Kanika Datta: Corruption has a deterrent

SWOT

Does corruption matter in a country's "corporate" reputation? Does it really dissuade foreign investors or hamper economic growth? India's low ranking on the Transparency Index year after year rarely attracts more than an "I-told-you-so" comment from commentators and analysts. Many of them, however, tend to hedge their remarks given India's relatively decent economic performance despite the many visible handicaps, corruption being just one of them.

At least one senior journalist I know strongly holds the view that corruption does not really matter in the bigger scheme of things; it's a government's performance that counts. Look at China or the south-east Asian economies (notably Korea), he said. None of them can be considered lily-white. Almost all are havens of crony capitalism in one form or another.

Most businessmen in the region are even considerate enough to offer receipts for bribes taken, to help reconcile any double accounting mismatches the briber may incur. Yet, the world rarely censures these countries or their business practices. Foreign direct investment continues to pour in and exports surge, making these economies models for India to follow. Even Indonesia's Suharto, who suddenly emerged as a villain in the US establishment press in the late nineties for all manner of business transgressions, largely escaped criticism until an IMF restructuring package saw prices go out of whack, provoking civil unrest.

The notion that corruption is a minor irritant in the political economy has its attractions, of course, not least because it is fashionably cynical. But I privately dismissed it, because India doesn't have a great deal to boast about in the global FDI stakes and perhaps pervasive corruption is one key reason for this. At rank 88, out of 159 countries, India enjoys the same ranking as, among others, Gabon, Bosnia, Armenia and Tanzania and is fully 10 points behind China.

Surprisingly, when I suggested that corruption doesn't matter to an enthusiastic young NRI, eager to invest in the new, improved India, he agreed, though only partially. Setting up base in India in the early nineties""in the first flush of pro-reform enthusiasm""he said he didn't mind paying bribes so long as the work he wanted got done. His cost-benefit analysis""as with most businessmen operating in India""involved setting off the transaction costs on this head with the higher costs of delays.

He even specified a regional bribery-efficiency ratio in India. Officials in the east, he said, took money and did nothing, the north was reasonably honourable on this count, the south was iffy whereas those in the west were most conscientious about discharging their under-the-table obligations. Recently, another businessman in the south mourned the departure of a flamboyantly corrupt chief minister, saying the successor was no less venal but far less efficient.

Sure, judged from the strictly amoral point of view, the whole question of corruption probably needs to be balanced with the gains of efficiency. Yet, no matter how stolidly unfashionable this may sound, it would be wrong to say corruption does not matter or influence investment decisions. Looked at another way, it signals that honesty in business practices has a premium attached to it.

Any way you look at it, the three-decade licence raj was probably the most perfidious example of systematised corruption anywhere in the world and India's economic performance through those times is proof of a direct connection between the two. No one can deny that the abolition of the licence raj and that the withdrawal of the government from swathes of activity have transformed India. As the blossoming of the telecom, automobile and the IT industries show, there is no better antidote to corruption, private or public, than competition.

There is no doubt that every businessman or prospective investor in India approaches the issue of corruption with a certain degree of practical amorality. When offset against the huge opportunity called India, the thinking goes, what's a few crores between petty officials? After all, the flourishing city of Gurgaon is a monument to the pragmatic co-existence of private enterprise and public corruption as are the decaying civic amenities of Mumbai.

Overall, most businessmen privately grumble not about the existence of corruption per se, but the degree. Liberalisation may have eliminated (or at least minimised) the bigger corruption within the system but the canker flourishes at the lower levels. So, where companies can now dispense with "liaison" men in Delhi to manage the licensing system, they continue to require the chaps who can manage petty local bureaucracy to provide power, water and the other infrastructure necessary to run a business.

This may be India's biggest challenge as it looks to fulfil its BRIC destiny.

The views here are personal.