Economic cost of corruption

20 NOVEMBER 2010

It is a sad statement that corruption is so endemic and is so deeply ingrained that the average citizen has become blasé about it! The costs to the nation are unbearably high. A recent study by Dev Kar, an economist with US thinktank Global Financial Integrity, has estimated that $462 b of Indian money has been salted away between 1948 and 2008.The unaccounted economy is half the official GDP! Imagine what could be done if that money went into Government coffers instead of to private bank accounts of scoundrel politicians!

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A few things have become eminently clear after the recent telecom scandal that resulted in the resignation of the minister, A Raja, whom the CAG indicted as having caused a potential loss of Rs 177,000 crores by selling 2G spectrum cheaply, and out of turn, to a select few.

One, that all politicians of all parties are corrupt.

Two that they all have information about other politicians' wrongdoings. This information is brought out whenever required. In other words, the information on shenanigans is a tradeable commodity and not a prosecutable one.

Three, the media gets credit for investigative journalism but is actually fed documented information whenever the need arises.

Four, the worst that can happen to a corrupt official, senior enough, is that he resigns. The stolen money is never recovered. There is, after all, a heads I win, tails you lose, situation when it comes to senior politicians. When will we ever have a Government that actually prosecutes corrupt offenders and recovers the money?

Post 1992, economic liberalisation set in. The Government, with Manmohan Singh as Finance Minister, did away with a lot of the license-permit raaj and reduced tax rates. The economy boomed. Yet in big ticket items the writ of officialdom ran large. Telecom, airlines, banks, roads, property development (including SEZs) and now natural resources were some of the areas in which big money could be made and was. The bureaucracy and political class was unwilling to let this opportunity go. The 2G spectrum allocation scandal was in telecom. Ratan Tata recently commented on how a fellow industrialist told him to pay Rs 15 crores as a bribe to get an aviation license. The potential for kickbacks on large aircraft orders is huge and is what has driven some airlines into near bankruptcy. In real estate we have had the Adarsh scam in Maharashtra and now on in Karnataka where the BJP Government of Yeddyurappa is likely to fall (not because investigating agencies discovered the scandal now but because the Congress Government was attacked in the telecom scam).

How will this ever change? It cannot be through a change in laws, or better enforcement of them, because all politicians are in this together and are unlikely to want to cleanse the system. A feeble hope is that the electorate votes, in state elections such as in Bihar, to vote on the basis of economic performance and throws out those perceived to be corrupt. Another way would be for citizens to petition the Supreme Court to be allowed to deposit the tax into the hands of the Court; the resulting pressure would compel the Government to proceed against corrupt offenders or look at empty coffers.

We are fortunate that the economy is growing strongly to be able to absorb such rampant loot. Look at the conditions of other countries which have mismanaged their economies. Ireland is broke, and is begging the EU to rescue it. Greece has been unable to meet its bailout conditions and its budget deficit is going higher. Both these countries may have sovereign default and that could then cause fears of a contagion effect, with resultant nervousness of investors.

Despite the bonanza to the Government from sale of 3G spectrum and of divestment of PSU companies, the fiscal deficit is not likely to be lower, because expenditure is rising thanks to an increase in fertiliser and food subsidies and other things, including a Rs 1200 crores payment to BSNL employees. BSNL is, in fact, bleeding money, yet the Government does not want to privatise it. The reason is the same viz. the potential of kick back from a tender to expand telephone lines. Little wonder that when other telcos are making money and expanding overseas, BSNL is needing budgetary support!

With an estimate $ 462 b of unofficial funds lying in foreign banks, our banking sector also suffers. A McKinsey study says that Indian banks will have to grow 5 times in 5 years, if they have to fund the needs of Indian industry.SBI has to increase its assets from $ 200 b to $4000 b in 5 years. ICBC, China's largest bank, by contrast, has assets of $ 1700b.(8.5 times SBIs) and would grow to $4000 b. by 2015 But this growth can never happen for two reasons. One, because the Government refuses to relinquish control on public sector banks, which have 70% of the assets. And two because of the endemic corruption where 50% of our GDP is underground, as per the Dev Kar study.

In corporate news of interest, Vodafone would like to settle its tax dispute with the Government which is asking it to bear a liability of Rs 11,000 crores (with Rs 2500 crores being payable in 3 weeks as ordered by the Supreme Court). This arises out of its failure to deduct tax at source when it bought a majority stake in Vodafone from Hutchison, in an offshore transaction in which one of the contentions of the tax authorities was that Vodafone wouldn't have paid billions to acquire just 1 share of a Mauritian company (which was the holding company). Yet, in the case of Swan Telecom that is exactly what has been done and we should see if it is also prosecuted with the same vigour. Law should be equally applied.

The other big corporate news last week was the takeover by Axis Bank of standalone investment bank, Enam Securities, in an all cash transaction, favourably viewed by the market. Globally, investment banks are not able to stay as independent, standalone entities. Axis gets an excellent team with a great track record. The owners of Enam would become amongst the largest shareholders of Axis!

The BSE sensex fell 571 points last week, to close at 19585 and the Nifty dropped 181 to end at 5890. The correction was long overdue, as the market had run ahead of itself, thanks largely to quantitative easing by the US. The ostensible reason was the political storm created by the telecom scandal and the fear that the Prime Minister, dragged in for inactivity, may resign. The global factor was the raising, by Chinese authorities, of margin requirements for their banks in order to contain inflation. And the fears of the problems of Ireland and Greece causing investor panic again.

Technically there is support for the sensex between 18000 and 18500 so one could start buying in the coming week. One can only hope that Prime Minister Manmohan Singh realises that he is a vertebrate and has a backbone after all and that everything does not revolve around the compulsions of coalition politics. He has a reputation to salvage.

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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21 Responses to "Economic cost of corruption"

Prakash Madnani

Dec 1, 2010

One of the main reason of our callous stand on corruption is as we all indians stand as dishonest citizens in our own eyes due to our out dated laws. Day to day we indulge in twisting law in one form or other.The national spirit is dead amongst us all and the strongest reason is our Income Tax law which expects us to pay our taxes honestly above 1.5 lacs Our leaders are totally ignorant about the reality of survival today. The Govt. at one stroke can raise Income Tax limit to minimum 5 lacs and tax income upto 15 to 20 lacs reasonably so that the citizens can live honestly with Dignity. The class of citizens above the said limit should be scrutinized microscopically as main scams and corruption creators would be found in the net and once they are compelled to pay correct taxes or punished for their wrong doings no one will have the spirit of nationality rekindled for the country.It is high time Govt acts sensibly to rope in the Black Money stashed abroad to convert it into redevelopment of the Nation.



Nov 25, 2010



Malcolm Bersohn

Nov 24, 2010

When a Mr. X has committed crimes that everybody knows about but he is
not prosecuted then we have to conclude that those with the legal authority
to prosecute him are too frightened to do so. Of what are they frightened?
Must be murder of them or family members. We have to weep when we think of the poorest people in society who go without because the money that
the government could have used to help them out of poverty is gone, flown
outside of the country.


Shyam Bhattad

Nov 23, 2010

The columnist frank and fearless bang on curroption and the politician. Every reader of this column should analyse the dreadful curroption worked out by the politician. The question is how to curb the curroption. We all are culprit. To get a berth in a train most of us pay additionally which is not accounted for. This example clearly indicate that there is no equilibrium between demand and supply. The curroption can only be curbed if the supply is equal or more than the demand. We bribe politician to get license, allotment etc. of things which are far less in supply or are situated in prime licality. This should be the moral duty of every citizen to forgo the things as were done in SWADESHI MOVEMENT.


Ashok Khanna

Nov 21, 2010

Regarding a remedy for corruption: (1) the entire public of India must refuse to vote unless the candidate has a clean record (2) the public must insist to severly prosecute the bureaucrat( sarksari babu)who works under/with a corupt politician, as there has to a sarkari babu who facilitaes the corrupt act.
Why only call politicians ' corrupt' as bureaucrats are as bad, and they also have millions stacked outside the country.



Nov 21, 2010

The media also has its limitaions as it has owners who's scrutiny can be tightened in terms of recheck of accounts etc if they go too far in investigatihg the govt. And investigations and headlines are limited by no.of pages of newsprint. Further any change in laws has to be effected by the very same crooks who are elected -will they ever do it ? Thirdly it appears the courts themselves are slowly getting encircled by distrust - so will our taxes deposited be safe ?! We are getting deeper and deeper in mess. Who will sve us ??



Nov 21, 2010

The money stashed in overseas banks to an extent of US$462Billion will not come back to India. I have been listening to this story for the past 25 years and the money kept aboard is increasing in geometric progression. It needs very strong political will. We are not in a position to punish a minister who is responsible for whopping loss of Rs 1.76 lac crores. In such a scenario we cannot expect any thing from this government on this count.


Bhutra R R

Nov 21, 2010

Now it is well understood by most of people that corruption is main issue.How to stop it?
Only two ype of people could do this,one very rich who have not to bother for next day or very poor who have to bother for their lively hood day to day or hour to hour.
Middle level people could think but they do not have guts,as they are afraid of avery thing.They are only talkers & generally they have every time counter argument ready.Still some people who are comfartable have to come out & do their best,this could be through punishment to guilty,no matter how high he is.
It is irony that PM replies that from PMO letters were sent in time.WHO will moniter whether his office gets replies or not? this is very clearly getting shelter of loop holes.Whether any one will take notice & action is big question mark?
Lets prey when enough is enough. 1.76 lac cr is some we cant even imagine.



Nov 21, 2010

An excellent review of the corruption scene in India.
Corrupt politicians always get away by change of portfolio, resignations etc. A few low placed govt officials may be punished but the political leaders are never. Congress says no one can point a finger or even a nail at the PM. Yes, they are right. No one pointed a finger at Dhritrashtra - the blind king of Mahabhartha.
TINA (there is no alternative) factor ensures PM MMS will continue. Scams will continue and if any tries to punish the guilty the govt will fall!! Hence, the learned lawyer Sibal defends so energetically the delay in action against `Scam Raja'



Nov 21, 2010

One can not claim to be honest and close eyes to rampant corruption carried on for years by one's subordinates. The whole council of ministers led by the PM is responsible for allowing this sham to go on for years together.

The PM tolerated this nonsense for political reasons. Anyone who has self respect would have resigned, but if you think you are unworthy of the gaddi and are merely holding it for the rightful owner to claim it, will continue to latch on and offer poor defence. The claim that PM cleared the Swami files in 2-4 days time is nothing but an ultra poor defence. It basically means that the PM can not even run the small PMO efficiently. How do we then expect him to rein in Rajas of this world?

Sadly, I am disappointed in the manner the PM is now trying to distance himself from the scamsters.

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