India’s costly culture of corruption

Steven Pearlstein
Columnist April 3, 2011

The perfect metaphor for the new India can be found on the new highway connecting this stately capital and Gurgaon, a Tysons Corner-like edge city of gleaming office buildings, shopping malls and high-rise condominiums in various states of construction that is already home to 3 million aspiring young professionals.

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics. View Archive

The high-speed roadway, part of India’s infrastructure boom, boasts four lanes in each direction. Most of the time, however, there are five lanes of traffic — testimony not only to how fast the Indian economy is growing but also to the Indian penchant for crossing lines and ignoring rules that get in the way of their ambitions.

Traffic lawlessness is a small problem for India. The much bigger one — the one everyone is talking about these days — is corruption.

The telecom minister is in jail, awaiting trial on charges that he sold wireless spectrum to many of the country’s biggest business groups for billions of dollars less than it was worth. His top aide recently hanged himself, and once-celebrated billionaire oligarchs are now being hauled before investigators.

Several-billion dollars have turned up in the foreign bank account of a politically connected businessman, said to be just a fraction of all the political “black money” that is laundered through tax havens such as Mauritius before returning to India disguised as foreign direct investment.

The government’s nominee to head an ethics watchdog commission was so ethically challenged that the Supreme Court had to step in to block his nomination, even as a former chief justice is now the subject of criminal investigation.

And if all that weren’t bad enough, one of the icons of the Indian diaspora, Raj Gupta — former managing director of McKinsey & Co., director of Goldman Sachs and Procter & Gamble, founder and chairman of the Indian Institute of Business — has been caught on tape providing inside information to hedge fund manager Raj Rajaratnam.

“The sheer size and audacity of this corruption has shocked the nation,” said G.V.L. Narsimha Rao, a political pollster.

Well, maybe not shocked, exactly.

After all, this is a country where people of a certain age still remember when you had to bribe somebody to get a train ticket, a phone line or government approval for a new piece of business equipment. The “License Raj,” and the petty bribery that it gave rise to, were said to have ended in 1991 with the market liberalization and deregulation pushed through by then-Finance Minister Manmohan Singh.

Twenty years later, Singh is prime minister, but it is still not uncommon to hear of people greasing palms to get a college scholarship, tax refund or mortgage from a state-owned bank. By various estimates, 15 to 50 percent of government subsidies for the poor are siphoned off because of fraud. Among the upper middle class, it is common to have two phone lines at home, in case one of the lines is cut by workers in the state phone monopoly looking to extract a bribe for reconnecting it.

Vinod Mehta, editor of Outlook, the Time magazine of India, explains that a web of restrictive laws governing the use and transfer of land make anything real estate-related a target-rich environment for bribery, and accounts for most of the corruption. Real estate developers report that the under-the-table costs of expediting the dozens of approvals can run into seven figures for major projects.

Backlog at the courts

The judiciary comes in for particular criticism. Not only are lower-level trial judges notoriously underpaid, incompetent and corrupt — the three are all of a piece — but there aren’t nearly enough of them to handle the volume of commercial disputes. By one estimate, it would take Indian courts 300 years to work off the current backlog at the rate cases are being decided. With little prospect for timely enforcement, contracts can be almost meaningless. Mumbai super-lawyer Zia Mody says deals involving foreign investors often shift dispute resolution to arbitration panels — in Singapore.

These are all reminders that, for all its progress in recent years, India’s economy remains very much an insider’s game. A recent study by two American business school professors confirmed that much of the formal economy continues to be run by a couple dozen family-controlled groups that seem to be in just about every major industry — manufacturing, retail, energy, infrastructure, shipping, construction and telecom.

Such family-controlled conglomerates are common in fast-growing countries — think of Japan’s kiretsu or South Korea’s chaibols. In developing markets, they can be effective for channeling capital and talent to their highest and best use and speeding the introduction of modern technology and management. But now that the Indian economy has opened and matured, the more enduring competitive advantage seems to be leveraging their political knowledge and connections in the many sectors where government licenses, approvals and industrial policies are still major factors. Akhil Gupta, who heads the Blackstone office in India, said that’s why multinational corporations continue to seek them out as partners before entering the Indian market.

The business of politics

Politics, too, is viewed as very much of a business, enriching elected officials and bureaucrats even as it provides the cash necessary to finance elections. The law, for example, limits campaign spending for a seat in the national parliament to roughly $50,000. The actual spending on a typical race is said to be many times that — and nobody doubts how the gap is filled.

The political business is also a family business, whether at the village, state or national level. Since independence, India’s national government has been dominated, with only one interruption, by a Congress Party that has been under the control of Jawaharal Nehru and his descendents, from daughter Indira Gandhi to her son Rajiv to his Italian-born widow, Sonia, with her son Rahul waiting in the wings.

Politicians talk a good game about cleaning up corruption — they just never get around to doing anything about it. Nor is it clear, says Shobana Bhartia, publisher of the Hindustan Times, that the great mass of Indian voters would reward them if they did.

Campaign pledge: A free color TV

Not unlike their politicians, Indian voters tend to view politics and government through the lens of “what’s in it for me.” For decades, politicians in many regions have won and held office by promising to provide subsidized rice and cooking fuel, but as the country has gotten richer, so has the cost of bribing the voters. After the last election in the state of Tamil Nadu, for example, the winning party made good on its promise to deliver to each household a free color TV, roughly 15 million so far. This bit of government largess also did wonders for the local cable television franchises, which just happen to be owned by the family of the party leader. In the next campaign, to be decided in a few weeks, the platform includes a food processor for the lady of every house.

Of course, many developing economies and democracies go through their robber baron and ward boss phases. But writer and former diplomat Pavan Varma suggests that the persistence of corruption here also reflects a strain of amorality in the Indian character: a willingness to tolerate corner-cutting and rule-breaking in the successful pursuit of wealth and power.

“Corruption, of course, is not unique to India,” he writes in “Being Indian.” “What is unique is the level of its acceptance, and the ‘creative’ ways in which it is sustained. Indians do not subscribe to antiseptic definitions of rectitude. . . . Their understanding of right and wrong is related far more to efficacy than absolute notions of morality.”

If there is any hope for changing these attitudes, it probably rests with India’s prosperous and fast-growing tech sector, where companies and employees play more by global than Indian rules, and the technology holds promise of bringing more honesty and transparency to governance.

At IPaidaBribe.com, Indians can look up the going rate for getting a daughter into college or winning a job transfer from the government-run hospital system, all based on the self-reported experience of the site’s users. Cities are even ranked by the size of the average bribe paid there.

Technology for ‘intractable’ issues

Nadan Nilekani, a founder of Infosys, is heading a fascinating and potentially game-changing project to reduce the rampant fraud in the administration of social programs for the poor. The Unique Identification Authority aims to get 600 million Indians to register their fingerprints and retina scans over the next three years that can be used to ensure that welfare payments, farm subsidies and scholarships wind up only in bank accounts of the people for whom they are intended. The biometric database will be 10 times larger than any in existence, and Nilekani says that gathering it and making it work represents a considerable political and technological challenge. At a total cost of $1.2 billion, or $2 per enrollee, it holds the prospect of eliminating billions of dollars worth of fraud every year.

“We will use the most modern technology to solve the most intractable problems,” said the rupee-a-day billionaire who reports to work each day at a drab government office building in Delhi.

Meanwhile, the state of Gujurat is using the Internet to bring transparency to the billions of dollars in infrastructure investments that it is making each year, so everyone can see what is being spent and what is being approved. Residents will be able to keep track of how much the government is paying to individual landowners to acquire and assemble the land necessary to locate new industrial plants and develop new cities, and how the payments are calculated.

Indeed, under the direction of its popular and apparently incorruptible chief minister, Narendra Modi, Gujurat’s government may have taken the lead in wiping out big-ticket bribery. That, anyway, is the testimony of business executives I spoke with, along with many others who line up to sing Modi’s praises at the regularly convened “Vibrant Gujurat” conference, where more than $450 billion in private investments were announced in January. With an economy that is growing at twice the rate of some other states, Gujurat may finally be providing Indians with the hard evidence of what their culture of corruption is costing them.

Among many in the business and governmental elite, there is a belief that India is approaching something of an inflection point, an awareness that its impressive growth cannot continue much longer unless it reforms its governance, its business culture and its institutional arrangements.

“We can’t take 20 years to deal with our inability to shed our feudal past and embrace political and economic relationships that are governed by the rule of law,” says Sanjeev Sanyal, a former bank economist who now writes about the environment and urban development. “This is the crisis of India.”

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