioned cars.

How each of these contradictions is resolved could play a big role in deciding which way India goes in the next 10 years—a million exasperated mutinies, a sclerotic oligarchic capitalism where competition and new ideas are shut out, a violent nationalism that is mistaken for patriotism, or a genuinely open economy and open society.

 

MINT 11 Aug, 2011

India Journal: There’s a Better Way Than the Lokpal

In Corruption on August 16, 2011 at 6:20 am

As Parliament prepares to look at a bill to create an anti-corruption ombudsman, or Lokpal, when it reconvenes next week, it’s worth thinking about when and where corruption takes place.

In India, the greatest prevalence of corruption is in the delivery of public services, according to perception surveys. That means the majority of Indians feel directly affected by corruption in the lower and middle ranks of public administration, rather than by corruption at the top. The Center for Media Studies, a Delhi-based think tank, in a 2010 survey of almost 10,000 households in a dozen Indian states found that on average, 15% of citizens had personally experienced corruption in public schools, while one out of five had experienced it in the public distribution of food benefits.

Basic public services have also historically suffered quality issues. A survey by Transparency International India in 2005 that looked at several public services across 20 Indian states found that of the more than 14,000 people polled, one-fifth were dissatisfied with public schools while 44% thought government hospitals were of poor quality.

The Lokpal has been proposed as an anti-corruption institution that will investigate citizen complaints. Two versions of it were drafted by members of a committee made up of government ministers and social activists. The committee failed to arrive at a consensus on several key issues including how to handle complaints of corruption in public service delivery.

While the government version attempts to make the Lokpal manageable and effective by limiting its jurisdiction to central governments and ministries, civil society wants to mandate the office to treat a significant portion of service transactions. This approach suffers from several shortcomings.

First, a single anti-corruption agency cannot be expected to deal with all grievances related to quality or deficiencies in public services. If the Lokpal were to be set up to do so, it would potentially be required to deal with millions of transactions. Such a proposition is not economically and managerially viable, as it would lead to creating parallel infrastructure and services in order to deal with them.

Out of 1.7 million checking drives the Indian Railways undertook during the financial year 2009-10, some 16 million instances of travelers without tickets were detected, according to their most recent annual report. And yet that’s only a tiny percentage of the approximately 10 billion passengers it transports annually. This gives us a sense of the volume of operations that would be required to substantially free the system from corruption.

Second, the way in which the activist-designed Lokpal deals with allegations of corruption in services is impractical to implement. It requires that every public institution list the services it will deliver within a stipulated timeframe. When this is not adhered to, citizens can lodge complaints to a locally appointed officer who is supposed to process these within 30 days. If this doesn’t happen, the complainant can then go to an appeals officer appointed by the Lokpal, who would be entitled to fine the local officer 500 rupees ($11) a day. This process essentially holds the poor local officer alone responsible for deficiencies and corruption in millions of cases coming to the attention of his or her department.

There are several alternate strategies that can improve service delivery and prevent corruption from taking place. Information and communication technology has emerged as an effective tool for fighting corruption without the confrontation that some anti-corruption methods involve.

One of the ways in which civil servants help corruption breed is by suppressing information and manipulating access to state resources. This includes information like land records, annual reports, budgets, meeting minutes, tenders and contracts, as well as applications for passports, ration cards, voter identity cards and Below Poverty Line cards, for example. Simply putting such documents online can reduce corruption because citizens can conduct their business without coming into direct contact with officials. The enactment of a Right to Information Act in 2005 and launch of National e-Governance Plan in 2006 prompted many Indian authorities make their documents available online.

The virtue of making documents online became evident in the case of the Bhoomi project in the southern Indian state of Karnataka. Launched in August 2002 and led by the state’s Department of Revenue, the project digitized some 20 million land records of 6.7 million farmers who then no longer needed to rely on the help of local agents and bureaucrats in obtaining copies of these records. Farmers can access records through 177 cyber cafes across the state. Public Affairs Center, a non-profit research institute based in Bangalore, found that only 3% of some 200 respondents at Bhoomi kiosks reported paying bribes to obtain land records as compared to two-thirds of 59 users surveyed whose records were not available digitally.

But much of the information that citizens need is not readily available. In most cases, information from existing and evolving datasets needs to be processed before it can become meaningful and usable for the citizens. What is the availability of train tickets between two stations?  How many kilos of grains are available through the public distribution service? Where are stores of blood of a specific group available? Citizens cannot effectively access or obtain dynamic information using right-to-information legislation or through online documents. But technologies exist to generate and communicate such information.

Online ticket reservation in the Indian Railways is an example of making dynamic information available to passengers. E-ticketing has helped to curb the rampant corruption that existed in long-distance ticketing decades ago. Previously, information on train vacancies was not made available to waiting passengers who thus could be coerced easily to give bribes.  Introduction of e-ticketing early in the previous decade allowed passengers to check vacancy and book a ticket online. Today the railways carry millions of passengers who can book their tickets without paying a bribe.

Launched in July 2010, NextDrop, a project initiated by a group of University of California, Berkeley, students in partnership with a local water board in the state of Karnataka, sends every registered household in Hubli district a text message before water is released from the pumping station. In case of problems, residents provide feedback to the engineers at the water board.

These are just a few examples of how dynamic information can enable citizens to take small but important decisions related to their daily activities. These methods help overcome human interference and provide equal and fair treatment to citizens according to clearly defined rules.

 

WSJ,  July 27, 2011