Monday, October 5, 2009

Have more government inspectors to remove corruption

When Rabindranath Tagore was about 12 years old, his father Debendranath took him on a tour of North India. On their way, they stayed in a cottage near Bolpur in Birbhum district where eventually Tagore would establish The Vishva-bharati University. Debendranath would tell his son few stories and anecdotes. In his autobiography, Jiban Smriti, Tagore alludes a few. One of them told by Debendranath is as relevant today as it was then.

In a Zaminder's house, the milkman would sell milk diluted with water. In order to stop the corruption, a person was appointed to look after the milkman. Unfortunately, it was found that the quantity of water in milk went up. Then the Zaminder appointed another person to inspect the first inspector. But milk became more watery. As more and more inspectors were appointed, the milk soon took the color of blue sky.

Does it sound similar to what we have in Indian government today? The industrialist L.M.Thapar (if my memory serves right) said few years ago that the government somehow assumes that all businessmen are thugs and all the government inspectors are as honest as saints. I think that a little more trust toward businessmen could go a long way in removing corruption.

My sense is that it may have to do with our ancient caste system where businessmen and traders , the Vaishyas, came third in the hierarchy of caste after the Brahmins and Kshatriyas. Probably they were looked down upon and not trusted then and the process has continued.

As I said in my previous blog, it will be a much better system where businessmen and others interacting with the government are provided the rules and regulations but they are trusted to follow the rules. One can make sure that he is following the rules by having his facility inspected by a private inspector for a small fee. The government can perform random checks on a few facilities to ensure that rules are being followed. This will reduce the need for most government inspectors and hence reduce graft.

This will reduce employee count in the government and will save the taxpayers plenty of money. However, it will upset those whose only dream is of landing in a government job and those who believe that the government must create useless posts at taxpayers' expense in order to create job.

Thursday, October 1, 2009

Corruption in India and its solution

Ask the average middle class educated Indian what the biggest ailment of India is today. Nine out of ten will immediately say corruption. Indeed, in the list of nations ordered by prevalence of corruption, India is in the top quarter.

What is corruption? Are their categories of corruption with varying degree? Do they all retard India’s growth? Why is there much less corruption in the USA, Canada and Western Europe? We need to look at these questions.

There are a variety of corruptions in India. While a person wants to remove one type, he may be actively encouraging another type. Let us list some of them.

1. Bribery: This is the most common form of corruption against which almost all Indians want to fight. It is an instance of corruption in government offices.
2. Black marketing: Usually it means legally selling some product or service and then not paying right sales, income or corporate taxes
3. Cheating customer or shoddy product: A seller can sell poor quality product to customer.
4. Smuggling: Getting some legal (such as gold) or illegal ( such as cocaine) material into the country from a foreign source
5. Nepotism: In many government offices, they officials do not take much bribe. But they will only favor those they know or someone having connection with a senior ruling party member or a minister.
6. Denial of benefit: In many cases, this happens because the uneducated persons are not aware of the subsidies they can receive from the government.
7. Software piracy: Here software is a broad class which includes both computer software as well as entertainment software such as songs, videos and movies.
8. Dowry: It is an ancient form of crime.


While all Indians decry corruption, each individual has one or more from the above list in mind. The item 1, bribery is mostly cited as corruption by Indians as well as other nations. However, the same person who hates bribery often indulges in illegal copying of software such as Operating System, word processor and anti-virus programs. Many people also illegally copy songs, movies and videos without paying any royalty to the creator.

If we look closely, we will find that each type of corruption is a symptom only. It is not true that Indians are by nature, more corrupt than other nationals. In most cases, the root cause is a wrong government policy.

Items 2, 3 and 4 were prevalent in 1970’s and 80’s but are almost gone today. This has happened primarily due to changes in government regulations. Earlier, importing gold was impossible in a country where gold jewelry is in great demand. The government was trying to change the behavior of people into not spending on gold. It did not work and gold smuggling flourished. Then in early 1990’s the government changed the laws and allowed a person to import up to 5 Kg of gold with little customs duty. Overnight, the gold smugglers became jobless. Similar effect happened in smuggling of electronic gadgets when laws were relaxed so that the gadgets could be manufactured locally.

The license and quota raj made sure that no company could reach economy of scale. As a result, companies were producing shoddy products. The massive restrictions on import and export made an artificial craze for “foreign goods” among Indians. A person wearing a Levi’s jeans brought by his relative was considered lucky. When restrictions were lifted, plenty of interactions happened between Indian and foreign companies. Faced with domestic and foreign competition, Indian companies improved the quality of products to international levels. Shoddy products became history. At the same time, due to improved quality at home, the local companies could export their products on a large scale. Today, Levi’s jeans are available everywhere but many people find it cost effective to buy locally made jeans. The craze is gone.

The government reduced income tax, excise and customs duties. This helped a lot in increasing tax compliance. People do not mind paying taxes as long as it is reasonable.

The last item, dowry is a social evil. As more people become educated this will diminish. Also, dowry is a byproduct of arranged marriage. When a man and a woman fall in love and decide to marry, the chances of dowry exchange is much less. Compared to two decades ago, many more educated youth are avoiding arranged marriage. If the trend continues, dowry cases will reduce. Dowry taking is a crime in India. But in addition, the government should create a publicity drive of advertisements and short films where dowry-taking will be portrayed as a shameful act by the friends and relatives of the dowry-taker.

Now we come to the crux of existing corruptions which are items 1, 5 and 6. All these come from government officials. Either bribe or influence gets things done in the government. Poor people with neither money nor influence are often denied their legitimate rights. I will site some concrete examples.
1. You attempt to start a small business. You have to get government clearance from 30 departments from pollution control to municipality to department of small business. Often a government inspector will come to your premises to certify and ultimately provide a clearance. You might have to bribe the inspector or clerks at the concerned department or both.
2. You are a poor villager eligible for Below Poverty Level (BPL) card that will make you eligible for various subsidies from the government. But you have been marked as a voter of opposition party and hence the government officials in collusion with members of ruling party, will deny you BPL card. You do not have the money or resources to fight against them.
3. You are a middle class salaried person who has little interaction with the government. But you pay property tax, electric bill, phone bill etc some of which may be provided by the government. In each case, you face big lines and if something goes wrong, it is hard to get it fixed. If your phone provider is a government company and you get a huge bill, you have to first pay the bill and then apply to the company to investigate their error. In every case, the government official behaves not as a modest public servant but as a high handed representative of the King.

Why do such things happen in India and how can they be fixed? If you look at the common root cause, in each case the perpetrator is a government employee. He has been endowed huge power to harass you if he chooses. He can deny you the pollution certificate if you do not bribe him. Since you do not want to delay production in your new company, you end up bribing him for the certificate although your pollution record is impeccable.

The root cause is that monopolistic power has been given to ordinary government employees. This type of corruption can be easily eliminated if the monopolistic power is removed. The way to do that is to create multiple providers of the service that only government employees provide today.

For example, when it comes to various inspections, there will be authorized private inspectors along with government inspector. The inspector will charge a nominal fee and provide the certificate. Since you have the option to go to any private inspector or the government one, the power of the government inspector will vanish. How do you ensure that a private inspector is honestly doing his inspection? There can be random checks to see if the inspector is complying with the rules. In general, in order to remain competitive, each inspector will operate honestly.

The government should get out of providing services such as water, electricity, telephone and completely privatize them. The municipal tax could be paid at private banks where customer service is far more superior. For every government service, there should be multiple competing service providers with which the government provider has to compete. Only competition will improve customer service and eliminate corruption.

Therefore privatization and competition are essential. If a single private company provides the service, it will be as tyrannical as the government service. Therefore the solution is a radical policy change where, for each service multiple private players will be introduced.

Finally, the government may simplify the processes a great deal. It can abolish most of the clearances needed to start or run a company. Instead of forcing the company get pollution clearance, it can just tell him the allowable limits of pollution level. Then the onus will be on the company to make sure that it remains within limits. The government essentially says that we trust that you will be within pollution limits. We may do random check in future. If you are found to be non-compliant, we will take drastic action such as huge fine or closure of the unit.

Privatization and reduction of clearances will not only reduce corruption but also reduce red tape drastically and improve the efficiency of government departments. It will also eliminate many unnecessary government jobs and thus reduce tax payer’s burden.