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
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.