Fixing corruption systemically

Dealing with corruption is also about confronting perverse incentives, silly laws, obtuse regulations, positive encouragement for rent-seeking behaviours and more.

Corruption, government, GST, Demonetisation, PM Modi
Any movement away from cash into the realm of electronic payments must over time reduce the size of the country’s illegitimate sector.

By Jaithirth Rao

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The general Indian approach to the problem of endemic corruption has been to focus on “getting” some individuals. It is almost as if there is a national obsession with being sanctimonious and finding a scapegoat for every scandal. It is to the credit of the present dispensation that even while it has not completely abandoned this approach, it has made an attempt to take a hard look at systemic corruption. This approach starts with the assumption that corruption is not simply about dishonest individuals. It is also about perverse incentives, silly laws, obtuse regulations, positive encouragement for rent-seeking behaviours, and an almost inexorable necessity for using the lubricant of corruption to deal with the clogged arteries of our economic edifice.

EAC-PM chair Bibek Debroy’s imaginative effort to get rid of obsolete and unnecessary laws has received the PM’s solid support. Many of us welcomed the financial inclusion implicit in the zero-balance bank accounts for poor citizens. What no one realised at that time was that the tsunami of millions of new bank accounts was going to deal a body blow to the famous 1985 Rajiv Gandhi problem statement of only 15 paise out of every rupee of welfare payments getting to beneficiaries. As the payments came in, bankers stopped complaining about low-balance, loss-making accounts. There were positive side-effects like women’s empowerment as many of these accounts were operated by women. The losers, of course, were the corrupt middlemen, touts, and officials who had feasted like vultures over the corpses of state welfare programmes.

Demonetisation was an attempt at a one-time shock therapy. It has not achieved the objective of adding to the coffers of Reserve Bank of India, but it has left behind a lingering fear factor among economic actors who now have an enduring anxiety about indulging in excessive shenanigans. The attack on corruption has happened indirectly. Digital payments have exploded. While the primary impetus has been provided by technology, demonetisation certainly helped push this along. Any movement away from cash into the realm of electronic payments must over time reduce the size of the country’s illegitimate sector. Clearly, there have been first and second order supportive consequences in the “fight against corruption”—an expression which we have been hearing for seven decades. Smaller but significant examples of the intelligent use of digital payments can be seen on our toll roads. Their financial viability has dramatically improved as cash payments and the temptations for siphoning off of legal dues has been pretty much eliminated.

I now come to GST, a subject on which everyone has an opinion. Support for GST goes back to the earlier dispensation and is based on solid academic work by experts like Vijay Kelkar. The general argument that many of us bought into was that the very existence of multiple state-level sales taxes had fragmented our country and we were losing out on our large market size, which we should have actively parlayed as a distinct competitive advantage for our economy. Nineteenth-century Germany achieved astonishing growth rates after a Customs Union was created. We were voluntarily depriving ourselves of this growth engine. We also had inordinately high production taxes like excise and absurd internal duties like octroi. A National Goods and Services Tax focused on consumption and with VAT credits was staring down at us as an absolute necessity. We have managed to put in place a less than perfect GST. But as someone said, the perfect is often the enemy of the good. We have to live in the land of realism. GST is not just about the removal of silly trade barriers. It has also taken a stab at corruption. It should not be forgotten that some of the most vociferous opposition to GST came from the Octroi Department Employees Unions. They are perhaps now the leaders of the movement to restore the Old Pension Scheme and hasten national bankruptcy.

Many have criticised GST as being against MSMEs, which have become the new darlings of disgruntled economists. In this context, I have a story to tell. Exactly 48 years ago, I met a businessman from a mid-sized town. He told me that he had an industrial unit with a dozen power-looms. In those days you needed an approval from a textile commissioner to operate power-looms. My acquaintance had not gotten any such approval. He also did not pay for electricity. He paid his workers in cash. He had never heard of provident fund, gratuity, or ESI payments. He paid cash for the yarn he bought. He sold his woven cloth for cash. He paid no taxes. He was a successful MSME businessman. The question to be asked is whether these are the kind of MSMEs we want. If you are not a fancy and ideologically committed economist, you might want to gather anecdotal evidence from non-corrupt MSMEs. Virtually all of them are happy with GST. They have legitimate complaints about the mechanics, about the portal being slow, about e-way bills not being user-friendly—but all are pretty much agreed that their businesses are more efficient, stabler, and in better health. The mechanical glitches are being addressed. Some of the initial gaming of the system and misuse has been largely eliminated.

Introducing GST when there were so many powerful, rent-seeking, and vested interests who benefited from the old system is a tribute to our democracy. But the effort required compromises. Petroleum products and alcohol have been excluded and real estate does not have the input credit mechanism.  It is going to take time and endless debate before these unnecessary exclusions are addressed. I would like to end by making a plea for the early institution of input credit for real estate not only on the grounds of economic efficiency, but as a crucial anti-corruption tool. At one stroke, crooked land sharks, dicey developers, municipal “approval czars” and many others who resemble my friend of 48-year vintage will be forced to maintain proper books of accounts. Home-buyers, lending institutions, steel, cement, tile, and paint companies, and the “exploited” construction workers will all benefit. The country will emerge as a healthier place, both economically and morally. Stamp duty collections will actually increase. I would argue that the GST council can afford to double the compensation paid to the states. The country and its fisc will still come out ahead. Once this is done, petroleum products can follow in some time. A frontal attack on a crucial repository of corrupt money can take place if we start with real estate.

(Jaithirth Rao, Founder and non-executive director, VBHC)

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First published on: 30-03-2023 at 03:45 IST