Thursday, March 13, 2014

Corruption AND Fight Against Corruption

Fighting corruption in India  (Source The Economist)

A bad boom Graft in India is damaging the economy. The country needs to get serious about dealing with it

IN THE early hours of February 20th 2010 Uday Vir Singh, an Indian forestry officer, bluffed his way past a private militia guarding a dusty port called Belekeri. For months suspicious-looking convoys of trucks had been thundering across India to the port’s quays on the country’s west coast, just south of the Goan beach where the super-spy mayhem which opened “The Bourne Supremacy” was filmed.
Mr Singh is no more a Jason Bourne than the next entomologist—he has a doctorate on metamorphosis in insects—and the infiltration he mounted with a few colleagues led to no gunplay. But it did uncover a massive scam, with hundreds of officials and politicians in the state of Karnataka in the pockets of an illegal mining mafia that, over five years, had made profits of $2 billion or more shipping illegal iron ore to China.
Such scandals have rocked Asia’s third-largest economy in the past decade. A lot of transactions that put public resources into private hands—allocations of radio spectrum, for example, and of credit from state banks—have come under suspicion. Of the ten biggest family firms by sales, seven have faced controversies. The brash new tycoons who came of age during the boom years of 2003-10 are under a cloud, too. Before he became boss of the central bank last year, Raghuram Rajan worried publicly that India could start looking like an oligarchy along the lines seen in Russia: “too many people have got too rich based on their proximity to the government.”
In a recent poll 96% of Indians said corruption was holding their country back, and 92% thought it has got worse in the past five years. One senior figure in the ruling Congress party worries about the feeling that “the law for the common people doesn’t apply to the political princelings and industrialists.”
In December voters in Delhi’s state elections supported the anti-graft Aam Aadmi Party strongly enough for it to get into power. Its leader, Arvind Kejriwal, held his new job only briefly before resigning to fight the national election taking place in April and May. Narendra Modi, the Bharatiya Janata Party (BJP) candidate for prime minister who is currently ahead in the polls, says he will purge India. That said, critics note that his personal rapport with tycoons, credited for some of the industrial success of his home state of Gujarat, may not make him the most thoroughgoing of purgatives. For his part, the outgoing prime minister, Manmohan Singh, claims history will absolve his administration of its reputation for graft. The leader of the Congress campaign, Rahul Gandhi, a scion of India’s most famous political dynasty, says he is a reformer, though it is hard not to see his family’s secretive habits as part of the problem.
India needs its private sector to build roads, factories and cities. But the relationship between companies and the state is broken. Corruption produces bad decisions; concern over corruption produces indecision. Graft does not function, as some claim that it does elsewhere, as an unseemly but expedient market solution to inert bureaucracy, greasing the seized-up wheels of industry. It has put grit in those wheels. Loans to industries with graft problems have infected the largely state-run banking system; at least a tenth of its loans are sour. Inept cronies have messed up vital road and power projects. Mines and other assets lie idle as courts dither over how crooked their owners are.
Private paralysis
Faced with this mess, private firms have cut investments; a fall in investment from 17% of GDP in 2007 to 11% in 2011 is one reason why GDP growth has slumped to 5%, the lowest level for a decade. And ineffective efforts to deal with corruption seem only to have made things worse. India’s cranky legal system, its overlapping investigative agencies and its raucous media have meant that responses to the problem may have done as much to paralyse business in general as to punish wrongdoers. Few senior people go to jail; but officials fear being accused of malfeasance, so many think the safest course of action is to make no decisions at all.
To rumble the iron-ore scam Mr Singh, the forestry officer, first went undercover in a town called Bellary, the hub of illegal iron-ore mining in the state of Karnataka. The task fell to him because many mines come under the remit of the forestry agency, and work on a previous pink-granite scandal had earned him a reputation in the area. A day’s drive north of the gleaming technology campuses of Bangalore, Bellary felt like the wild west. The Reddy family, which had close connections to the state’s BJP-led government, appeared to rule the roost. A businessman who visited a Reddy associate recalls being escorted by men with automatic weapons to a mansion with a Bell helicopter and a collection of 13 cars. “They were like Indian warlords,” he says.
Each day up to 2,000 trucks took the ore to the port at Belekeri in convoys as much as 25km (16 miles) long. Accounts and bank details found on computers taken into custody at Belekeri created a trail to 70 families who had bribed officials and politicians effectively enough to cause an “administrative collapse”. Karnataka’s anti-corruption body prepared a 25,000-page report. The affair is now in the hands of the police and the courts.
Rumours and rupees
Iron ore is a smallish part of the picture, but how small is hard to say; quantifying graft in India is a frustrating affair, and distracting conspiracy theories and innuendo abound. Bankers in Mumbai claim that the rupee, one of the world’s most actively traded currencies, is manipulated by politicians for personal gain. The business interests of the present cabinet—if you believe the rumours—include a real-estate empire in Singapore and an insider-trading ring run by a minister’s son.
To try to get to grips with the problem The Economist has interviewed politicians, industrialists, bureaucrats, financiers and investigators. Their views, provided on a basis of anonymity, point to a well-established system of graft, partly linked to political funding. Few people think that anyone important will go to jail, but despite this some reckon that the next decade will be less corrupt than the last one.
Petty corruption includes slipping banknotes to the police and to officials to get paperwork done. According to Transparency International, an organisation that tracks corruption, 54% of Indians say they paid a bribe in the last year, compared with 44% in Nigeria and 36% in Indonesia. Jobs with opportunities for extortion are sought after and a slice of the profits funnelled up the ranks.
Firms offer “speed money” to avoid red tape. “Everybody pays,” admits an executive at a firm known for its good governance. A billionaire says, “it is hard for any business to be fully compliant…When you are dealing with the tax people or the environmental people the consequences for the business become very severe—they can hold money in escrow or imprison you.” But it is the boom in large-scale rent-seeking—the use of wealth to distort the allocation of resources from which more wealth could be produced—that has opened up a new era of corruption.
In the old days graft was almost quaint. Before the liberalisation that began in 1991 firms faced the “licence-permit Raj”, a regime of rules and quotas that was more easily navigated with the help of carefully deployed smallish bribes. Occasionally there were big scandals. In the 1980s allegations that a $50m kickback had been paid on an Indian arms deal by the Swedish firm Bofors engulfed the government of Rajiv Gandhi.
But India’s entry into the global economy created unprecedented opportunities for dishonesty. Property became a multi-billion-dollar business governed by officials paid a pittance. The value of mining licences soared along with commodity prices. Privatisations and public-private partnerships became common, and prone to manipulation. At the same time the elite cadre of the civil service, the Indian Administrative Service (IAS), has decayed. A top officer puts the clean and motivated proportion of its 5,000 members at just 10%—and adds that at the other end of the spectrum 15% are “scum”.
The Economist has looked at three ways of quantifying the profits from rent-seeking. The first is to tally the money made from scams, based on estimates from officials and investigators. (Our calculation uses realised profits, or the present value of anticipated profits. We use the low end of some official estimates.) The second approach, which is applied more widely in our new index of cronyism (see article), measures the relative performance of billionaires in industries, such as mining and property, that are prone to rent-seeking relative to those in other lines of business (see chart 1). A final method tracks the relative performance of an index of politically linked listed firms constructed by Saurabh Mukherjea of Ambit Capital, a broker (see chart 2). An average of the approaches suggests the gains from rent-seeking over the past decade peaked at about $80 billion. That is equivalent to 7% of the stockmarket’s value today. It is worth noting, though, that the share of GDP for the rent-seeking billionaires and the premium on politically connected firms are no longer what they were in the boom years.
Not all of the gains were achieved through corruption. But if one were to assume politicians and officials got an average cut of 5-15%—a rate consistent with the trail investigators have found in the iron-ore and telecoms scams, then total bribes paid would amount to $4 billion-12 billion.
Many bribes, like much else in India, can be paid for in cash, which can be deposited at banks using “Benami”, or nominee, accounts, or accounts in servants’ names. Gold is another possibility; there is a lot of it about, with India’s bullion imports since 2002 worth 14% of current GDP. Property deals are also used to launder cash—even legitimate deals often have a cash component.
Funnelling funds
On big deals the obliging politicians and officials may get a stake in the business. India’s audit agency believes land deals near Delhi Airport involved firms that were fronts for politicians. By using layers of legal shells politicians can be made beneficiaries without being easily traced. Taking the trail offshore can add still more concealment.
In an office in Delhi an anti-corruption tsar is looking at a piece of paper. On it is the name of a fixer in Singapore who is active in the Indian city of Hyderabad and who funnels illicit funds offshore. The official says there are about 25-50 such individuals, known as “settlers”, serving India, mainly from Singapore, Dubai and London. The scale of activity is “immense”. By cross-checking India’s trade statistics with those of its trading partners, Global Financial Integrity, a research organisation, estimates that gross illicit outflows from India have averaged $52 billion a year since 2007.
One way of transferring bribes offshore is “mis-invoicing”. For example, a firm in India controlled by a politician will buy diamonds or software from a party abroad at inflated prices before importing them. The excess profit booked by that second party, also controlled by the politician, is pocketed outside India—tax-free and with little risk of investigation if it is a shell company domiciled in a free-trade zone such as Dubai. Mr Singh found widespread mis-invoicing in the iron-ore scam.
How much Indian money is stashed abroad? India’s tax authorities have a database of offshore-account holders given to them by the German government, but appear to be under political pressure not to release it. “They’re sitting on it,” says the anti-graft tsar in Delhi.
The ex-manager of a unit serving Indians at a large Swiss bank says the firm had $10 billion of assets from resident Indians and a market share of 10-20%. The Russian and Far East desks were much busier. (This fits with the finding that Indians buy just 3% of “prime” London property, a popular investment with plutocrats.) The banker adds that India’s big political clans may have been dealt with by a separate wing of the bank. Adding in an estimate for them, he calculates that the offshore assets of Indian residents held in all global banks as between $100 billion and $150 billion.
How does that fit with estimates of illicit wealth overseas? The anti-corruption boss says his agency has identified assets of $2.3 billion, mainly held through trails of offshore shell companies and accounts in tax havens, and that his understaffed agency tracks about 5-10% of such activity—suggesting a total pot of $23 billion-45 billion.
Bringing it all back home
Some of this comes back to India through mis-invoicing. But wealth is also “round tripped” back under the guise of foreign investment. An insight into round-tripping, in this case of legitimate funds, came in a 2012 British legal case involving UBS in London. Its bankers ran a scheme in which $250m of offshore funds belonging to Reliance ADAG, an Indian firm, were invested in one of its subsidiaries in India via a vehicle in Mauritius. The London tribunal judged that this broke Indian rules. (In a 2012 statement Reliance said that no action had been brought against it in London and that the matter had been dealt with and closed by Indian regulators.) Lawyers for a banker involved argued the practice was “widespread”. India’s regulators say they have since cracked down.
When the bribes come home they undoubtedly enrich some Indian politicians. A 2008 telecoms scandal saw a minister allocating spectrum on iffy grounds. The government turned a blind eye. “We knew some of the decisions taken by him were blatantly illegal…[and] done to raise large amounts of money,” says another minister of that time who was close to the prime minister. The more pernicious danger is that the political system as a whole depends on the bribes. For one thing they seem to provide a significant source of election funds; for another the big parties increasingly need to court small parties in order to rule, and allowing them to get rich when in power seems to be one of the ways that this is done (it was a factor in the telecoms case).
To hold a rally at which Sonia Gandhi, the head of Congress, appears costs up to $330,000. The buses, hats and sound-system all have to be paid for. To run a credible campaign in a seat in a parliamentary election costs between $300,000 and $3m per candidate, depending on the importance of the seat and the competition. Armies of volunteers have to be paid, and booze and SIM cards given out.
Add in state and local elections and the total cost of politics in India between 2010 and 2015 for all parties will be $5 billion, calculates the top Congress politician, which would work out as a substantial fraction of the estimated bribe pool. Strict campaign-finance rules mean most of this has to be raised illegally.
A third of campaign funds are raised centrally by parties and the rest locally. Parties have arms-length treasurers who act as their bankers. Those handling bribes take a cut for themselves.
Illegal party funding is at the heart of corruption. But politicians are in denial, says the Congress bigwig. “Nobody wants to admit that they have taken money. It is a completely hypocritical system.” New laws, for example a Lokpal Act passed in December to create a new anti-graft agency, just add to the huge weight of legislation dating back to the 1980s that is cynically passed and not enforced.
There is certainly a lack of will to enforce rules. A second anti-graft boss cheerfully admits that prosecutions take at least a decade; in the past three years only 25 top civil servants have been investigated and none has lost his job. Regulators say that if they act against the interests of industrialists they can get an earful from politicians.
But there is a more optimistic view. When it comes to low-level graft, reformers hope that technology can eliminate the middlemen who seek to benefit. Putting train reservations online has removed a lot of opportunities for bribery. Then there are chunks of the economy that are already pretty free of graft, such as consumer goods and the technology business; in the past few years it is largely in those sectors, more than in the rent-seeking ones, that billionaires have made hay.
Some institutions are clean, too. They include the central bank and the Supreme Court, which on March 10th introduced rules to speed up trials of politicians. The banking system, despite its bad debts, has not been captured by tycoons as were those in South-East Asia and Russia in the 1990s. In February a chunk of radio spectrum was auctioned off smoothly, a process that makes impropriety harder.
And the messy response to a decade of graft, though inefficient, has started to change financial incentives. Sporadic court actions—mining suspended in some areas, some spectrum allocations being cancelled—have made rent-seeking less profitable, and foreign investors have begun to shun such sectors. Ambit’s index of politically linked firms, which did well in the late 2000s, has underperformed badly since. India has only a middling rank on our cronyism index.
Perhaps market forces and a backlash from voters will turn the tide. But even if they don’t, citizens like Mr Singh, the insect-expert turned mafia-buster, will fight on. He doesn’t carry a phone lest it betrays his location; he has a bodyguard, and police guard his home. But in an office decorated with posters of plants the ferocity he brought to his fight can still boil over. The iron-ore scam made him feel “so angry that I told myself either you do something or you die,” he says. “What will I be doing in three years’ time? I am going to pursue this. I am going to bring it to a logical end.”

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