The government is not above the rule of law

It takes a lot of doing to make the economy fall from a 9 per cent growth rate two and half years ago to 6.1 per cent in the quarter ending December. A fall of one per cent means the loss of almost 15 lakh jobs and so there is a lot of pain, mostly inflicted by the UPA government. Corruption scandals also refuse to cease. But the real tragedy is that the rule of law, one of India’s strengths, is crumbling.

This government undermined the rule of law when it overruled the Supreme Court in Vodafone’s tax case. It decided to change the law retroactively and tax similar deals going back to 1962. It was unfair when it announced in this Budget to make Cairn, India’s largest producer of petroleum, pay $90 a ton in tax suddenly when other private companies are paying $18. As it is, India’s reputation has suffered ever sinceenvironmental permissions were re-opened after they had been granted officially. But when Maharashtra Hybrid Seeds Company was arbitrarily denied a license in 2010 when it had had toiled for a decade to develop Bt Brinjal, the world’s scientific community was aghast. The company had completed 25 environmental bio safety studies through independent agencies, rigorous field trials by two Indian agricultural universities, and all protocols to the government’s satisfaction. Finally, there is much sympathy for Norway’s Telenor, which became the unwitting victim of the Supreme Court decision to cancel licenses given out corruptly--no wonder Telenor is claiming $14 billion in damages from India.

Citizens look to the state to reduce uncertainty in their lives. The state does this through a robust rule of law. As it is, there is great uncertainty in an entrepreneur’s life, which is why three out of four businesses fail. But the UPA government, instead of making life predictable is the main source of uncertainty. It has weakened the rule of law; corruption is a symptom of this weakness. Some think it was inevitable: the rule of law was a foreign import of the British; after they left it began to wither. When officials began to think they were above the rule of law, it collapsed.

The rule of law is based on a moral consensus, expressed daily in the ‘habits of the heart’. People obey the law not only because they fear punishment but because they think it is fair and it becomes a habit and a form of self restraint. While Indian habits may not be quite as liberal as English habits, India always had a rule of law expressed as ‘dharma’, which gave coherence to people’s lives, reduced uncertainty and provided self-restraint. For this reason the founding fathers of our Constitution often invoked dharma in their speeches. The great P.V. Kane, who won the Bharat Ratna, called the Constitution a ‘dharma text’. In pre-modern times, dharma restrained the power of the state via raja-dharma—it was higher than the king whose duty was to uphold it. Some of the UPA’s ministers would do well to ponder this thought.

It may seem bizarre to invoke tradition when that tradition was responsible for so much unjust hierarchy and social injustice. But the rule of law originated in religion almost everywhere. In the West, it emerged from Christianity. Long before modern European states, Pope Gregory I established laws for marriage and inheritance. The Church also discovered the old Justinian code, which became the basis of civil law in continental Europe. Frederic Maitland says the rule of law gained higher legitimacy because it emerged from religion; thus, no English king ever believed that he was above the law. Indian kings had the same conviction about dharma. In the same way, the rule of law is central to Muslim civilization.

The ideal of a ruler guided by ‘dharma’ exists in the Indian imagination even today, thanks to the extraordinary continuity of our civilization. When the vast majority on the sub-continent is deeply religious, it is not inappropriate to turn to tradition to seek that moral core that can restrain public officials and citizens. Fusing tradition with modernity could help restore the moral core in a meaningful way in support of the modern rule of law to re-invigorate India’s democracy.

Don’t be my favourite friend, be my most favoured nation

With time we come to realize that the only reliable pleasures in life are the smaller ones. The big sources of happiness--success, fame, marriage and religion—often fail us. Among the smaller enjoyments are things like friendship and humour. What is true for individuals can also apply to nations. Instead of nationalism and military grandeur, a modest delight in trade is more dependable, and this was underscored by a happy piece of news on February 29th.

Prime Minister Yousuf Raza Gilani told Pakistani reporters, "People have not understood MFN. It means ‘most favoured nation’, not ‘most favourite friend'. Pakistan will now merely treat India as it treats a hundred other countries.” Gilani was defending his cabinet’s historic decision to open up trade with India. Having thrown its doors open to 6850 products, it will remove all restrictions to trade by year end, and pave the way for granting India Most Favoured Nation status. Although there was no risk of India becoming most favourite friend, ‘sabse pasand mulk’ as the Urdu press put it, there were 6850 reasons to be happy in both countries.

This beleaguered civilian government in Pakistan continues to amaze us. Not only is it battling on all fronts--war in Afghanistan, hounded by its Supreme Court, hostility of its own army, grave problems with the United States—it has gone and asserted a fine civilian conception of its national interest. By not insisting on Kashmir as a pre-condition of trade liberalization, it has proved gutsy, reminiscent of Narasimha Rao’s bold liberalization in 1991 when he was pushed against the wall.

It is better not to be euphoric when it comes to Pakistan. Still, the announcement was a healing balm for an India which has suffered unending bad economic news—much of it self-inflicted—over the past twelve months. The strategic significance of this opening is huge—it will energize free trade area in South Asia via SAFTA, which has suffered so far through Pakistan’s intransigence. If the experience of North American Free Trade Area (NAFTA) is any guide, SAFTA could transform millions of lives on the sub-continent.

Presently India-Pakistan trade is a paltry $2.6 billion, less than one per cent of their respective global trade. It should quickly climb to $ 10 billion by 2015, still modest compared to $ 60 billion trade between China and India. To make the deal a success, India will have to buy more from Pakistan; presently the trade is heavily skewed in our favour--Indian exports are $ 2.3 billion to Pakistan’s $ 0.3 billion. India has 80 per cent of South Asia’s GDP, which makes our neighbors suspicious. Dominance brings responsibility and India will have to be more generous— as Germany is in Europe today; large-heartedness should replace our traditional policy of reciprocity if we want a peaceful South Asia.

In this case India has played its cards well. It gave Pakistan MFN status way back in 1996, without insisting on reciprocity. Unilateral liberalisation works because lower trade barriers help one’s own people. Besides, a government’s first duty is to its consumers; afterwards, to its producers. As one of the world’s more productive economies, India like Germany has only to gain from free trade. The major threats to trade liberalization are Pakistani extremists, who are dead set against this deal; the other is bureaucracy and red tape, which could easily stall this reform by keeping a tight lid on visas, for example.

Much credit goes to Prime Minister Manmohan Singh, who has persisted in engaging patiently with Pakistan’s weak civilian government. He took a lot of flak for his moderate stand at Sharm-al-Sheikh. By assuming that Pakistan’s civilian government was as much surprised by 26/11, he reposed faith in Gilani, whom he saw as a moderate, modern Pakistani and strengthened his hand against the army and the extremists. There is a clear lesson here: do not see a nation as a monolith and look for opportunities in unlikely places.

For the moment, India and Pakistan do not have to be favourite friends. They should be content to be good neighbours and trade with mutual respect. They will be rewarded in the end for trade multiplies connections between human beings and brings prosperity, stability, and peace.

Think of the spectrum like the village commons

In a shock ruling ten days ago, the Supreme Court cancelled 122 mobile phone licences that had been deceitfully awarded in 2008. The ruling sent the telecom industry into chaos, confirmed dreadful corruption in the government’s decision-making process, and damaged the reputation of our nation in the eyes of the world—especially foreign investors. There was much euphoria inside the country, however, for justice had seemingly been served.

The Supreme Court also instructed the telecom regulator (TRAI) to auction the illegally gained 2G spectrum, as it was done in the case of 3G spectrum. “While transferring or alienating natural resources, the state is duty bound to adopt the method of auction by giving wide publicity so that all eligible persons can participate,” said the Court judgment. Auctions are certainly a better way to allocate a scare resource than first come first served, but what Mr Raja did was, of course, preposterous — he subverted the “first come first serve” policy by changing rules mid-way; he allocated spectrum out-of-turn in a non-transparent manner, and that too at 2001 prices, thus creating the biggest corruption scandal in India’s history.

But is auctioning the best way to allocate radio spectrum? Although it is scarce, should it used as a money making device by government? Since water is scarce, should it be auctioned? No. The risk in an auction is that “animal spirits” of entrepreneurs forces them to bid very high, which is then reflected in high tariffs, and this forces the poor out of the market. Thirty one countries have used spectrum auctions and many have regretted it for this reason. India is, perhaps, the world’s most successful telecom market with the lowest tariffs in the world. Hence, it has the highest number of subscribers who are poor. The credit for this goes to the previous government which had the courage to change policy from high license fees to revenue sharing between the telephone company and the government. If the state had been “duty bound to hold an auction”, cell phones would not have reached the poor.

In the ideal world, radio spectrum would be like sunshine which is not owned by anyone or any government but everyone enjoys it without any cost. But unlike sunshine, spectrum is finite and hence it has been historically controlled by governments. It is widely accepted that government allocation is inefficient and leads to corruption. Ronald Coase, the Nobel Prize winner, exploded the myth long ago that governments should control spectrum to prevent airwave chaos. Today many experts think of spectrum as a common grazing ground around a village, which is open to everyone to use freely. They claim that new spectrum sharing technologies allow a virtually unlimited number of persons to use it without causing each other interference--this eliminates the need for either property rights or government control. This is why the United States has gone ahead and designated a 50 MHz block of spectrum in the 3650 MHz band as a “commons”.

If the spectrum were a “commons” nobody would own it nor need to auction it. A telecom company would merely register with an authority, which would assign it a spectrum frequency for its use. When the company reached the limit of its spectrum, the authority would release it some more. Just as a villager pays a nominal tax for maintaining the commons, depending on how many cattle he grazes, each cell phone subscriber would pay a nominal fee, say a paisa per minute, towards upkeep of the spectrum. It would be form a part of the monthly bill, and transferred by the phone company to the authority. Just as a village needs rules to prevent over-grazing, there would be rules in maintaining spectrum to avoid a “tragedy of the commons”. The rules would be transparent, monitored in real time, and no one would be able to corner the spectrum.

Unfortunately, the Supreme Court judgment has come out so heavily prescriptive in favour of auctions that future governments in India will be shy to adopt a better alternative. Technology is developing very rapidly and soon the world will be ready for an “open spectrum” regime, but the Court’s inflexible judgement will inhibit the Indian government in doing the right thing. A pity!

A liberal but strong state is need of the hour

The mistake is to think that the current paralysis in decision making in Delhi is limited to politicians. Gutless bureaucrats, risk averse at the best of times, have done as much damage. India’s economy has sound fundamentals and is today one of the world’s strongest, but its confidence has been badly shaken by a weak state that cannot enforce its own laws, let alone enact its legislative agenda. Partly to blame is the Anna Hazare movement which has led to contempt for state institutions. Around the world, the Left wants a large state and the Right wants a small one, but what India needs is a liberal but strong state that will, at least, implement its own laws.

The other mistake is to believe that the Indian state has weakened in the past two decades as a result of coalition politics. Truth is that India has always had a weak state and its history is a story of political disunity and warring kingdoms. Even our strongest empires were far weaker than say, the Qin Dynasty in China which built the Great Wall to keep out invaders. (That those invaders ended up in India in a chain reaction is another story.) The historian, Chris Bayly, describes how early European travellers to India were struck by the energy, colour and sophistication of the bazaar compared to the decadence of its rulers.Although historically weak, at Independence India inherited strong, robust institutions of the state—a professional police, bureaucracy, and judiciary. These are now in decay and the gap between ideals and reality has grown. It should not take seven years to build a road that takes two elsewhere; neither should it take 19 years to get justice; nor 23 years to build a dam. Poor governance and its cousin, corruption, are symptoms of a weak and soft state.

However, India has historically had a strong society, which prevented tyranny by the state. An Indian was defined by his village, caste and family, not by the state (as in China). The law—dharma--also emerged from society, not the state, and was later codified in Dharmashastras. But that old society is now changing. As Adam Smith predicted in The Wealth of Nations, the growth of markets would lead to a division of labour and new social groups would emerge. Open access to markets and job mobility would undermine traditional social authority, replacing it with more flexible, voluntary groups. Two decades of high growth is doing that and Anna’s movement reflects how it. The country is evolving from a traditional to a modern civil society. This is a positive thing for a modern democracy needs a vigorous civil society to keep it honest.

The past twenty years of capitalist growth have made India one of the world’s fastest growing economies. The contrast between a successful private economy and a weak, public order has led to the impression that India might be able to manage without a strong state. But markets do not work in a vacuum. They need a network of regulations and regulators to enforce them. In the past two decades good regulators have definitely contributed to India’s economic success. The telecom revolution was partly ushered by its first regulator (TRAI) under Justice S. S. Sodhi and B.K. Zutshi, who were strong enough to withstand pressures from the Telecom Department, which wanted to weaken private mobile companies. Stock exchanges have been strengthened by SEBI, the capital market regulator. The Reserve Bank’s oversight of banking has improved and matured. The insurance and pension regulators have also earned their spurs. On the other hand, power regulators in the centre and the states are mostly spineless, self-serving, retired babus, who have failed to implement Electricity Act 2003, and prevented a power revolution in India.

A ‘strong state’ usually carries a bad odour, conjuring up authoritarian images of Nazi Germany or Soviet Russia. A ‘liberal, strong state’ is, however, not oppressive. It is efficient, enabling and tough against law-breakers. It punishes the corrupt swiftly. But it also protects liberties and dissent and enjoys legitimacy among the governed. A strong civil society is needed to hold such a state accountable. More than ever, Indians today need to make a liberal case for such a strong state.

When democracy won but the people lost

The past two weeks witnessed a remarkable spectacle in which India’s democracy won but India’s people lost. On November 24, the government announced a bold reform to allow 51% foreign stake in retail. It triggered off a storm of protest across the political spectrum, and eventually forced the government to back down and suspend the reform. During the entire debate no one asked why China and dozens of countries welcome foreign investment in retail. The defeat of the government means that Indian consumers have lost a chance for lower prices, India’s farmers have lost the prospect of higher returns, a third to half of India’s food will continue to rot, and millions of unemployed rural youth have been denied jobs and careers in the modern economy. It is also a severe blow to the future of reforms in India.

It does seem odd that democracy should win and people lose. But democracy’s great flaw is that it is easily captured by vested interests. In the 1980s, labour unions captured it to ban computers in government offices, banks and insurance companies. Today the powerful kirana trade has succeeded by funding opposition to a policy that was patently in the nation’s interest. The kirana lobby created an atmosphere of fear. The same fears were expressed during the 1991 reforms. If the government had given in then, India would not have lifted 200 million people out of poverty; not raised 300 million into the middle class and not made India the second fastest growing major economy.

Indians today are victims of the primitive “mandi system” which escalates food prices by 1:2:3:4, resulting in the world’s highest gap between the price a housewife pays and what the farmer receives. What a farmer sells for 1 is sold at the mandi for 2, which becomes 3 at the kirana store and 4 to the consumer. When you pay Rs 20 per kilo for tomatoes, the farmer gets only Rs 5. As tomatoes travel from the farm to the mandi to the bania, each middleman gets his cut. The price spread varies by commodity and season, but studies show that the gap is less in countries with modern retail. This is because large foreign retailers usually buy directly from farmers without middlemen. Thus, they can pay Rs 8-10 to farmers for the same tomatoes and sell them for Rs 15-17 to consumers, and still make a profit. Some middlemen will lose out but P Chengal Reddy, secretary-general of Consortium of Indian Farmers Associations says, "India has 60 crore farmers, 120 crore consumers and half a crore traders. Obviously, government should support farmers and consumers. FDI in retail will bring down inflation.”

It will also save food from rotting. Global retailers have perfected a cold distribution system. By investing in thousands of cold storages and air-conditioned trucks, they will reduce farm wastage, and bring a revolution in transport, warehousing, and logistics, as they have done in major countries like Argentina, Brazil, Chile, China, Indonesia, Malaysia, Russia, and Thailand, which have allowed 100 per cent FDI in multi-brand retail since the 1990s.

In none of these countries have small stores been wiped out; nor are there complaints of predatory pricing by supermarkets—the two fears expressed in the past two weeks. According to a recent study, small outlets have grown by 600,000 in China since 2004. “In Indonesia, after ten years of opening FDI in multi-brand retail, 90 per cent of the business remains with small traders, while employment in the retail and wholesale sectors grew from 28 million to 54 million from 1992 to 2001”. Kirana stores continue to succeed because they offer personalized service, give credit and deliver to the house.

This issue goes beyond shops and supply chains to whether India’s democracy can throw up the sort of leaders who can reach out and persuade opponents about much needed reforms. This was a test for the Prime Minister. He made a bold decision to usher in a retail revolution. He gave a choice to the states to opt out of the reform. He may have failed this time but if he is courageous he will persist and win the next time because he is doing the right thing for the nation.

Duty or revenge, no one is above the law

On a sweltering afternoon on September 29^th principal district judge S. Kumarguru began to hand out sentences. There was a hushed silence in the packed courtroom in Dharmapuri, Tamil Nadu. He began at 3.30 but could not finish until 4.40 because he had to read aloud the names of 215 government officials. Among those convicted were 126 forest officials, 84 policemen and 5 revenue officials. Seventeen were convicted of rape and they were sentenced from seven to 17 years; others received from one to three years on counts of torture, unlawful restraint, looting and misuse of office. Had 54 of the accused not died in meantime, the sentencing would have taken longer.

Early on June 20, 1992 four teams of government officials descended on the adivasi hamlet of Vachathi, near Sathyamangalam forest, also home to the dreaded brigand Veerappan. They assembled the villagers beneath a neem tree and let loose a reign of terror as they searched for smuggled sandalwood. They picked up 18 teenage girls and dragged them into the forest, where they raped them repeatedly. They only brought them back at 9 pm. Claiming a haul of sandalwood from the riverbed, the officials then put 133 villagers in jail.

How does the human mind begin to cope with this soul-numbing news? My first reaction was horror at the rape of teenage girls by men in uniform. Second, was a feeling of relief and catharsis when punishment was meted out to powerful men. The third emotion was outrage at those who allowed the case to drag for 19 years. Then questions arose in my mind. How could this happen in the first place? And was this not as serious an act of corruption as the 2G scam? And why was the nation quiet?

The last time I had felt similar emotions of revulsion was in reading about Ashvatthama’s night time massacre of the sleeping Pandava armies, which had turned the mood of the Mahabharata from heroic triumph to dark, stoic resignation. Ashvatthama was a fine young man but he was totally transformed by his father’s brutal murder. Many of the officials in the Vachathi raid were also fine young men, but their personalities changed during the losing battle against the infamous outlaw Veerappan and they got caught in a Mahabharata-like escalating cycle of revenge. How else do you explain it?

The 65 year old Angammal, whose daughter had been raped, also spoke of vengeance. “It is sweet revenge for us”, she said, “to see those who raped our daughters being sent to jail.” Only the state is allowed to take revenge in civilized societies and we call it punishment. Some think that revenge is neurotic but I believe that the “thirst for revenge” fulfils a legitimate human need. If a good person suffers, then the bad person should suffer even more--this idea is embedded in the human psyche. Wanting to punish a villain is ubiquitous in literature and movies because it brings profound moral equilibrium to the human mind.

The statement of the senior-most official convicted, Mr. M. Harikrishnan was striking. The retired Conservator of Forests claimed that the officials “had merely been doing their duty”. The judge obviously disagreed and awarded him three years in jail “for causing evidence to disappear”. The Nazis who were tried at Nuremberg for killing Jews also had claimed in their defence that they had been doing their duty.

The Vachathi case is “one of the worst examples of the abuse of power in Independent India” said P. Shanmugam, who is one of the heroes of this story. As president of Tamil Tribal People’s Association, he worked tirelessly to bring justice for 19 years. But the real issue is this: how does one prevent such abuse of power in the future? I believe this will only come about if those charged with enforcing the law do not see themselves as above the law. To perceive oneself below the law needs a cultural change, especially in the police. The best feature of this court judgement is that senior officers have been punished for crimes committed by their juniors. Cultural change begins at the top. This is why we need Anna Hazare to continue his fight against corruption.

A primer for the corruption fighter

The dust has settled and a degree of calm prevails. Anna Hazare has returned to his village after conquering Delhi. He ought to consolidate his gains now before letting loose another storm. He would do well to sit down with his advisors in this lull and draw up a result oriented, longer term agenda to fight corruption. To this end, I offer Team Anna a primer on what we know about corruption--what works and what doesn’t--a sort of corruption fighter’s manual.

A strong Lokpal is a good idea but it should be lean and effective. Less is always more and the Lokpal will succeed if it does few things. Let it focus on the big fish and leave the smaller ones to Lok Ayuktas, Vigilance Commissions, and other agencies. The Lokpal should have the power to initiate a case without the government’s permission and its decisions should be binding. Chief Vigilance Commission (CVC) has failed for these two reasons, and it too should be reformed by removing these two handicaps. The CVC should be answerable to the Lokpal but not be under it. Similarly, Central Bureau of Investigation (CBI) should be answerable to the Lokpal, but not under it. All three—Lokpal, CVC, CBI—should be autonomous bodies. However, in CBI’s case, the “single directive” (which requires prior government permission before prosecuting senior officers) should not scrapped as suggested by the Supreme Court for it was paralyze decision making.

A lot depends on luck when it comes to who is the Lokpal. The Election Commission was a mediocre institution until the determined T.N. Seshan came along, and he was followed by another outstanding CEC, J.M. Lyngdoh. Karnataka’s Lok Ayukta has recently brought the state’s chief minister to his knees. One can help ‘luck’ by insisting on probity, toughness, will power, and courage when selecting a Lokpal.

While the Lokpal is needed medicine, it is administered long after the sickness appears. Hence, prevention is better than cure. To prevent corruption, we must reform our institutions of governance—the administration, police, judiciary, and elections. Since Indians confront the bureaucracy daily, it is the first priority. Corruption will be cut if decision making is transparent, discretion is reduced, rent seeking opportunities shrink, officers are punished for deliberate delay--the favoured tactic of a corrupt babu-- and punishment is guaranteed to the guilty.

But none of these administrative reforms will work unless the incentive system within the bureaucracy is changed from the present one based on seniority--where everyone gets promoted based on years of service--to rewarding good performance and punishing poor outcomes. The present assessment system is ineffective—you cannot have eight out of ten officers being rated as ‘very good’ or ‘outstanding’, especially when India’s bureaucracy is rated the worst among 13 countries in a survey by an independent firm in Hong Kong.

There are two types of corruption—harassment and collusive. In collusive corruption the bribe taker and giver collude—such as in the 2G scam—to steal money that belongs to the state, and both should be harshly punished. In harassment corruption, an official gives a citizen what his rightful due—a ration card or a birth certificate--only after he earns a bribe. The bribe giver is a victim here and should be encouraged to complain. This is why Kaushik Basu has suggested that a bribe-giver be given immunity to encourage him blow the whistle. The virtue of the Jan Lokpal draft is the strong protection advocated for victims of corruption. The government’s bill is superior in stipulating strong punishment for false complaints.

The Internet is our best friend in preventing harassment corruption because it brings transparency in transactions. We got our first taste when buying railway tickets and corrupt booking clerks have practically gone out of business. Placing land records on-line in Karnataka and Andhra has reduced the corrupt power of revenue officials. Those states which are using e-governance in giving birth and death certificates, ration cards, pension payments, driver license renewals have cut down on speed money. It should be mandatory for every government department to place its rules, procedures, and forms on its website. Cash transfers based on the Aadhaar smart cards will do much more to reduce the massive corruption that exists in delivering jobs, subsidised food and fuel, and other services to the poor.

Citizens Charters have been a flop so far but post-Anna some state governments, like Delhi, have decided to implement these and from September 15 officials will be fined Rs 10 to Rs 200 per day when they fail to deliver services to citizens on time. Five states have announced that they plan to follow suit.

Land is the biggest source of corruption because government decision making is deliberately opaque. Change of land use, municipal permissions, completion certificates, plus dozens of permissions result in massive collusive corruption. The amounts are even larger in awarding contracts for natural monopolies--mining, oil and gas, telecom spectrum—and the answer is open, transparent bidding (like an auction) under a firm regulator. Because most industrial and large real estate projects require environment clearance, the ‘licence raj’ had shifted to this ministry.

Ever since Indira Gandhi disallowed corporate donations, elections are now only fought with black money. Cleaning up electoral funding has to be a priority along with other electoral reforms such intra-party democracy and banning criminals from politics. Judicial and police reforms are crucial. The police cannot be a lackey of state chief ministers and has to be given autonomy as reform commissions have suggested. Given the growing cases of the misconduct of judges, the judicial appointments must come under a judicial commission comprising of non-judicial persons.

Finally, the most important lesson--keep the government small. A lean government tends to be more competent and less corrupt. Sensible governments no longer run industries, airlines, and hotels. Fewer controls and fewer licenses mean less corruption, as we have seen since 1991. Reforms are the best medicine against corruption.

India Says No to $80 Toilet Paper, Wall Street Journal

An anticorruption campaign has given voice to a growing middle class tired of public indignities

A year ago, no one in India could have imagined that cabinet ministers, powerful politicians, senior officials and CEOs would be in jail now, awaiting trial for corruption. The credit for this dramatic shift belongs in no small part to the anticorruption movement of a 74-year-old activist, Anna Hazare, supported by determined justices of the Supreme Court, an exceptional auditor general, rival television channels in search of "breaking news" and, crucially, a newly assertive Indian middle class. The long-term impact of this movement is unclear. It could lead to something profoundly good, or it could destabilize the whole system.

A series of corruption scandals has swept India over the past year. These include graft-ridden purchases for the 2010 Commonwealth Games in Delhi, for which rolls of toilet paper were purchased for $80 each; the government's sale to favored companies of licenses for the mobile-phone spectrum, at prices so low that they are estimated to have lost taxpayers somewhere between $10 billion and $40 billion; and the grabbing of expensive apartments in Mumbai by politicians, officials and generals on prime property that was meant for war widows.

Fighting this pervasive corruption has been Mr. Hazare, a villager in a white rural cap who evokes the figure of Mahatma Gandhi and has successfully emulated Gandhi's protest tactics of hunger strikes and peaceful marches. Mr. Hazare launched his first hunger strike, a five-day fast, in April. As a result, the government agreed to draft a bill creating an anticorruption agency that would investigate complaints against officials, but the bill was weak, and Mr. Hazare rejected it.

His second hunger strike, which he staged last month in Delhi, drew tens of thousands of supporters and spurred the government to agree to discuss his own version of the bill—a considerable victory, since politicians of all parties have stonewalled the creation of an anticorruption agency for 40 years.

Many officials were taken by surprise by Mr. Hazare's support from the middle class, which is almost a third of India's population today, up from 8% in 1980. Since reforms in 1991, India has become the world's second-fastest-growing economy, and the middle class is expected to become 50% by 2022.

There are still vast areas of horrible deprivation, but a significant number of Indians have experienced a palpable betterment in their lives. As a result, the discourse of the nation, or what Alexis de Tocqueville called "habits of the mind," are changing. People have begun to believe that their future is open, not predetermined, and can be altered by their own actions.

The same thing happened in the West after 1800. In her book "Bourgeois Dignity: Why Economics Can't Explain the Modern World," Deirdre McCloskey argues that the West rose not only because of economic factors but because the discourse about markets and innovation changed. People became encouraging of entrepreneurs. New perceptions and expectations emerged.

In the same way, the rise of India and China has brought dignity to their middle classes. Ordinary conversations over chai in India are now about markets and focus on the contrast between private success and public failure. While the private sector provides cutting-edge services and products to the world, the roads outside are potholed, electricity is patchy and water supply erratic. The difference between the two worlds is accountability: In private life, if you don't work, you don't eat; in public life, jobs are effectively for life. Indians believe that they are rising despite the state and are often heard to say that "India grows at night, when the government sleeps."

India's electoral politics do not cater to this aspiring middle class. Every party treats the voter like a victim, focusing on welfare programs or historical wrongs. Politicians have not realized that with high growth, mobility and a demographic revolution, aspiring Indians will soon overtake those who see themselves as victims. The person who got India's 851,695,668th cellphone in June was a village migrant, and no one in the country's political life captures his hopes. An op-ed about Mr. Hazare's protest movement in the Times of India had just the right title: "It's the middle class, stupid."

For too long Indians have been denied dignity by public officials who ride in cars topped with flashing lights and make citizens wait endlessly in gloomy offices, placing miles of red tape in their way to get even basic documents. The newly assertive middle class will no longer put up with this. As the social anthropologist Shiv Vishwanathan says, "The consumer revolution that we have experienced in the past two decades has told the citizen that he can expect a higher quality of governance."

It would be a shame if Mr. Hazare's movement contributed to undermining India's finely crafted constitutional system, which has made its democracy the envy of the developing world. Street protests and hunger strikes can gain attention, but legislation requires working within the system, in the messy details of parliamentary negotiation.

Mr. Hazare's bill is needed medicine, but it is being administered long after the sickness appeared. Clearing swamps is a better way to tackle malaria than administering quinine.

To prevent day-to-day corruption, Mr. Hazare and others like him need to work on reforming the rules of India's bureaucracy—creating transparent decision making, reducing discretion, shrinking opportunities to manipulate public rules for private gain and penalizing delays (the favored tactic of a corrupt bureaucrat). Indian bureaucracy needs to be transformed from a system based on the benefits of seniority to one that rewards good performance and punishes poor outcomes.

India's churning reflects a deep middle-class anger with pervasive graft in the government, police and judiciary. Bourgeois dignity may well hold the key to this Indian puzzle, but it needs to find expression within the bounds of the country's constitutional system. Street theater seldom makes for lasting reform—and sometimes brings down the good with bad.

—Mr. Das is the author of "The Difficulty of Being Good" and "India Unbound."

Judging sex, lies, war and yoga politics

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Good omens for rule of law in India

On April 8, the day before Anna Hazare broke his fast, I was in Cairo to present the ‘Indian model’ for Egypt's future. After the conference, a few of us wandered off to Tahrir Square, where a massive demonstration had broken out. Through a twist of fate, I found myself suddenly on the podium, offering good wishes to the 37,000 protesters from the people of Al Hind. In the next three minutes I tried to convey a lesson from India’s democracy: it is not elections, not liberty, not equality that finally matters; it is the rule of law. Corruption persists in India because the rule of law is weak.

That night at three am I woke up to the sound of gunfire. I thought they were bursting crackers. There was a knock, and my host whispered that the army had moved into Tahrir Square and I should be prepared to flee as my ‘three minutes of fame’ was posted on YouTube. Filled with fear, I quickly changed, picked up my laptop and passport, and waited. I must have fallen asleep because the next moment it was 7 o’clock and I was still alive. I saw a cloud of smoke above Tahrir Square and switched on the TV to learn that the army had left as quickly as it had come, leaving two dead.

I returned home much relieved. My Egyptian adventure made me view our own politics differently. Although I share Anna Hazare’s rage against corruption, I feel ambivalent. However, the arrogant grandees of the political class, who from their private jets and black SUVs, are trying to smear his anti-corruption movement have not understood the limited nature of political power in India.

India has always had a weak state and a strong society. Because political authority was either too distant or irrelevant to its daily life, we never allowed state power to be so concentrated, as in China, that it could reach deeply and change its basic social institutions. The type of despotic governments that emerged in China or Russia, which were able to divest the whole society of property and personal rights, have never existed in South Asia. Hence, India’s history is of relative political disunity while China’s is one of strong empires. Not surprisingly, India became a chaotic democracy after Independence. In the 1960s Gunnar Myrdal called it a ‘soft state’. Today, India seems to be rising from below, marching towards a modern, democratic and market-based future without too much help from the state. It is quite unlike China, whose success has been scripted from above by an amazing state that has built incredible infrastructure.

What is this society that has held India together for centuries? Jawaharlal Nehru defined it in three words: village, caste, and family. It consists of the over half a million autonomous, self sufficient villages; more than two thousand, hierarchical jatis or sub-castes; and the joint family. What is significant is not hierarchy, as most think, but the idea that the group is more important than the individual. India’s society is changing today with power shifting from traditional to the civil society, including media.

The Indian state evolved from a tribal society, and the tribal raja’s authority was limited by his kinsmen. The land did not belong to the king but to the clan families. Even when sovereign states emerged in the 6th c BC, like Magadha, the king’s power was limited by dharma or the law, and by the Brahmin who interpreted the law. The law did not spring from the king as it did in China, but was above the monarch who was meant to protect it. The Raja who violated dharma is called a mad dog in the Mahabharata, and it calls for a revolt against him.

A successful nation must have an effective state and society. A weak state tolerates corruption, creates uncertainty in peoples’ minds, and weakens the rule of law. People generally obey the law because they think that it is fair and applies to everyone equally. But if policemen, ministers, and judges can be bought, then people lose confidence in the rule of law.

The belated arrest of Suresh Kalmadi, the charging of Kanimozhi, and A. Raja already in jail—these are good omens for the future of the rule of law in India. It is now important to try and sentence the guilty speedily. The political class has stone-walled a Lok Pal bill for 40 years. Anna Hazare’s original version was hugely flawed but with persistence we will soon have an effective law. A Lok Pal bill is not a panacea but it is a big step in the right direction. Meanwhile, I feel grateful that India has come a long way. Unlike Egypt, I do not have to fear the army, nor Islamists high jacking our secular democracy.
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It is immoral for us to slow growth

Chinese Premier Wen Jiabao said last Sunday that his country’s annual growth target has been lowered to seven percent for the next five years. He made this remark in an on-line chat with the nation. “We must no longer sacrifice the environment for the sake of rapid growth as that is unsustainable,” he said. He urged the government to shift its focus from GDP growth to the quality and benefits of growth.

Premier Wen’s statement comes in the wake of huge concerns in the West over the impact of China’s (and India’s) economic growth on the global environment. China's GDP growth reached 10.3 percent last year and is expected to be nine percent this year. Although he was talking to his netizens, Wen’s message was aimed at his critics in the West. His remarks appear to be eminently sensible--who could be against protecting nature? But is Premier Wen right to slow down the growth rate of a poor nation? I do not think so.

There is a saying that a woman can either be beautiful or faithful but not both. The proverb illustrates the human tendency to create mental boxes and fit people into them. Wen appears to have fallen into the ecological trap in believing that you can either have high growth or a clean environment. We too will soon be asked that if China is taking steps to lower its growth rate, why is India still obsessed with high growth? Indeed, the day after Wen’s online chat, India’s finance minister Pranab Mukherjee presented a road map in the Budget to achieve a 9% GDP growth rate, hoping that it might go higher.

The dichotomy between high growth and protecting the environment is false. A nation can grow rapidly and save its environment just as a woman can be both beautiful and faithful. The only sensible way to grow, in fact, is to make peace with nature and save the green-blue film on which life itself depends. But to ask a poor country to slow down its economic growth is immoral—it is to condemn its poor to penury. The past two hundred years teach us that the poor will only rise into the middle class unless there is growth. Growth creates jobs and wealth, which the government taxes and spends on roads, education and healthcare, and this enables the poor to rise. Indeed, 350 million Chinese and 225 million Indians have risen out of poverty in the past 25 years because of high growth.

Once upon a time I used to be a huge fan of the ecology movement, but I feel gloomy today. I am upset that so many fine projects have suffered from endless delay at the hands of activists. No one calculates the real cost of delay--the lost future of a starving child who does not realise a dream when a factory or power plant does not come up. The movement has evolved into an anti-science, anti-growth, secular religion. I shudder to think that if activists had been as zealous in the 1960s, they would have killed India’s ‘green revolution’, which multiplied our wheat and rice crop many times and succeeded in feeding 500 million additional mouths.

Meanwhile, bureaucrats and politicians have captured ecology and made it a lucrative business in India. Indeed, the prime minister complained in 2009, “Environmental clearances have become a new form of Licence Raj and corruption.” Hence, I was glad when a clean, modern minister came in 2009. But my optimism soured quickly when he turned activist and began to re-open major projects, such as Niyamgiri, Lavasa and POSCO, and proceeded to “make an example” of them. His arbitrariness resounded around the world and turned investors against India. The Reserve Bank reported recently that India’s foreign direct investment declined by 36% in the first half of 2010-11 primarily because of “environment policies in mining, integrated township projects and ports.” Of course, the environment ministry must ensure that projects meet standards, but it must do so by creating transparent institutions and not through arbitrary acts.

All of us must become sensitive to nature, especially with the rapid degradation of forest cover and global warming. But we must also be aware of the fundamentalist and irrational nature of the ecology movement, which is willing to sacrifice human opportunities to preserving nature. Environmentalists have nostalgia for vanishing, old lifestyles and refuse to admit that their earlier Malthusian predictions were wrong. Despite massive population growth, people around the world are better off today, and as prosperity and education spreads, population growth has begun to slow down in most countries. Obviously, we have to protect nature, but if it does come to a choice, human beings, I think, must precede nature. To believe the contrary is not only elitist but also immoral.

Politics of freebies promises a bleak future

The stench of corruption spreads quickly from Delhi. With the news that Tamilnadu chief minister’s daughter, Kanimozhi, is soon to be charged by the CBI, the money trail in Raja’s 2G scam seems to be established. The noose is tightening and DMK’s PR machine is working overtime to spread ‘sincere lies’ before the state election on April 13. Each of the major parties--the DMK and the AIDMK--commands the loyalty of about a third of the voters. The Congress, DMK’s junior partner, controls 12% to 15% of the vote and Vijaykanth, AIDMK’s partner, holds around 9%. The AIDMK has the anti-incumbency advantage but it will be a close contest. What should concern us, however, is another form of corruption raging under the bright Tamil sun that challenges our political morality.

The DMK believes it won the last election because it promised free television sets. To promise is one thing but the DMK government actually gave away millions of TVs! The sets were paid for from the state treasury--not party funds. In the coming election, voters are being promised fans, mixies, laptop computers, and 4 gm of gold for a poor bride’s mangalsutra. Tax payers in Tamilnadu are outraged but Kanimozhi asks, ‘what is wrong in giving people what they need?’ People wonder, however, if free TVs have a link to DMK owning a Tamil TV channel. Some greedily ask, will the next politician offer Rs one lakh cash?

It is not that Tamils don’t value integrity. They just don’t expect it from their politicians. They cynically believe that politics is the art of the sincere lie and cite the example of Dhritarashtra in the Mahabharata, who flourished through hypocrisy and nepotism. Chennai is not so different from Hastinapur and Tamil voters would prefer to be bribed openly. Populist give-aways have always been a great temptation. Roman politicians devised a plan in 140 B.C. to win votes of the poor by giving away cheap food and entertainment—they called it ‘bread and circuses’. Punjab’s politicians gave away free power and water to farmers, which destroyed the state’s finances and also the soil (as farmers over-pumped water). Hence, Haryana has supplanted Punjab as the nation’s leader in per capita income.

The idea of free TVs and mixies is morally troubling. The election commissioner has pleaded helplessness, saying that freebies only contravene the law when they are distributed before an election. Most of us do accept state spending on public goods. Roads, parks, and schools are examples of public goods as they are open to everyone. However, spending public money on private goods (such as TVs) seems offensive. It is legitimate for the state to equip schools and public libraries with computers but not to give free laptops to a section of the people. It is just as wrong to erect statues to oneself with public funds. But the Supreme Court has ruled otherwise. It has recently absolved Mayawati, arguing that the people of U.P. had elected her and can remove her at the next election if they object to her statues. There is a fine but important line between public and private goods.

Nothing quite explains Indian politics as the fact that we embraced democracy before capitalism. The rest of the world did it the other way around. India became a full fledged democracy in 1950 with universal suffrage and extensive human rights, but it was not until 1991 that it opened up to the accountability of market forces. This curious historic inversion means that we learned about rights before we learned about duties. In the market place, one has to produce before one consumes and earn a salary before one can buy a TV. In the same way, an election is supposed to enforce accountability in competitive politics. A voter should vote on the basis of performance. Instead, the Tamil voter is going to vote for a free mixie. Because democracy came before capitalism, Indian politicians have a tendency to distribute the pie before it is baked.

It is ironic that Tamilnad should be the setting for this corrupt practice. The state has high literacy and a reputation for being one of India’s best governed and most prosperous. It has had a succession of good administrations no matter which party was in power. Food rations actually reach PDS shops and NREGA wages are actually paid to the deserving! With prosperity, Tamils have outsourced menial work and are now learning Hindi in order to speak to their Bihari servants. But political morality evolves through experience.

Free TVs mean less money for investing in the future--in roads, ports, and schools. Eventually Tamilnad will pay a price—for without investment, growth will slow down. Ask the voters of Punjab. One day, the Tamil voter will also understand the trade-off—free TVs mean that their children will have a poorer future.

Is it Criminal to think small in India?

There are two spaces in the politics of India. And one of them is empty. The two spaces reflect the classic division between those who look ahead and aspire versus those who look back and complain. Our political parties cater to the second--to the victim in us through their politics of grievance. The present gridlock in the parliament is also symptom of the same dispirited politics—no party is sufficiently hungry for reform to break the logjam. No one reflects the spirit of a rapidly growing India. Nor is anyone thinking big--and it’s criminal to think small in India. Until the second space is filled, our politics will not be whole.

Congress appeals to the victim in the ‘aam admi’ with an ever expanding menu of job guarantees, food, gas and kerosene subsidies, and more. The BJP panders to the sufferer of historical Muslim misrule and to Congress’ minority vote-bank politics. Mayavati and caste parties focus on the historical injustice to Dalits and OBCs. The Shiv Sena gratifies the injured pride of the ‘Marathi manoos’. All of this is about the politics of grievance and injustice.

India, however, is changing dramatically. It is nothing short of a miracle that it has become the world’s second fastest growing economy in the midst of the most appalling governance. With high growth, mobility, and a demographic revolution of the young, Indians who aspire will soon overtake those who see themselves as victims. Pew surveys show that a majority of Indians believe that they are better off than their parents and that their children will do even better. The person who got the 750 millionth phone number last month was a village migrant whose dream keeps slipping as his calls keep dropping partly because A. Raja corruptly handed out the 2G spectrum. India’s 100 millionth internet user in 2013 will have information which only the most privileged could access twenty years ago. No one in India’s political life captures their hopes.

China’s politicians do a far better job. While we debate if growth is pro-poor, China talks about growing rich. It understands that performance is a function of expectations. Those with higher expectations get higher performance. China no longer thinks itself a Third World country—it is challenging America today. In India, only a few politicians-- Nitish Kumar, Sheila Dixit, and Narendra Modi--appeal to the aspirers. They speak the language of governance, roads and schools. But we need many more of them.

When I put this to a powerful Congress politician, he said that ‘India shining’ had died in the 2004 election. I gently reminded him that India’s high growth economy had delivered 300 million into the middle class; another 250 million had been lifted out of poverty since the 1980s. So, a total of 550 million aspirers are surely worth fighting over. ‘Ah, but there are still another 550 million whiners, and their votes are more reliable than the shiners!’ he said. If poverty were to magically disappear in India, the Congress party might lose its reason to exist.

Could the BJP become a party of aspiration? Vajpayee tried this when he unleashed the telecom and IT revolutions. His ‘India shining’ slogan did not lose the 2004 election—in fact, it was the defeat of key NDA allies in Andhra and Tamilnadu. But even he could not shed Hindutva. There is no one today in the BJP who has the courage and vision to discard the old baggage and convert it into a classical right of centre, secular party that stands single-mindedly for reforms and good governance.

Aspirational politics would tackle our problems differently. Take, for instance, food inflation. The politics of grievance applies short term bandages--it tries to catch hoarders, stops forward trading, forbids export of grains when the country has had a bumper rice harvest and expects a record wheat crop (while ignoring Rs 17,000 crores of grains rotting under the tarpaulins of FCI). The politics of aspiration would recapitalize and reform agriculture and raise long term supply—it would allow competition against FCI in the warehousing of food, permit foreign investment in retail to establish cold chains, and allow farmers to lease their lands in order to raise productivity.

Who will fill the empty space in Indian politics? None of our parties understands that we live in a time of revolutionary change. Could it be Rahul Gandhi? But so far he hasn’t given any hint that he thinks big. India has doubled its cotton crop in the past five years; yet there have also been suicides of farmers in the cotton growing areas. Both facts are correct. Rahul Gandhi has chosen to focus on suicides. The future, however, will be built by those who focus on the first, who think big and give young Indians a sense of limitless possibilities.

Don’t be silent, prime minister!

“The things we admire in men, kindness and generosity, openness, honesty, understanding and feeling, are the concomitants of failure in our system. And those traits we detest, sharpness, greed, acquisitiveness, meanness, egotism and self-interest, are the traits of success. And while men admire the quality of the first they love the produce of the second.” In these famous lines, John Steinbeck, goes to the root of our present crisis in public morality.

He has also expressed the dilemma of every Indian mother who has to give a name to her son. Unlike the West, where everyone is called Tom, Dick or Harry, parents in India spend months trying to decide their child’s name--they are, after all, forecasting its future. Torn between names that suggest goodness and success, they prudently choose success, which explains why every fifth Indian boy is called Arjun, and no one Yudhishthir.

Mahabharata’s heroes come to mind because there are parallels between the epic’s lament and the things we might say about our leaders today. Our republic has been in a state of continuing crises for months; the epic is a continuing repository of crises in public morality. Just as we have a problem with our governance institutions, so did the epic. What is at stake, both then and now, is our conception of success. Andimuthu Raja, former Minister of Communications, causes us discomfort because he has undermined this conception. Until recently, Raja was a huge success in the world’s eyes—he had power, money and status. Then he fell. We turn to Yudhishthira, the epic’s un-hero, to find out if there another way of engaging with the world. He (and Steinbeck) raise thorny questions: What price are we are willing to pay for worldly success? Is it possible to be both successful and good? Why high status cannot be conferred on a person who is honest and kind?

The problem of silence is at the heart of today’s political crisis. The rage of the Indian public is over an honest Prime Minister who seems to be presiding over one of the most corrupt governments in recent Indian history. In these dark days, people have desperately wanted to clutch on to an honest man. They found one in selfless, ethical Manmohan Singh. So was Bhishma, yet he remained silent when Draupadi was being disrobed. When Draupadi insistently questioned the ‘dharma of the ruler’, everyone remained silent. Then Vidura scornfully spat out at the immorality of silence: when a crime occurs, he said, half the punishment goes to the guilty; a quarter to his ally; and another quarter falls on the silent.

Our prime minister’s silence in the 2G scandal has been deeply disturbing. Soon after Raja announced his fraudulent policy in September 2007, the PM sensed that a crime of huge proportions was afoot. He wrote to Raja objecting to his policy, asking him to be transparent. Raja replied immediately, defending himself. On 3 January 2008, the PM acknowledged this letter—yes, ‘acknowledged’, as though he had acquiesced. This gave Raja the go-ahead to issue the licenses. In May 2010, the PM admitted that Raja had indeed written to him. Why did the Prime Minister fall silent after having objected to the policy?

Raja has shamed us before the world. We, however, have always known the ugly truth: India’s corruption begins when one is born--you have to bribe someone to get a birth certificate. It ends when one dies, when you are forced to ‘buy’ a death certificate. In between lies a dreary life of civic unvirtue, of continuous rishwat and sifarish. Founded on such high ideals, why is India so corrupt? There is nothing wrong with our genes. And the issue that Yudhishthira and Steinbeck have raised is a universal problem. You cannot blame parents for wanting children to grow up to be winners in life’s rat race. But you can teach children to do the right thing--not to be silent when they see a crime. You can also reduce corruption by reform of the institutions of governance.

What makes Draupadi’s question admirable is her insistence on dharma. Huge energies are spent on debates between the political Left and the Right when the real divide is between right and wrong conduct. Manmohan Singh understands this. This is why he promised to attack corruption through governance reforms in 2004 when he came to power. Reforming is never easy—it is like waging a war at Kurukshetra—but it must be done. The purpose of the Mahabharata’s war, we discover at the epic’s end, was to cleanse the earth which was groaning under the accumulated iniquity of its rulers. Our own rulers should prepare for the same fate as befell the sons of Bharata, unless they act now. The rulers of France also lost the faith of their people and suffered that fate in 1789.

Chance to start afresh

There is a lesson in the morality play that we are witnessing today which has been triggered off by the 2G financial scandal. It comes from a scene in Malcolm Gladwell's recent collection of essays called What the Dog Saw, and I have condensed it below:

On the afternoon of October 23, 2006, Jeffrey Skilling sat at a table at the front of a federal courtroom in Houston, Texas, waiting to be sentenced by the judge. Mr. Skilling was no ordinary criminal. He was wearing a navy blue suit and a tie. Huddled around him were eight lawyers. Outside, television-satellite trucks were parked up and down the block. Skilling was head of the energy firm, Enron, that Fortune magazine had ranked among the “most admired” in the world and valued by the stock market as the seventh-largest corporation in the United States. It had collapsed five years ago, and in May, Skilling had been convicted by a jury for fraud, and almost everything he owned had been turned over to compensate former shareholders.

“We are here this afternoon,” Judge Simeon Lake began, “for sentencing in United States of America versus Jeffrey K. Skilling, Criminal Case Number H-04-25.” The judge asked Skilling to rise. He then sentenced him to 292 months in prison – twenty-four years, one of the heaviest sentences ever given for a white-collar crime. He would leave prison an old man, if he left prison at all.
“I only have one request, Your Honor,” said Daniel Petrocelli, Skilling's lawyer. “If he received ten fewer months, which shouldn't make a difference in terms of the goals of sentencing, if you do the math and you subtract fifteen percent for good time, he then qualifies under Bureau of Prison policies to serve his time at a lower facility. Just a ten-month reduction in sentence….” It was a plea for leniency. Skilling wasn't a murderer or a rapist. He was a pillar of the Houston community, and a small adjustment in his sentence would keep him from spending the rest of his life among hardened criminals. Judge Lake thought for a while, then he said “No”.

Indians are not unfamiliar with Enron. As a result of its involvement in the beleaguered power plant at Dabhol, the words ‘crony capitalism' entered our vocabulary in the 1990s. Unlike India, persons in high places in the United States serve time in jail. American judges are in the habit of meting out exemplary punishment, as Judge Lake did to Jeffrey Skilling of Enron. Indians would dearly like to substitute in the narrative above any number of names, although Andimuthu Raja, former Minister of Communications is the one that comes to our mind today.

Wasted rage?

As things stand in today's India, we investigate, charges are filed; we even establish guilt; but then years go by, and nothing happens. People lose interest. It would be a real shame if all the valuable rage we have accumulated over weeks in the 2G affair were to go waste. One way to ensure it does not happen is to actually put a few people behind bars this time and do it reasonably quickly. It would go a long way to restore our faith in the system.

In a recent opinion poll, 83.4 per cent of the people in eight major Indian cities believed that corruption had gone up after liberalisation, which only confirms that people still do not understand that corruption persists in India because reforms are incomplete and scams occur in sectors like mining and real estate, which have not yet been reformed. That it occurred in telecom, an otherwise reformed sector, does come as a surprise. It has happened because the minister created artificial scarcity in the spectrum and gave it away in driblets to those who allegedly bribed him. The scam could have been avoided if the licenses were awarded via open, transparent bidding on the Internet, as in the case of the 3G spectrum.

The 2G scandal should also remind us about the real corruption of India which does not make the headlines. The ordinary, small and medium entrepreneur still faces on the average 27 inspectors who have the power to close his factory unless he pays a bribe. The most notorious are those in the excise, sales, and the income tax departments. Of course, for every bribe-taker there is a bribe-giver, who is also guilty of wrongdoing. But remember, it is an unequal relationship. The citizen is always vulnerable before a person in authority. The official holds the threat of closing a citizen's enterprise. A few states have tried to rein in petty officials but mostly they run amok, rapaciously. Hence, many young, honest men and women today shy away from becoming entrepreneurs. The ‘inspector raj' is one of the reasons that India has failed to create an industrial revolution.

Beginning of accountability

Returning to the big picture, it is a matter of some cheer that in recent months ministers have been sacked, serious inquiries have begun, individuals have been arrested. We are also heartened by Nitish Kumar's huge victory in the Bihar elections, which he claims was the result of good governance. We would like to believe that this is a turning point in our history, the beginning of some sort of accountability in our public life. It is sobering to remember, however, that we said the same thing in 1989 when Rajiv Gandhi's Congress-led government was defeated after the Bofors gun scandal when the Prime Minister's family and friends were allegedly involved in bribes and kickbacks.

We ought to take inspiration from the United States not only because it punishes guilty persons in high places as Judge Lake did in the narrative above, but it enforces its Foreign Corrupt Practices Act (FCPA) vigorously. If any of the telecom licensees in the 2G scam had been American companies—for example, AT&T-- India would have quickly found its smoking gun. Ten years ago, America's Justice Department was investigating 5 to 10 companies involving foreign bribery at any given time; today, it is 150. Under American inspiration, Britain just passed a new Bribery Act, which is even tougher than the U.S. law. To ensure that companies don't simply consider FCPA fines as a “cost of doing business,” the U.S. attempts to jail corporate officials, both American and foreign.

The rage of the Indian public would be redeemed not only by jailing a few people but also by instituting reforms in the system similar to the American FCPA. Only then will some of the taint go away from an honest Prime Minister who seems to be presiding over one of the most corrupt governments in recent Indian history.

Licence raj could kill microcredit

Although human life is less than the blink of an eyelid interms of the universe, it is staggering what it is able to create. Thirty million (yes, three crore!) poor women in Indian villages have taken small loans and started enterprises. With the loan they buy a cow to sell milk, or invest in a sewing machine to sell clothes or open a small kirana shop. What began as charity work by NGOs has become self-sustaining business, thanks to the entry of professional microfinance companies (MFIs) who are gradually replacing the village moneylender. In many districts, micro-credit is as common as a cell phone or a paan-walla. It has given women dignity, many of whom display the same intelligence and drive as our best entrepreneurs in Bangalore. It is financial inclusion at its best.

Success, however, creates envy as the Pandavas discovered in the Mahabharata. The problem began in October when politicians in Andhra Pradesh accused microfinance companies of loan sharking and causing suicides. They called for interest rate controls and told women to stop repaying loans. The police began to imprison MFI employees. The state issued an ordinance that requires MFIs to obtain government permission for each loan, which means that 1.3 crore tiny loans in Andhra villages will require prior approval—an impossible task, reminiscent of the dreaded licence raj and a clear invitation to bribery. Meanwhile, a credit culture of weekly repayments built over a decade is destroyed. Banks, fearing default, have stopped lending to MFIs, and this miraculous business is about to close, thus killing the hopes of three crore micro-entrepreneurs.

Microfinance companies charge 24% to 32% interest, which appears high until you realize that we too pay 30% on our credit cards and village money lenders charge 65% to 100%. Even the Nobel Prize winning Muhummad Yunus’ Grameen Bank charges 20% interest (based on subsided credit). The truth is that it is expensive to deliver and collect loans weekly in rural areas. Customers do not think it high because they earn far more from the businesses they start with their loans. Success invites rogues and some loan sharks have disguised themselves as MFIs (with names like ‘Vessel under the Borewell’) and are giving the industry a bad name by using strong arm collection tactics. Suicides are, of course, a terrible tragedy. But it is extremely unlikely that suicides could have been caused suddenly by professional MFIs who have built trust with customers over a decade. If rogue MFIs are responsible, they should be punished. Why kill the ethical ones through Licence Raj?

Officials want to shut this business because it threatens the government’s microfinance company which gives subsidized loans at only 3%. But women prefer private MFI loans because they say you need to bribe to get a government loan. And when you add the cost of multiple trips to the city and the bribe, the government loan ends up costing over 40%. The private MFI delivers the loan at the doorstep every seven days. Although official’s claim that women are being duped, we all know that a poor person is far more aware of every paisa she earns and spends.

Politicians had so far ignored MFIs, but the successful public stock offering (IPO) of one of the microfinance companies woke them up. If MFIs were making good money, why couldn’t they have a slice? They colluded with officials to announce a harsh ordinance that has brought the entire micro-lending industry to its knees. Since it is a matter of survival, they are waiting for MFIs to come running to them with bribes.

Microfinance should be regulated, but in an intelligent manner. MFIs should be transparent and be obliged to disclose interest rates. Competition should be encouraged—it will lead to lower rates. Rogue MFIs should be caught and punished. Imposing caps and harsh interest rates controls will destroy the industry as it did in Tunisia and Columbia. Countries that had tried to control loan rates have invariably killed their microfinance business for industry margins are thin. Our regulators should learn from countries like Peru, which has imposed capital buffers, and this has led to a stable environment.

This astonishing story reminds us that the poor do not need charity but opportunity. Just when microfinance’s success is inspiring other businessmen to seek a ‘fortune at the bottom of the pyramid’, such as Tata’s Nano, its own death would be a tragic loss. Crores of women would be thrown into the money lender’s clutches. Andhra’s image will also take a beating. Until recently, Andhra was hailed for pioneering this industry. An international official was heard to say recently, ‘corrupt officials and politicians of Andhra are about to kill the chances of the poor’. The new Chief Minister of Andhra, Kiran Kumar, should now step in and not allow this to happen.

In search of America’s liberty and India’s dharma

It is one thing to win power, another to wield it. Two dispirited leaders met in Delhi this week. President Obama was chastened by dramatic electoral losses in the US Congress and Prime Minister Manmohan Singh disheartened by never ending corruption scandals. Both seemed to have forgotten the fundamentals of what created their respective democracies. Just as one cannot understand America without the concept of liberty, so is India inexplicable without the idea of dharma. At the end, their spirits did lift but both leaders have much work to do to restore confidence in their ideals.

John Boehner, the new speaker-to-be of the House of Representatives and an architect of the Republican recapture of power, explained Mr Obama’s fall from grace. He said that President Obama had ‘ignored the values that have made America—economic freedom, individual liberty and personal responsibility’. It does not matter if Mr Boehner is right; half of America believes it. Every nation is an ‘imagined community’ and what voters ‘imagine’ is what counts. America’s image of itself is a land of opportunity and entrepreneurship—it is not a European style welfare state with a culture of entitlement. Mr Obama forgot liberty in is his pursuit of equality, say his critics.

Just as America’s founding fathers were obsessed with liberty, so were India’s founders deeply attached to dharma--so much so that they placed the dharma-chakra in the middle of the Indian flag. The Congress party still does not realize how much it is diminished by the relentless series of corruption scandals. People insistently ask, ‘where is dharma in our public life?’ This is a sad because we placed so much hope in a prime minister, who is personally honest and who promised good governance as his primary goal in his first three major speeches when the UPA first came to power in the middle of 2004.

The ideal that exists in the Indian imagination is of a ruler guided by ‘dharma’. In this context, dharma does not mean ‘religion’, which is a recent usage that emerged only in the 19th century Bengal when Christian missionaries claimed that ‘Jesus’ path was the true dharma’. Hindus countered their challenge, claiming that theirs is sanatana, ‘eternal’, dharma. The meaning of public dharma which inspired the makers of our Constitution is ‘doing the right thing’.

Although the economic circumstances of India and America are different, the answers to their problems are surprisingly similar. America is a rich country which is stuck in a jobless recovery--wages have been lagging for decades. Its best and brightest prefer to work in services and its industrial base is fast eroding. India is poor but rising rapidly. Like America, its high growth rate is driven by services, not by industry. In our euphoria over India’s growth we forget that we still have to create an ‘industrial revolution’. Only through low tech, labour intensive industry will we be able to create jobs for the rural masses.
Both India and America have to get their best and brightest to go into industry rather than glamour jobs in finance.

Instead of creating bogus jobs through employment guarantee schemes, India needs to create genuine jobs through private enterprise. To do this we need to reform our labour laws; pass the land acquisition law; remove ‘inspector raj’ which encourages bribery but discourages entrepreneurs; and push massive skills training through public private partnerships. Our present high growth will only take us to a middle income status--$5000-$7000 per capita income. After that India will get stuck like many Latin American states, unless we improve governance and create an industrial revolution. ‘Let us not take high growth for granted’, says the respected economist, Ajay Shah.

India should also emulate Mr Obama’s obsession to improve the ‘quality’ of primary education in order to build our industrial base. He is the first Democratic president to say that ‘bad teachers should be fired if they can’t train kids to succeed’. India’s problem with government schools is much worse than America’s. One in four government primary school teachers here is absent and one in four is not teaching. Yet, our new Right to Education Act is silent on outcomes. Mr Obama’s courage to take on teachers’ unions in America should inspire our leaders to also speak out about the ‘dharma of a teacher’.
Mr Obama’s visit ended on a high note and two politicians have since been sacked. The real work must now begin. To restore dharma in public life, Dr Manmohan Singh must drop corrupt members in the UPA cabinet; push civil service reforms to make officials (including school teachers) accountable; enact labour reforms and the land acquisition bill; stop the dangerous Food Security Bill, which holds the potential for becoming the biggest corruption scandal in India’s history. Only then will he begin to restore dharma and make India deserving of ‘great power’ status.