One must turn to Francis Fukuyama's book of yesteryear, called Trust: The Social Virtues and the Creation of Prosperity, to recall the general message that a modern economy cannot function without trust of the kind that allows economic transactions to take place between perfect strangers. Modern economies function on the basis of social capital and cultural moorings as much as on physical or financial capital; take away that social capital and the rest of the system does not hold. The relevant issue is not whether it is Reliance or the petroleum ministry that is in the right; the point is that no one knows and a solution to the dispute is difficult because at its heart there is a lack of trust.
The reason why the change of law for taxing Vodafone, for going after Shell, and some of the more egregious tax decisions on transfer pricing could affect investment inflows is the same: will foreign investors trust the government and the process of rule-making? Are electricity distribution companies making hay in Delhi, at the cost of consumers? If you took a poll, you might be surprised at the answer. It is this lack of trust, in leaders and in companies, which brought crowds to Anna Hazare's fast. Yes, Manmohan Singh is an honest man, but what use is such honesty when so many central ministers have had shadows of doubt on them?
The corrosive damage that the spread of crony capitalism has done - in mining, in public-private partnership deals, in telecom licensing and so much else, and in the pricing of electricity - is not so much raise costs in the economy, though that too has happened. Rather, it is bringing the system to a standstill, as with the Reliance stand-off. Courts have ordered the blanket shut-down of mining; bureaucrats have an excuse for not taking decisions; and there is a cloud over every defence deal. How can any system function in such an environment? Other societies with a reputation for corruption have prospered. Indonesia did well for decades, but eventually imploded. China too has done very well despite rampant corruption, but is now cracking down. The problem in India is not with just one party, nor just politicians, nor only the government. The private sector may not survive much scrutiny, but at least it deals with its problems and moves on. In the government and in public-private partnerships, the washing-out process is more complicated, and hence slower and more difficult. Still, we had better get down to the task, for this much is clear: if you cannot trust the motives of the key economic players, you can forget a return to rapid economic growth.