My brother came to visit me at our offices in Lower Parel in Mumbai this afternoon. He was duly impressed by the spanking new buildings that occupy what used to be Morajee Mills land. I guess I can understand why he was impressed because usually he ends up in seedy run-down offices trying to do business. He has a bunch of dealerships for equipment and materials required for large-scale public sector enterprises. As part of his business, he has to visit the offices of his customers who are housed in crumbling offices because state-owned loss-making enterprises are severly resource constrained and cannot afford nice premises.
What brings you to Mumbai, I asked. He was here to attend the wedding of the son of a high-ranking official of XYZ (a loss-making state-owned enterprise which I will not identify to protect my brother’s life.) It was a grand affair attended by high-profile political figures. How can an official of XYZ, however high-ranking, afford such a grand affair, I asked. After all, these people have a salary of about $250 a month (plus some modest perks.) It is all part of a system, my brother replied.
The chief engineer of XYZ makes about $2 million a year in kick-backs from suppliers because the going rate is about 10% of the budget that the chief engineer controls. Just to put that figure in perspective, that is about 500 times the per capita GDP of India. When promoted to “technical director” from the rank of a chief engineer, the annual take of the person goes up to $5 million. Which is why the going rate for the promotion is about $3 million. Merely having one’s tenure as the technical director extended by six months costs about $1 million.
The private sector suppliers of these public-sector monopoly enterprises compete amongst themselves and the competition is primarily based on how much they are willing and able to give back in kick-backs to just be awarded the contracts that often range from a low $5 million to upwards of a $100 million. Merely being awarded contracts is not the end of the game. Getting paid for work done and material supplied is also a huge challenge. Without regular kick-backs, payments can take years and could easily doom the private sector supplier.
As I said, my brother is a small-time distributor for a bunch of suppliers. To get business from these public-sector enterprises, he has to deal with chief engineers and other such people in charge of making purchasing decisions. What he is compelled to do to run his business, I don’t really know and even if I did, I would leave it unsaid here.
The question that I persistently seek the answer to is this: Why is India so abjectly poor? There is no single factor, of course. But pervasive corruption has to be one of the most important factor among the mix of factors such as a poor culture, questionable ethical standards, a cargo-cult democracy, widespread illiteracy, stupid economic policies, and so on.
India is rated as one of the most corrupt countries with a “corruption perception index” (CPI) of 2.8 and is tied in the 90th place (out of 145 surveyed) with countries such as Gambia, Malawi, Mozambique, Russia, Nepal, and Tanzania according to Transparency International Corruption Perceptions Index 2004 which notes that “corruption is rampant in 60 countries, and the public sector is plagued by bribery”. Finland, New Zealand, Denmark, Iceland, Singapore, Sweden, Switzerland, Norway, Australia, and the Netherlands hold the first ten positions as the least corrupt countries. Haiti and Bangladesh are tied at rank 145 as the most corrupt countries. One cannot fail to appreciate the correlation between how corrupt a country is and how poor it is. Correlation hints at possible causation but in itself does not imply causation and definitely cannot tell in which direction the causation holds. Are corrupt countries corrupt because they are poor or is it that they are poor because they are corrupt? Perhaps there is some circularity in the causal chain and poverty and corruption are mutually cause and consequence.
Corruption leads to economic waste because it is an inefficient way of doing business. If 10% of capital expenditure that a public sector enterprise is paying for ends up in the pockets of its office-holders, it means that capital equipment does not get replaced or maintained as it should. If the supplier has to pay kick-backs to get business, it will have to cut corners in the quality or quantity of material supplied. Economic rent seeking behavior is not productive and in India millions of man-years must be wasted in unproductive rent-seeking. Public sector monopolies represent a resource sink precisely because they a ridden with corruption from top (the bureaucrats and politicians who appoint the high-ranking public sector officials) to the bottom (the clerk who will not push your file to the next desk without being paid his Rs 100).
So what is to be done? Surely lecturing school-children about the evils of corruption is not sufficient. First we need to be aware of what is going on and who is beind the going-ons. Investigative journalism comes to mind. Where are the watch-dogs and what are they doing? An informed citizenry is the best defense against the kleptocracy that exists today. Next, when investigation reveals corruption, the matter should be rigorously prosecuted to its logical end. And one must get one’s priorities clear when doing so, and not hound a poor milkman for diluting milk and believe that justice has been served.
Here is my proposition. Let it be known that any corruption above a certain figure (say, $1 million) is an offense that will attract the death penality. Between half a million to a quarter million, it will be mandatory 20 year rigorous imprisonment. Then every month, take the harsh step of convicting about 10 and hang them. In a year, the number of people who find corruption in the millions of dollars attractive will fall. This is simple economics: when the price goes up (death), the demand for the thing (getting one more million dollar in one’s Swiss bank account) goes down.