All in India agree today that corruption poses a serious crisis for India. But what is corruption, and who is responsible for it?

Some say that politicians and bureaucrats who take bribes are alone responsible for corruption. If only the government would ‘free’ resources, assets and institutions from public control, they argue, there would be no corruption. But they forget that in the 1990s too, corruption was blamed on the ‘licence-quota-raj’ and it was said that liberalisation and privatisation would clean up the system. How come privatisation has instead brought in its wake corruption of a scale unimaginable in earlier times?

The Radia tapes have revealed very clearly that corruption is not limited to bribe-taking alone, but it is, rather, a much wider process involving the loot of resources and subversion of institutions by private corporations.

We have seen a remarkable people’s movement in recent times against corruption. Recently this movement won a significant victory in forcing the Government to take a firm step towards drafting an effective anti-corruption law. A genuinely effective and unbiased anti-corruption mechanism is certainly an important tool for any struggle against corruption. But can a law alone curb corruption if the policies causing corruption remain the same?

Why has there been a quantum leap in the scale of corruption in the era of liberalisation and privatisation?

Now, in the liberalized economy, privatisation of precious natu ral resources like land, minerals, spectrum (telecom airwaves), etc as well as of monopoly services like roads, airports and so on has created the possibility of unprecedentedly huge profits for private corporations. Simply by cornering land, minerals, spectrum and other precious resources for a throwaway price, a corporation can earn mind-boggling profits. As corporations compete for these lucrative ‘gifts’, they are quite willing to spend a small percentage of these enormous profits on bribing politicians like Madhu Koda or A Raja and other decision-makers.

The Daily Scam – Corporate ‘Subsidies’ and Black Money Flows

The country’s public exchequer does not lose money only in a few big scams. Daily, as a regular routine, hundreds of crores are drained away in the shape of write-offs of corporate taxes and black money flows to foreign banks! Every single day, the Union Budget writes off Rs 240 crore worth of corporate income tax – and the same amount worth of illicit funds flows out of India daily into foreign banks.

In the 2011 Budget, corporate tax exemptions (described as “subsidy payment to preferred taxpayers” in the budget) in 2010-11 stood at a staggering Rs. 88,263 crore! It may be noted that the total quantum of revenues forgone is rapidly increasing – it was about Rs. 2.4 lakh crore in 2006-07 and Rs 5.7 lakh crore in 2010-11! The proportion of revenues forgone to revenues collected is also rising fast – from about 50% in 2006-07, it reached 80% last year.

Why are the richest corporations, whose CEOs are among the billionaires of the world, getting subsidies when the Government claims it lacks money to ensure free education, healthcare and food for the poorest Indians? Why are these same richest people enjoying the licence to bleed the country by way of black money daily? Can corruption end without challenging these policies and priorities of the Government?

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In this process, it not just politicians and bureaucrats who personally take a bribe who are corrupt. Rather, the entire Government and state machinery is corrupt, because it acts under the influence of vested corporate interests rather than public interest. As a rule, the entire government structure in liberalised India makes laws, policies and takes decisions tailored to facilitate corporate grab of land, minerals and other resources; and even selectively overlooks laws of the land relating to environment, mining, etc. This is not just a one-shot scam; it is an ongoing, continuous process of drain of our resources for corporate profit. The telecom scam was estimated to have cost the exchequer around Rs 1.76 lakh crore; but corporations earn many lakhs of crores every year as profits from real estate, export of minerals and so on, not to speak of the enormous sums that are being openly gifted to the corporate sector as tax exemption and sundry concessions.

Changing Face of Corruption in Liberalised India: Facts and Implications

Has liberalisation and privatisation led to a fall in corruption or a quantum leap in corruption? Let us get an answer from the horse’s mouth, from the consulting firm KPMG’s study “Survey on Bribery and Corruption: Impact on Economy and Business Environment”, based primarily on corporate response. This survey highlights the ‘changing face of corruption’ and clearly recognizes, “From what started as petty payments demanded by ‘babus’ during the license raj days, corruption has taken a much larger form and scale today. ... It is not about petty bribes (‘bakshish’) anymore but scams to the tune of thousands of crores that highlight a political/industry nexus which if not checked could have a far reaching impact. Media stories on financial scams indicate that while petty corruption is more of an irritant and mostly driven by public officials at lower levels, larger scams could be attributed to the willingness of the private sector to pay senior public officials to get their work done.”

Corruption-prone Sectors

On the basis of corporate perception (48% of the respondents were from MNCs and another 28% from India-based MNCs), the KPMG survey has ranked certain industries and sectors as being particularly corruption-prone. Real estate and construction tops the list followed by telecommunications, social development sectors, financial services, defence, IT/ITES/BPO, energy and power, and others (including media, consumer goods, pharmaceuticals, health care, heavy engineering and transport). 68% of the respondents acknowledged that corruption was often induced by the private sector. Accordingly, the survey emphasises the need to bring the private sector within the ambit of anti-bribery, anti-corruption regulations.

The Struggle for a Transparent, Effective and Accountable Anti-Corruption Law

Recently, a successful struggle was launched with Anna Hazare’s fast, which ended by forcing the Government to form a joint drafting committee including civil society activists and experts along with Government representatives to redraft the Lokpal Bill.

However, it is clear that the Government which went to all lengths to cover up corruption in the 2G scam, appointment of CVC, etc, is not likely to make it easy to draft a truly effective Lokpal Bill. The road ahead for the Lokpal Bill is not smooth – people’s vigilance and continued struggle will be called for to ensure a good law.

While appreciating the need for an effective Lokpal legislation and agreeing that the Government draft of Lokpal Bill was toothless, some people have cautioned against creating a draconian ‘super-cop’ that would endanger democracy. It must certainly be ensured that the Lokpal Bill not only be effective but also transparent and accountable. All concerns regarding democracy and accountability are genuine and must be fully addressed while drafting the Bill. But care must be taken that corruption is not condoned or legitimised as a necessary cost of democracy. A super-cop is not wanted, but an effective and independent cop, accountable to the people rather than beholden to the very people it is meant to prosecute, is certainly needed.

At the same time, we need to take the struggle beyond the Lokpal law alone, and challenge corporate corruption and plunder.

Myth of High Taxation Inducing Corruption

Another myth fondly marketed by pro-liberalisation advocates is that corruption is induced by high levels of taxes. Interestingly enough, even as the KPMG survey highlights the complicity of the private sector in the ongoing growth of corruption, in the preface to the survey, economist Surjit S Bhalla echoes this view quite loudly, calling for further reduction in taxes including capital gains tax levied on real estate transactions. “Na rahega baans, na bajegi bansuri” (if there is no bamboo, you cannot have a flute) – this is Dr. Bhalla’s simple prescription for containing and curbing corruption. Well, this is precisely the policy direction that successive governments have been following in India over the last three decades. In the latest 2011-12 budget, the government has reduced the surcharge on corporate tax from 7.5% to 5% even as corporate tax exemptions handed out in the preceding year reached a staggering Rs. 88,263 crore (between 2005-06 and 2010-11, the total volume of exemption in corporate tax has been an astounding Rs. 3,74,937 crore)!

If high taxes induced corruption, reduction in taxes should have pushed corruption progressively down. Yet we have another study, funded by the Ford Foundation and undertaken by the Global Financial Integrity, which indicates precisely the contrary. A GFI study entitled “The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008” by economist Dev Kar estimates the illicit financial flows (IFF) from India during the 61-year period (1948-2008) at $462 billion. As much as 68% of this aggregate IFF is attributed to the post-reform period (1991 onward). According to Mr. Raymond W. Baker, the Director of GFI, budget deficits and inflation have had little to do with the accelerated rate of transfer in the post-reform period. The GFI study squarely attributes the alarming increase in IFF to the reforms themselves: “What is clear is that, during the post-reform period of 1991-2008, deregulation and trade liberalization have accelerated the outflow of illicit money from the Indian economy. Opportunities for trade mispricing have grown, and expansion of the global shadow financial system accommodates hot money, particularly in island tax havens. Disguised corporations situated in secrecy jurisdictions enable billions of dollars shifting out of India to “round trip,” coming back into short- and long-term investments, often with the intention of generating unrecorded transfers again in a self-reinforcing cycle.”

What Drives the Flow of Black Money?

Illicit financial flows constitute the dominant part of India’s black or underground economy. According to the GFI study, 72% of illicit wealth is accumulated abroad while the remaining 28% is held domestically. And the study finds both to have been increasing quite rapidly in the post-reform era – while the post-reform size of the underground economy has increased on an average to 42.8% of the GDP (as against 27.4% in the pre-reform period), the compound annual rate of growth of illicit flows which stood at 9.1% during the pre-reform period shot up to 16.4% during the post-reform years.

The study categorically admits that its estimate of illicit flows is quite conservative, as it underestimates both the principal amount (for example it does not take into account smuggling and distortions in trade pricing, not to talk of deficiencies of official statistics) and the interest component (the study has applied the rate of return accruing on US treasury bills which is far short of the actual rate of return on assets like real estate, precious metals, art objects). Yet even this conservative estimate is more than double the amount of India’s total external debt at the end of 2008 ($ 230.6 billion)!

What is it that is driving the illicit flows of funds (as distinguished from what constitutes legal flight or export of capital) in the wake of the reforms? The study suggests a couple of important reasons – (i) the growth of foreign trade leading to greater scope for trade mispricing (according to the study 77.6% of aggregate illicit outflows is attributable to trade mispricing), and (ii) greater income inequality within the country leading to the emergence of a growing band of High Net Worth Individuals (each with investable assets of more than $1 million) who are “the main drivers of illicit financial flows”. In 2006, India had 100,000 HNWIs, and by 2009 the figure jumped to 127,000. In the recently released Forbes list of dollar billionaires, India with 55 billionaires stood at third position – next only to the US and China – in a global total of 1210 billionaires. In 2001, there were only 4 Indian billionaires in the global list of 538.

What is the destination of the illicit financial flows? Typically, these flows end up either in commercial banks in developed countries or in offshore financial centres (OFCs), the emerging ‘retreats’ for global finance. In 1995, developed country banks absorbed 60% of illicit flows from India, but over the next two decades the share of banks fell to 40% while the share of OFCs rose to 60%. The reason behind this shifting preference is quite obvious – the OFCs offer greater secrecy and immunity than banks and hence attract more illicit funds from across the world. India currently has Double Taxation Avoidance Agreements with 65 countries and even when the government is aware of part of Indian assets illegally held abroad, it avoids naming those account holders in the name of respect for international diplomacy and investor confidence!

Checking Corruption Calls for a Change in the Policy Regime

Anti-corruption laws alone cannot check corruption. To rely on anti-corruption laws without changing the policy regime that causes corruption to thrive is like mopping the floor without turning off the tap!

Interestingly even as neoliberal advocates have to acknowledge the growth of corruption, they arrogantly use this evidence to push for still greater liberalisation and global economic integration. The KPMG survey would have us believe that it is the disproportionate growth of certain sectors and the indiscriminate entry of new players which lies at the root of heightened corruption as these new players seek to resort to bribery to disturb the level-playing field and secure a skewed field in their favour and everything could be sorted out by just strengthening the regulatory mechanism.

The Radia tapes however tell a different story, it is the well-entrenched players who go all out to protect their turf and the socalled new players are often proxy players propped up by the big few. But the question is not so much whether new or old players are more responsible, it is the subservient role of the state vis-a-vis big business which is facilitating and increasingly legalising corruption as a by-product of economic reforms and as a byword for governance. The US apparently has the best regulatory mechanisms in place, yet the world has seen its worth during the recent explosion of the financial crisis. And any mechanism in India will have to cope with not just the pressure of domestic big business but global capital and its chief custodian, US imperialism.