As in many emerging economies, domestic and foreign businesses and investors in India have long reconciled themselves to the fact that a degree of corruption has become a necessary by-product of doing business in the country.
But over the past year, a series of high-profile scandals – contracts awarded by sports officials for the 2010 Commonwealth Games, the acquisition by politicians, bureaucrats and army officers of flats meant for war widows and the granting of licences to telecommunications firms – has drawn attention to the sheer scale of corruption, which continues to harm not just the economy but ultimately also the lives of India’s more than 1.2 billion people.
The scandals have tainted prime minister Manmohan Singh’s reputation for integrity. Economists, bankers and anti-graft groups say that, while increased corruption is not driving foreign investors away, it is making them increasingly uncomfortable. And if left unchecked, business leaders warn that corruption could have a material impact on India’s image as an accountable and transparent democracy – and on its future economic growth.
“Corruption could be a major hurdle in India’s growth story in the coming decade and may impact its fair business competitiveness,” Deepankar Sanwalka, head of risk compliance at KPMG, wrote in the executive summary to a March survey of leading Indian companies on the impact of corruption on India’s business environment. Almost a third (31%) of respondents said that corruption represented a “key risk” to the government’s projected 9% GDP growth rate over the next five years.
THE $39 BILLION SCANDAL
The ongoing fallout from the second generation (2G) telecom spectrum licence scandal has perhaps done most not only to tarnish the image of the government, but also to reveal the increasingly high-level nature of the corruption problem in India.
Allegations of misconduct over the allocation of 2G licences to mobile telephone operators in 2008 led to the arrest of India’s former telecommunications minister, Andimuthu Raja, as well as charges being filed against both domestic and foreign companies, including Reliance Telecom, Unitech Wireless, local partner of Norwegian telecoms firm Telenor, and Swan Telecom, partner of UAE-headquartered mobile operator Etisalat. Two of India’s most prominent businessmen, Reliance ADAG chairman Anil Ambani and Ratan Tata, chairman of the Tata Group, have also been questioned by parliamentary committees in relation to the affair.
The financial scale of the alleged wrongdoing is staggering: India’s state auditor pegged the loss to the exchequer at $39 billion – equivalent to the country’s defence budget – while prosecutors accuse Raja personally of accepting as much as Rs3,000 crore (around $6.8 billion) in bribes related to the award of 2G licences.
Estimates of the overall cost of corruption to the Indian economy are difficult to reach given the scale and nature of the problem. Washington-based organization Global Financial Integrity estimates that the Indian economy lost $314.2 billion through illicit financial flows such as corruption, tax evasion and crime between 1991 and 2008.
And there is widespread recognition that the problem is growing more serious. Surjit Bhalla, managing director of Oxus Research and Investments, a New Delhi-based advisory firm, says the 2G scandal is indicative of the scale of the problem.
“It’s probably the case that corruption in India is higher today than at any other time in its history,” Bhalla, a former government economic adviser and World Bank official, says. “As the economy transits from a low level of development to a high level of development, corruption increases.”
LACK OF OVERSIGHT
The telecoms scandal has also shed light on the often murky relationship between government and private companies in India.
Anti-corruption campaigners believe the rapid growth of the private sector over the past two decades has not been matched by an effective institutional framework to govern its conduct and to oversee the award of large government contracts. This has created a system that is prone to exploitation on both sides.
“The private sector has stepped into activities hitherto done by the state – telecoms, highways – as well as basic services – hospitals, education,” says Biswajit Mohanty, a board member of Transparency International’s India chapter. “Whereas the state was accountable to the parliament, state assemblies, courts, etc., corporates are not accountable to anyone except shareholders, and sometimes not even to them.”
The government has established institutions such as the Telecom Regulatory Authority of India and the Central Electricity Regulatory Commission to better regulate private as well as public firms providing these services. For instance, “the fixing of tariffs is more transparent now than before,” says Shashank Bhide, director of the National Council of Applied Economic Research, a leading independent institution. “There are more players. Consultations are much more now than ever before.”
But anti-corruption activists say the mere existence of such institutions has failed to check the surge in graft, bribery and other illegal activities. And increasingly more of them, incensed by the extent to which laws are broken and by the apparent inability or unwillingness of the state to prosecute those accused of corruption, want the system strengthened.
HAZARE'S HUNGER STRIKE
This is what pulled thousands of ordinary middle-class Indians out of their living rooms and into the streets in late March to support a nationwide protest against corruption, led by a 71-year-old Gandhian, Kisan Baburao “Anna” Hazare. He was just one among a large number of activists asking the government to usher in a stronger version of a law that would create a federal ombudsman, known as a Lok Pal, or caretaker of the people, with wide-ranging powers to investigate and prosecute those accused of corruption.
Hazare travelled to New Delhi to begin a public fast to demand not just a stronger law – a draft has been introduced eight times since 1968 – but also the inclusion of ordinary citizens in a committee to draft a new version. The government labelled the demand unconstitutional, but such was the public outcry, thanks to a concerted news and social media campaign, that Prime Minister Singh was forced to relent, announcing, 98 hours into Hazare’s fast, that his cabinet had agreed to draft and implement a new ombudsman bill with input from civil society. Hazare and his cohorts are now demanding that the draft law be approved by lawmakers by August 15 – India’s independence day.
WAKE-UP CALL
Investment advisory firms say the 2G scandal was a wake-up call for foreign investors – who had grown used to reading articles about India’s 8–9% annual GDP growth – that it’s money, not just reputational or regulatory risk, that’s at stake.
Will this incident, or the spate of other scams that have dominated news reports, have a negative impact on investment? Respondents to the KPMG survey, most of whom were CEOs or CFOs of multinationals operating in India, are concerned. More than half (51%) said that corruption would lead to India attracting less investment than its emerging market peers, while 46% said that investors may shy away from industries tainted by corruption, which may result in skewed growth. Just 3% said that corruption would have no impact on India’s future investment outlook.
But most observers do not think that corruption will scare investors off altogether. For one thing, “it is not that clear that corruption in India is much higher than in other [emerging] markets,” says Bhalla, and adds: “It’s not corruption that puts off investors, it’s uncertainty.”
Siddhartha Sanyal, chief India economist at Barclays Capital, agrees. “People who have dealt with India for a while know that you have to deal with indiscipline and corruption,” he says. “So when corruption allegations come up, [investment] does not become a no-no overnight.”
However, Sanyal says investors frequently highlight one problem: “Among the bigger emerging countries, the rules and regulations are very difficult to follow and adhere to in the case of India,” he says, adding, “That in itself creates some confusion and can... lead to an element of nagging and chronic corruption.”
Sanwalka, meanwhile, does not believe that corruption will drive foreign investors away, but cautions that many are becoming more concerned about it. “India still remains a hot investment destination. I don’t think on that front there has been a change in view. However, clearly people are seeing corruption as an issue and a challenge,” he says. As a result, “they’re doing that much more debate and due diligence.”
He also says that while corruption has not triggered a knee-jerk reaction among foreign investors, there could be long-term effects. For instance, as other markets in the region develop and competition for capital increases, outside firms may start to consider India differently. “The cost which they attach to corruption will start making a difference then,” he adds.
Sanwalka cites research by the Washington-based Cato Institute suggesting that a one-point increase in corruption levels in a country can lead to a reduction in per-capita FDI inflows of up to 11%. With India’s FDI declining by 22% year-on-year to $21 billion in 2010, this is clearly a concern.
The impact on overall economic growth from a drop-off in FDI would likely be limited given that FDI accounted for just 1.4% of GDP in 2010. However, with India keen to attract greater foreign investment over the next five years, particularly within infrastructure, any negative impact on investor sentiment could disrupt future growth plans.
LOOKING FOR A REACTION
Nevertheless, the biggest potential obstacle to growth due to corruption would be if the current spate of scandals fundamentally destabilized the domestic political structure in Delhi.
Prime Minister Singh is well aware of the fact that former prime minister Rajiv Gandhi, also from the Congress Party, lost the 1989 general election over allegations that his government accepted bribes from a foreign defence firm, Swedish gun maker Bofors AB. Whether or not the current spate of scams ends by costing Congress and its allies politically, observers say good governance – specifically, actual delivery of health, education and other basic services – is rewarded at the ballot box. They say the leaders of two states where the government is seen to have delivered – Gujarat and Bihar – have been re-elected largely because of this. Of course, the reverse is also true, with many state leaders forced out due to corruption scandals in recent years.
Looking ahead, Sanwalka says many people are looking at whether and how quickly those accused of corruption in the Commonwealth Games and 2G scandals are prosecuted and punished, or if indeed they are found guilty.
“Unless [the government] is seen to act decisively, I don’t expect things to change,” he says. “But if they really take stern action, it will have a huge impact in terms of people thinking two or three times before going down that road.” It will also send a message that “perceived immunity doesn’t exist anymore”.
ADVANTAGE LOST
If the government fails to act on corruption in the face of mounting evidence and growing anger, there is a fear that it may start to undermine India’s reputation, both at home and abroad. A number of economists have cited India’s democratic and relatively transparent political system as a potential long-term advantage when compared with other fast-growing emerging Asian economies with non-democratic or more opaque political and legal systems, such as China.
Anupama Jha, executive director of Transparency International, says that if the government fails to respond to the current corruption challenge, this potential advantage could be eroded in the eyes of the international community.
“India has democracy, India has much more potential than other economies, that is why rampant corruption is a greater cause of concern for investors as well as the common people,” she says.
And even if the government does announce more stringent anti-corruption or oversight laws, BarCap’s Sanyal believes that the current furore over corruption could derail other, vital structural reforms that are necessary for the long-term growth of the Indian economy.
“This is the time when the government could have been more aggressive in implementing reforms. If the government goes on the back foot, then the medium- and long-term targets may take a back seat,” he says. “That is the fear.”