There is a story that Jawaharlal Nehru was upset to learn that there was widespread corruption in India; he should have known that it was his idealism which sowed the seeds of corruption. In a world of scarcity and allocation by government, corruption was essential for transaction of any business. Any government official who stood as door keeper to a ration or a permit was easily corrupted. Admissions to elite colleges, licence to increase output of your factory could only be secured by bribing a babu or a neta.
The mild degree of corruption during Nehru’s days multiplied during Indira Gandhi’s reign. Many industries got nationalised, each being an opportunity for politicians to help themselves to spoils — the worst being the banks which fuelled corruption massively. Congress socialism, whatever the noble intentions behind it, was a massive machine for increasing corruption. The so-called neo-liberal reforms did not dismantle the socialist structures. They just enhanced the value of the assets the government could allocate. So, in addition to licences or permits, politicians had assets to sell which they did not own. Remember the mobile telephony scandal.
Narendra Modi is serious about attacking corruption. The Prime Minister is a moralist. For him, tax evasion, sending money abroad, black money in its various forms, are not just illegal activities; they are treasonable. He would like to root out all corruption, and that was his top priority at the BJP national convention rather than the economy.
Corruption is morally indefensible, but may be economically efficient. So, in an economy used to such illegality, it is costly to remove corruption. We are told that for SMEs, the GST has been a shock. They made their small profits from tax evasion as they bought and sold. Now, with the GST, they have to declare every transaction and incur the tax along the way. Black money hoards represented the profits of a thriving private economy. Eliminating corruption effectively means reducing the profits of doing business in an economy practised in tax evasion and other forms of illegal behaviour.
Investment has been drying up in India over the last three years. One reason for this I have heard mentioned is that potential investors are worried that questions may be asked as to where they got their funds.
The real issue which the Prime Minister has to face is that the entire economic system built up over the last 70 years of socialism is designed to encourage tax evasion and corruption. If you want to remove corruption, you would have to dismantle the socialist structure. Every restriction on the movement of goods under the pre-GST system was used to bribe and cheat. Remove it by the GST, and growth will be hit, hopefully just temporarily. Wherever there is government regulation of business, there is scope for bribery. Even the subsidy for kerosene was manipulated to sell the kerosene on black market. The PDS system has been admitted to be corrupt even by its champions. People compete even for the job of a peon because they can earn a lot extra in government.
The Prime Minister has no programme of deregulation or de-nationalisation. He has to face the fact that corruption cannot be eliminated without changing the system root and branch. He will face a setback to growth. He has to find new ways to enhance growth.
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