India Economy

How corruption hurts the economy

J mulraj | Updated on January 19, 2018 Published on January 24, 2016

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Corruption denies advancement through merit, critical for a thriving economy

The founder of modern Singapore, Lee Kuan Yew, realised, at the very start that he needed to root out corruption if he wanted his small country, which had not been blessed, as India is, with natural resources, to prosper.



Today, Singapore ranks number three in the World Bank’s ranking of richest countries by per capita income and number seven in Transparency International’s Corruption Perception Index. God, in His infinite wisdom, gives countries advantages and disadvantages. He deprived Singapore of many natural resources, but gave it good leadership. He gave India lots of natural resources, an intelligent people, but a lousy polity. (Ah well, the electorate must also share the blame for that). Had India’s priority, when it achieved independence, also been to root out corruption, India, given its other advantages, would have had a higher per capita income than Singapore’s $82,763, instead of the paltry $5,418 (Purchasing Power Parity basis). That would make India the world’s largest economy.



Corruption hurts



On Transparency International’s Corruption Perception Index, India is ranked 85th. Singapore is seven. There is an inverse correlation between corruption and economic betterment of people.



Despite all the evidence, Indian political leaders still have not learnt that rooting out corruption is one of the main planks to propel a country’s economic development. By its very nature, corruption preserves the status quo, providing benefits to a select group of people, and protecting them from paying for their follies — thus denying advancement through merit, which is the sine qua non of a vibrant and successful economy.



No less a person than RBI Governor Raghuram Rajan has stated in an interview that ‘no one wants to go after the rich and well-connected wrongdoer’. He is absolutely spot on. Nothing happens in well-known scam cases, even with mounting evidence of fraud.



Can we then aspire for India to be a rich country, unless we are willing and able to root out corruption?



Investors, domestic and foreign, need to feel confident of the legal system being able to protect their rights. In the period January 1-18, foreign institutional investors have been net sellers of Indian equity totalling ₹9,446 crore. Doubtless this was due to worries over China, and over the sharp drop in prices of crude oil, which has fallen below $ 30/barrel from a peak of $140, and of commodities.



The fall in commodity prices has ground trade in bulk commodities virtually to a halt. So much so that it is now cheaper to rent a 1,100 foot container ship than a Ferrari; perhaps the Monk who sold his Ferrari would have done better renting it out!



Crude oil prices are unlikely to rise higher after sanctions on Iran were lifted, which will add to supply. Low oil prices are severely straining the finances of OPEC countries, and of countries like Russia and Venezuela dependent on it.



OPEC countries used to be providers of capital to global markets when prices were high. They are now borrowers from global capital markets. So, capital will not only be scarcer, but will also become more expensive, now that the US interest rate cycle is rising. These factors are affecting, and will continue, to affect stocks.



For example, China had, using cheap money, provided under quantitative easing programmes, built up excess supply of various things, including steel. Now that its economy is slowing down, it is dumping the excess steel in world markets.



The world’s largest steel maker, Arcelor Mittal, is bearing the brunt of this dumping; its market cap has fallen 95 per cent from its peak.



What next?



Technically, the market seems to have fallen enough and is poised for a rally, which began on Friday. The long-term India story remains good, especially when compared with the plight of other countries. A lot of things need to be done to achieve our potential, and the government has good intentions. It is trying to find ways to provide jobs, and its initiatives to help start-ups is a great way to do so and ought to have been done decades ago.



We need to, however, urgently fix corruption and a judicial system that moves far too slow to be effective. Without this, India would be an ‘also ran’.



The writer is India Head, EuroMoney Conferences





Published on January 24, 2016
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