India’s moment of truth

Corruption now threatens to bring down a land of opportunity

Four quarters of steady economic deceleration have caused widespread anxiety. The talk of a new Hindu rate of growth — different from the late Raj Krishna's famous 3.5 per cent per annum, but hovering around 5-6 per cent, far below the 9-10 per cent "Chindia" dream — has seriously commenced. Is the current economic gloom justified? Are we watching a short-run blip, or a new downward trend?

To some extent, India's slowdown cannot be separated from the global economic realities. The BRIC countries — Brazil, Russia, China and India — have, of late, decelerated, as has Europe. But external economic reasons can only provide a partial explanation for the state of India's economy. All is not well internally.

To understand the internal causes, let us turn to what may be called a new triad of India's political economy. India has (i) the fifth largest concentration of dollar billionaires in the world (after the US, Russia, China and Germany), (ii) the third largest middle class (after China and the US), and (iii) the single largest concentration of the poor.

Historically, India's economic structure had the massively wealthy princes at the top, whose incomes were based on inherited wealth and land; a tiny middle class; and a huge mass of the poor. The poor were always with us, but billionaire businessmen and a huge middle class were not. They constitute a historical novelty for India.

This historical novelty generates two intertwined results. It simultaneously makes India a land of opportunity and a land of corruption. Let me explain.

A 250-300 million strong middle class generates a huge market. The emergence of billionaires shows that the market so created can produce enormous wealth. Information technology billionaires were predominantly a product of exports, but most other billionaires have been internally produced. The middle classes consumed, while the entrepreneurs invested and reaped rewards. A virtuous cycle of boom seemed to be in place.

Indeed, an economy that grew at 7.5-8 per cent per annum, with such a large middle class, was also bound to become an ardent object of international attention. China has been the greatest business opportunity of recent times, India the second biggest. Foreign direct investment in India barely touched $100-150 million per annum until 1991; over the last few years, it climbed to $25-30 billion annually (China attracted over twice as much). Foreign capital thus came to India in ample measure, creating the so-called India story in international circles.

If the rise of formidable Indian entrepreneurs is a positive side of the growth story, corruption is the negative side. Many of India's billionaires have benefited from corrupt links with the government. Entrepreneurship alone did not produce their riches. In any sector dependent on land, natural resources and airwaves, government control was so virtually complete that if the politicians and bureaucrats wanted bribes, honest business was simply impossible. Collusion was the result, benefiting all three actors — politicians, bureaucrats and businessmen. If, according to Forbes magazine, India has 49 listed dollar billionaires today, it probably has several billionaire politicians, too — all unlisted, of course.

India is not the only example of such mutually enhancing collusion. Such patterns have been repeatedly witnessed in high-growth, but less developed, economies. The US in the second half of the 19th century — the so called Gilded Age — is only too well known. But Japan during the 1950s, South Korea and Taiwan after their economic take off in the late 1960s, and China today are examples of the same phenomenon. Indeed, we have virtually no historical record of a society that rapidly moved from a rural to urban, from an agrarian to industrial, stage of development, without corruption marking the process of transformation. Rapid economic growth is accompanied by entrepreneurial energy as well as corruption.

The structure of the problem is as follows: if an economy grows at an average of 8-9 per cent per annum, some sectors are likely to grow at 15-20 per cent per annum. If government can manipulate a small regulatory or licensing rule in these sectors, the politician, the bureaucrat and the businessman can become multimillionaires overnight. It is an enormous human temptation, afflicting all rapidly growing, less developed economies.

But it is also true that high growth eventually begins to falter, if such societies do not clean up their act. The US after 1900 and South Korea in the 1990s tackled corruption with vigour. Such corruption is not only morally abhorrent, leading to popular uproar, but it also begins to hurt economically, for it engenders policy paralysis, once popular revulsion is mobilised politically. China will have to face this problem before long. India's moment of truth arrived sooner because of a free press, judiciary and civil society. Corruption now threatens to bring down a land of opportunity.

In recent years, India's investment rate had begun to touch 35-36 per cent of GDP, high by any standards except the Chinese. Alarmingly, the investment rate is headed below 30 per cent of GDP today. Too afraid to be taken to task for wrongdoing, bureaucrats have not cleared big investment proposals. Tired of a non-cooperative government, India's businessmen are finding it easier to invest abroad.

Consider what all of this does to the third part of India's current political economy triad: namely, the largest single concentration of the poor in the world. That India still has so much poverty, and so many malnourished children, should be morally deeply troubling. But tackling poverty is no longer simply an ethical imperative. It is increasingly a political necessity. The poor vote more than the middle class and the rich do. Their electoral weight now is simply too great to be ignored.

That is why no political party opposed NREGA. Indeed, at roughly $6-7 billion a year, NREGA programmes are now perhaps as big as the total budget of the home ministry. To NREGA, we must add the fiscal implications of the right to education and other welfare programmes. How best to use resources for mass welfare will continue to be debated, but sooner or later, all democracies end up having welfare programmes.

The National Advisory Council, India's main think tank for social welfare today, rightly insists that government should more adequately focus on the disadvantaged. But it has — wrongly — never made a connection between economic growth and the welfare of the poor. Welfare programmes must be financed through tax revenues, and the higher the economic growth rate, the greater will be the availability of revenues. At a 5-6 per cent growth rate, these programmes cannot be fully funded without incurring unsustainable budgetary deficits. There will be less available for the poor.

As finance minister in 1991, Manmohan Singh helped give birth to a new India. Manmohan Singh, as prime minister today, needs to preserve his legacy and return India to a high growth path. Restoring investment is key. He is too good a mind not to know this intellectually. It is time for action — again.

The writer is Sol Goldman Professor of International Studies and Social Sciences at Brown University, where he also directs the India Initiative
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