How does corrupt India grow fast?

The World Bank has suspended $ 800 m worth of loans to India \’s health sector after detecting corruption in procurement. Fair enough: corruption should be checked.

Yet if corruption is really a no-no, the Bank should stop almost all lending to India , so widespread is corruption here. The Bank may have just discovered corruption, but it is no news at all to the public. Transparency International ranks India low down in 88 th position in its Corruption Perception Index. This is on par with disaster African economies like Mali , Benin , Gabon and Tanzania .

The Bank insists on international tendering, and this reduces the scope for corruption in big industrial and infrastructure projects. But not where decisions are more decentralized. Optimists think devolving power to panchayats will cut corruption. Alas, surveys suggest otherwise.

I recently got an update on corruption from a lady IAS officer from Maharashtra . This is among India \’s fastest-growing states, and so (I thought) less affected by corruption. Not so, said the officer.

When handling a Zila Parishad, she was told by an Opposition politician (who had done such deals himself when in power) that all the tenders for an educational project were benami bids of a single mafia group, and the rates quoted were several times the market rate. She checked in shops, and found this to be true.

Why did rivals not quote lower prices? Because the contractor mafia had divided up territories and ensured that nobody else could bid. Why did elected politicians not intervene? Because the contractor-mafia were members of Zila Parishads and the state legislature. Why did senior bureaucrats not intervene? Because almost all of them were getting a cut from the same rigged contracts.

Indeed, her fellow officers warned her that by checking the quotations, she was taking personal responsibility for procurement, whereas corrupt officers ensured that the blame for any scam exposed by the media could be pinned on others. Her anxiety to ensure honest procurement led to delays and ruined her reputation for efficiency: word went round that Madam was an officer who kept raising queries and not taking decisions. She managed a transfer back to Mumbai, where she could deal only with policy and not actual execution.

In another case, she said, a notorious politician running a betting racket took a large bet that a Hindu-Muslim riot would occur. He then got somebody to throw a dead pig into a mosque, to spark a riot. But a local bureaucrat moved swiftly and scotched the riot. The enraged politician told the bureaucrat to leave the state or be killed. The bureaucrat scampered abroad on study leave.

Is this not very exceptional, I asked the lady officer? No, she answered, IAS officers regularly exchange horror stories in Maharashtra , and each is worse than the other. We are so deadened by corruption that we don\’t even get angry. Why bother when nothing can be done about it? Honest bidders kept out by the mafia have nobody to go to: the politicians and bureaucrats are part of the racket, the police will refuse to register a case, and the courts are moribund. Only the media offer some recourse.

In large contracts where rivals cannot be kept out, winning tenders can be too low, not high. No honest bidder can make a profit at such rates. Crooks put in low bids because, after getting a contract, the contractor can (through collusion) supply substandard materials, and submit bills for more materials than actually supplied.

In civil construction, all bidders quote competitive prices for the task tendered, along with very high charges for any design changes after the contract is signed. With collusion, a low, unprofitable winning bid can be converted into a gold mine by announcing later design changes, ostensibly to improve a project and serve the poor better.

We have all heard horror stories of mafia control and corruption in Bihar , and are not surprised at low economic growth there. But what does one say of horror stories from Maharashtra , one of India \’s fastest growing states? Why does entrenched corruption not convert Maharashtra into another Bihar ?

The answer seems to be that democracy induces politicians in Maharashtra to ensure that public services improve even while lining their pockets. This is not always the case where caste politics determines elections ( Bihar , UP). But it is the case in most states. Politicians favour bureaucrats who are corrupt but efficient: this yields both money and votes. Thus democracy sets a ceiling on corruption, and gives an incentive for bijli-sadak-pani.

African autocrats have no need to seek votes, and so seek just money. That explains their performance.

So, perhaps democracy explains why India , despite being as corrupt as many African failures, can nevertheless register 7.5% GDP growth. Democracy is probably good enough reason for the World Bank to keep lending to corrupt India