From legislation to regulation, the entire system needs serious reforms if corruption is to be checked
In the last 12 years, the amount of money illegally diverted to private hands from national resources has reached astonishing proportions. Some instances have gained their fair share of notoriety by now. The CAG estimated presumptively that the country lost well over Rs 1.7 lakh crore in the 2G spectrum allocation scam and Rs 1.86 lakh crore in the coal-block allocation. Praful Patel, as the civil aviation minister, ordered the ailing Air India to buy 68 planes and not 28 as was originally approved, and in order to do this, Patel gave “long-term perspective” as an excuse, while releasing valuable Air India routes to private parties. In 2010, the country lost R70,000 crore in the Commonwealth Games scam. Welfare schemes also have been marked by theft and diversion of national resources to private hands. The public distribution scheme is said to have made rich men of many officers of the Food Corporation of India. By creating millions of bogus ration-cards to divert subsidised grains to the market, many bureaucrats and traders made big money. It is estimated that 40% of subsidised kerosene for the poor is diverted for adulteration with diesel for trucks. Money from the MGNREGS is said to reach perhaps just 50% of its targeted beneficiaries. Most government projects and welfare schemes have substantial illegal diversion of resources to private parties. These are said to include low- and high-level bureaucrats, politicians, ministers and intermediaries. Intriguingly, though there are many newspaper reports—and other documentation—of such corruption, it is difficult to name more than a handful who were arrested, punished and whose illegally gained assets were confiscated.
The administration and regulation of economic policies and enterprises is complex. Institutions were created after Independence and staffed. Rules and procedures were prepared. To ensure that they are followed, there has to be a frame of multiple approvals. These are revised periodically to make them stronger. Even when there is no doubt about eligibility, the laid down system has to be followed. I suspect that they are framed to enable easy diversion of funds to private use.
The socialistic pattern of society, from the 1950s to 1980s, taught people to trust the government, not non-government organisations or businesses. Anyone working for private profit was suspect. State-owned enterprises were set up through nationalisation, to provide services to the public that were low-priced. Profit making by them was incidental. The return on government investments was not the priority. It was inevitable, therefore, that over time, these enterprises stagnated, gave poor returns, many used state ownership to favour cronies. Both central and state enterprises were infected by the disease. Where they enjoyed a monopoly over raw materirals, imports, etc, they seemed to do well (for example, oil and gas, airports, ports, railways, power generation and transmission, etc). As the economy grew and private investment entered to give competition, many state enterprises declined. (for example, HMT, BSNL, MTNL, Air India, and many others apart from almost all state government-owned enterprises).
In 1969, Indira Gandhi nationalised banks and insurance companies, ostensibly for them to be a boon for the poor and for agriculture and rural India which would now access credit easily. Control over funds for all purposes opened a fresh avenue for which rules and procedures could be devised. It enabled crony-lending, based on contacts rather than the capability to repay. It significantly expanded opportunities for theft by those who ran the system and the contact men who brought the two parties together. The financial position of state-owned banks today is one sign of this. Debt became the principal source of capital. Bank deposits were the primary lending source, not long-term savings. The government relaxed debt-equity norms. This was done especially for high investment projects like infrastructure. In most of them, the promoter brought in only 20-30% as equity. With so much civil construction in such projects, many promoters soon withdrew their contribution by taking illegal commissions from contractors.
Tax evasion, hawala channels to accumulate capital illegally in overseas banks and benami investments in India became common practice for many businesses (intermediaries and government functionaries). Rigid licensing led to under-invoicing of exports and over-invoicing of imports so that funds could be illegally accumulated abroad. Now, the Mauritius route, participatory notes, FIIs, provide other ways.
To some extent, relaxation of licensing in the 1980s, and even more liberalisation from 1991, began unshackling the economy and enterprise from the “license-permit Raj”.
It left intact the structure of bureaucratic control over all business and investments, through government departments and officers. Control Raj, therefore, remains to this day. The difference is that the pickings are now much larger as evidenced by the many scams and the financial condition of state-owned banks. Add to this the control exercised by state governments on acquiring land, giving environmental clearances, employing labour, etc.
Today, many government-owned national resources have become very valuable. There is much money to be made in licensing, selling or just allocating them. These include coal, telecom spectrum, iron ore, airline routes, some road projects (through toll), etc. The country’s investigation prowess is not geared for the scale of potential and actual theft this scenario offers. Government employees found it very profitable to collude. The judicial process was too slow and tended, after many years of meandering trials, to either acquit (for lack of enough evidence) the accused or impose nominal fines. Statutory regulators were created to rule on issues which could lead to large profit, or to sell natural resources (by licensing, fixing tariffs, etc).These offices have limited penal powers, and those manning them are retired bureaucrats with strong government links. An exception was the Competition Commission of India which had powers to fine companies in proportion to their turnover acquired by using illegal means (like price collusion, etc). Though CCI has imposed fines of many thousands of crores of rupees on many companies in cement, real estate and other sectors, very little has actually been recovered. Appellate courts and tribunals have stayed such orders for years. This is a good example to show how our judicial system has not understood the damage to the economy because of the misbehaviour by enterprises.
The present government shows no intention of changing the system nor of moving to a free-market economy. The system is rotten and has created methods for massive corruption and theft. It has to change drastically at all levels—administration, police, judiciary, regulators, procedures, rules, inspectors, multiple clearances, investigation, penal provisions and so on. A key reason for slow trials in courts is the role of governments as the biggest litigants in India. Despite promises, government departments continue to appeal against all unfavourable judgments.
Easing the doing of business in India seems to be purely rhetorical. Unless there is reform at all levels, we will not reduce corruption.
The author is former director general, NCAER, and was the first chairman of the CERC