A fast way to tackle corruption

9 APRIL 2011

Sydney Hopkins, who wrote the famous book "Mr. God, this is Anna" may well consider writing a sequel "Dr. Manmohan, this is Anna", after the indefinite fast undertaken by social activist Anna Hazare, succeeded in getting the Government to agree to discussing the Jan Lokpal bill, with an equal representation my members of civic society and the Government. It is a sad commentary on the state of the Indian polity that a Government, headed by a person considered to be honest, should find itself having to act under duress, to take on the all pervading corruption that has engulfed India.

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The Anna Hazare protest had huge popular following and, had he been taken seriously ill as a consequence of the fast, would have had major political repercussions for the Congress party. It had to give in.

The proposals mooted by Anna Hazare and other social activists seek to make the Lok Pal, at the Centre, and Lok Ayukta, at the State level, completely independent authorities, like the Election Commissioner, and impervious to influence by politicians/bureaucrats, with a timeline for punishment of the corrupt. Investigating agencies like the CBI and the CVC, used as tools by politicians to shield their own species, would come under the Lok Pal and used as they should be, as investigating agencies rather than tools of political convenience.

All these are unexceptionable proposals, and would be discussed and, hopefully, enacted. If the Government waffles over enactment, it risks losing the next election; such is the angst against its ineffectual meting out of punishment to the corrupt. It ought, in fact, to show its resolve by speeding up the trials of Kalmadi, Raja and Chavan, to counter the perception of its ineffectiveness. The Bill, when discussed, would need to also enact safeguards against overuse of powers by the Lok Pal/Lok Ayukta; all Constitutional authorities have such safeguards in our system.

Another pressure point on the Government to deal more stringently, and speedily, with corruption would be if someone were to ask the Supreme Court, in a public interest litigation, for permission to deposit tax with it, and asking the Court to keep the taxes thus collected in escrow, until such time as the Court felt that cases were being proceeded with at a satisfactory pace. If everyone did that, with the consent of the Supreme Court, the resultant shutting off of the revenue tap would, most assuredly, result in speedier action.

Last week the sensex started off strongly, in the intoxication of India's World Cup victory, but then started falling on global concerns over rising oil prices and the resultant worries about inflation. The EU raised interest rates by 0.25% to 1.25%, the first hike in 3 years, even though several of the European Union economies are in deep trouble. Ireland has been bailed out but Portugal is on the brink of bankruptcy and Spain is next. The fund raised by EU to bail out failing members will run out after Portugal and be insufficient for Spain.

The US economy is doing better and aggregate earnings per share of S&P companies have almost recovered to their pre- financial crisis levels (see chart below). The main problems in the US is excessive spending by the Government, including state Governments. Employees in Governments have entitlements. Retired employees have defined benefits, including healthcare, for which the pension fund assets set aside to meet these commitments, are not earning adequate returns to meet the obligations. Entitlements would have to be whittled down, but it would take a bold President to do that.

(Source: www.chartoftheday.com)

By contrast, the Indian economy is doing far better - imagine what it would be doing if dirty politicians did not bite away a chunk of the economic pie! So if corruption is tackled more seriously it would be good for economic growth. Foodgrain production this year is the highest ever and the problem now is to create enough storage capacity to keep the procured grain, after obtaining technology (which we don't have) to keep it from rotting.

The problems of 'entitlements' of the developed economies like the US could also turn into opportunities for India in sectors like healthcare; medical tourism can take off in a big way. The inadequate returns on pension fund assets of States, which result in a deficit, provides an opportunity for emerging markets like India to get funding for building infrastructure. In India fundamentally strong companies like IDFC or PFC are finding it tough to raise money for 8.5% infrastructure bonds, a return the pension funds in developed countries would salivate over. If India is to spend $1 trillion on building its physical infrastructure, we would need to supplement domestic savings with foreign investments.

Martin Wolf, the respected economist at the Financial Times, talks about "Waiting for the Great Rebalancing" Countries like China, which kept its exchange rate low and relied on exports to boost its economy and build up foreign currency reserves, have been financing developed countries like the US in what is called 'uphill capital flows'. Capital has flown from emerging markets, where it is more needed and can be used more productively, into developed markets, to finance consumption. The reversal of this would be a rebalancing act.

Emerging markets like China and India, with high savings rate (over 35%) would try to encourage greater domestic consumption. India already relies on domestic consumption; its export/GDP ratio is not significant. For these economies it looks, therefore, that the rising interest rate cycle may be over, or nearing the end. That would be positive for stockmarkets. A study by the Economic Times Intelligence Bureau expects sales growth of Nifty 50 companies to be 21.2% and operating profits to grow by 19.6%.

In corporate news of interest, the proposed takeover of controlling interest in Cairn India by Vedanta has been referred to a Group of Ministers, postponing the clearance further. The GoM will discuss the issue of royalty, fully paid by ONGC who has a 30% stake in the fields and is stating that, as per the agreement, the royalty paid is 'cost deductible' and hence reimbursable. It is justified, and overdue, that the Government takes up cudgels for its companies as all Governments do (Britain's Prime Minister, Cameron, spoke up for UK registered Vedanta and Cairn plc). ONGC has a legitimate claim and it must be dealt with now, when clearance is sought for the deal, rather than in the slovenly pace of the courts of law.

The other interesting corporate news of interest is the likely fly in the ointment for Vodafone in its deal to acquire the 33% stake in Vodafone held by the Essar group, for $ 5 b. Indian law doesn't allow foreign holding to exceed 75%; the acquisition of the 33% stake would have exceeded it by 1.35%, which Vodafone would have to sell later. The fly in the ointment is that another 5.11% stake held by Omega, a subsidiary of IDFC, is likely to be now treated as foreign holding, by virtue of the fact that, since Septmber, more than 50% of IDFC is foreign held! This would mean that Vodafone plc would buy 33% for $5b only to have to sell 6.46% later. Its Vodafone's call (I couldn't resist that).

Global concerns over oil and inflation may cause the market to dip further, but the India story is good and, viewed together with the rebalancing taking place, is a good long term bet. There would, of course, be many dips in between but equity investors in good quality Indian equity would do well over the long term. Investors may then say, Mr Bull, that was Anna!

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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5 Responses to "A fast way to tackle corruption"


Oct 4, 2011

Let the Ministers be there only to Administer as Representatives of the People.
The main aspect of Corruption is concentration of power. Break it down.
Let decision making be taken away from the chairs of Ministers.

Let there be committee with Vito Power on all major issues and Govt, Public as well as Other Authorities be a part of it and constitute a decision making body with retrospective Responsibility.



Apr 26, 2011

corruption begins with Ministers,MlA's ....
they are already indulged in corruption then how can they remove corruption.

I think stick Law & rules should be came into force


Prakash Madnani

Apr 16, 2011

Respected leader Anna Hazare and his team has initiated steps to check corruption of bureaucrats and Political Leaders but before that let us all citizens begin to clean up ourself to be above corruption. Our unpractical Income Tax Laws demanding tax over and above Rs 1,80,000 as taxable is a farce which makes us all law breakers. Bring exemption limit to 3 to 5 lacs and tax level of 10% till 20 lacs and above that 20%( In par to Singapore Tax laws )and this step will open flood gates of all ill gotten wealth lying not only in bank vaults abroad but also huge cash flow floating within the country in Government coffers voluntarily in the Country and may kill black money permanently. Hope some one up is listening.



Apr 11, 2011

If your basis for a well functioning US economy is that the S and P is doing well then sorry you are badly mistaken. The unending deluge of digitally printed money supply is what is pushing up the prices of the stocks. The entire exercise is to placate the 401K holders.
The bottom will surely fall out sometime.


vinod n

Apr 10, 2011

Tackle corruption:

No cash donations to political parties.

If unaccounted cash found with anyone - be he politician, polotical party, or a bureaucrat - he should be grilled for 3 days 36 hours qaat a stretch as they do a small business man - the money should be confiscated and the person jailed till investigations are over - which may take months!

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