Big graft yes, but big growth too

I am delighted that public outrage is mounting over corruption. To get better insights into the nature of corruption today, I discussed the issue over lunch with three businessmen who had headed small and mid-cap companies.

Their immediate reaction was that things had got worse. But on closer examination, they said that the rising problem was low-level corruption at the state and municipal levels. One businessman said the hassle of dealing with these low-level inspectors and functionaries was so exasperating that he had sold his main business. All three agreed that low-level corruption was not so extortionate as to render business unprofitable. But it was a rising everyday headache.

Inspectors of all sorts were interested only in lining their pockets, not in enforcing regulations. Environmental inspectors were the worst. Environment minister Jairam Ramesh may have brought some welcome sense of principle to a ministry once viewed as purely extortionist, but state-level inspectors supposed to implement environmental regulations are more cynical and venal than ever.

What about demands for money from top politicians? Here the news was surprisingly good. Thanks to economic reform and deregulation, business in many sectors and states could now flourish without top political payoffs. One businessman said he had three factories in Tamil Nadu, yet had managed to keep a low profile and avoid attracting the attention of either the DMK or AIADMK, which have ruled the state in turns.

Excellent, i said, but then how do you account for the fact that money in politics seems more humongous than ever before? Well, they replied, the big political money is being made in three areas —real estate, mining, and government contracts. We avoid all three areas, said the businessmen, and so we are able to avoid the big payments that some others make. One of them said he had considered venturing into power generation, but abandoned the idea on finding out that dubious dealing would be necessary to get a coal mining licence or linkage.

They said crony capitalism was endemic in real estate, mining and government contracts. The greatest fortunes were being made in land through discretionary allotments and sweetheart deals. Mining leases could be pure rackets, unrelated to the track record or qualifications of entrepreneurs.

The classic illustration of this related to former Andhra Pradesh governor ND Tiwari. He reportedly made the mistake of promising a mining licence to the madam of a brothel that supplied him with young girls. When the madam did not get the licence, she was reportedly so enraged that she released photos of the governor cavorting with three nude girls. This occasioned much merriment, and Tiwari had to resign. Yet, surely the real scandal was the revelation that our standards are now so low that even brothel owners feel qualified to become mining magnates.

What about individual chief ministers? My business friends said that some CMs were more honest than others, but all had to provide for their party coffers. Even in states reputed to have the least corruption, the chief minister would raise money from a small, favoured coterie of businessmen, while sparing smaller fry.

Now, too much cannot be read into a lunch conversation with three small and mid-cap businessmen. Yet, on balance it seems to me that they shed valuable light on a question that has long puzzled analysts: how can India enjoy accelerating GDP growth when corruption and political extortion seem to be reaching new heights?

First, the virtual abolition of controls like industrial licensing, import licensing and foreign exchange quotas means that many businesses in many sectors can now expand freely without political payoffs or long delays. This has been a major gain of economic reform.

Second, corruption and payoffs that once hit all sectors of the economy are now limited mainly to three sectors —real estate, mining and government contracts. These are large sectors and provide plenty of payoffs, which is why politicians look richer than ever before. But in these areas, politicians make money by encouraging the expansion of infrastructure, townships and mineral exploitation. Although this provides unjust windfalls to politicians and their business cronies, it is consistent with faster economic growth. The new distortions are ugly indeed in moral terms, yet are less damaging than the distortions of the old licence permit raj.

Third, the media needs to focus not just on big money at the top, but on low-level corruption at the grassroots level. True, it is less exciting to break stories about corruption among petty officials and inspectors than stories about telecom giants or governors romping with naked girls. Yet the harassment that ordinary folk face is at this grassroots level.

What do you think?