Why PM Modi should push economic liberalisation now

The best use of his store of political capital is to undertake big ticket economic reforms.

When a small Takshashila team walked around Bangalore’s wholesale markets, Dobbspet town and a few tiny village in the latter’s vicinity as part of our #FootNote initiative, we noticed many people reporting that they were not only inconvenienced but suffered monetary losses, yet supported Narendra Modi’s currency reform (‘demonetisation’) initiative. This is counter-intuitive, except perhaps in the context of religious faith.

To better understand this phenomenon, I conducted a twitter poll earlier this week that sought to investigate to what extent have people conflated their opinion of Prime Minister Modi and his currency reform initiative.

The results, after just over 1800 responses, were as follows:

Obviously, there is no claim that this poll is representative of the entire population of India. It is more likely representative of the forty thousand or so people who follow my twitter handle. Even so, the responses are interesting, and support what we noticed on the #FootNote tour.

Modi-Demonetisation-Poll

What does this mean? As Karthik Shashidhar, our resident quant, remarked, in 87% of the respondents there is an overlap between their opinion of Mr Modi and his policy. In other words, people’s attitude towards him overshadows their opinion of his policy. My colleague Nidhi Gupta, who recently reviewed Christopher Achen and Larry Bartels’ Democracy for Realists (Princeton University Press), that exposes the flaws of democratic systems, noted that in this case too, the notion that people vote on issues does not seem to hold up.

We’ll repeat the poll again in January to see how much the responses change.

In any event, the upshot is that the demonetisation episode shows that Mr Modi enjoys tremendous political capital that he can use to implement the type of structural reforms that would be extremely difficult for other leaders to pull off.

He should not lose the opportunity.

Postscript: Mr Modi’s team conducted their own poll using his smartphone app. Both the framing of the questions and the type of sample suggest that the poll is essentially a device to rally his supporters rather than obtain an objective estimate of public opinion. It would be wrong to assume it reflects what Indians think, just as it would be wrong to use my twitter poll for the same purpose.

What causes corruption and erosion of moral values?

Ans: The abridgement of economic freedom

Click to enlarge


An illustration showing how government interference in economic activity increases corruption, crime and leads to the moral degradation of society. Although the chart only refers to bans, it also applies to lesser interventions like price caps, price floors, excessive tariffs, quotas, reservations and so on. The difference is one of degree.

In defence of lobbying

The lobbying industry must be allowed to function transparently within the ambit of the law.

This is an unedited draft of today’s column in Business Standard.

A famous Indian politician was searching for an issue that could energise his party cadre and move the masses. An group of businessmen produced a report on “making India self-contained in her supply” of a particular commodity. It had arguments on the rationale on consumption of the commodity, why it was necessary and why the poor needed it more than the rich. One of the politician’s close associates forwarded the report to the party leadership across the country while his personal secretary echoed the report’s arguments in an op-ed article the subsequent week.

The politician embraced the cause and triggered off a historic agitation, the basis of which, partly at least, was the output of corporate lobbying. The politician was Mohandas Karamchand Gandhi, the industry group was FICCI and the commodity common salt. The historic event in question, of course, is the Salt Satyagraha (see this post for details). It would be hazardous to suggest that a FICCI monograph singularly triggered off Gandhi’s famous march to Dandi. It would, however, be equally hazardous to discount the importance of lobbying on national politics then, as indeed in contemporary times.

The current debate over corporate lobbying conflates two separate issues: one, the legitimate persuasion of politicians on the merits of a certain policy measures and two, the illegal activity of bribing them in pursuit of this goal. The latter is wrong. The former is necessary. We might be in the throes of moral panic, but we should not mix up the two.

Lobbying is inevitable in a modern representative democracy: the more rules you make, the more complex the economy, the more the need for ‘specialists’ to intermediate between citizen, corporation and the state. That’s why we have lawyers, who help individuals and firms navigate the legal system. That’s why we have chartered accountants, who interpret the arcana of tax laws. These intermediaries play an important economic role by specialising in such matters and saving you and I the trouble of mastering law and the tax code when all we want is to go about our business.

Lobbying serves a similar function. It is far more efficient for businesses to hire public affairs specialists and lobbyists rather than involve the management in the byzantine world of Indian politics. If we consider lawyers and chartered accountants as legitimate professionals, why not lobbyists?

One argument against mainstreaming lobbying is that lobbyists risk making democracy a plaything of the rich. Those with deeper pockets will get to unduly influence government policies. This is reasonable in and of itself. However, isn’t it true that richer people can afford better lawyers and bend justice in their favour? Isn’t it true that richer people have smarter accountants who can find ingenious ways to pay less tax? More importantly, isn’t it the case that richer people already influence government policies, but in opaque, shady, dubious or wholly illegal ways? Those who doubt this can contact Mr Kejriwal for details.

Hey wait! What about the Niira Radia controversy? Doesn’t that connect shady corporate lobbying to high corruption? Yes, it does. However, that controversy arose in a country where lobbying is not only unregulated by perceived by many as a dubious activity. Had lobbying been a recognised as a legitimate profession, bound by its own norms and governed by a set of rules—like law and accountancy—we might have been spared some of the scandal.

This is, in fact, a good time to have a public debate over lobbying. Before 1991, most corporates would line up outside government offices as supplicants pleading for licenses, quotas and permits. After 1991 and until the exposure of big corruption scandals of 2010, canny businessmen sought to create legislative loopholes that would allow them to squeeze through, but keep their competitors out. This approach is becoming untenable.

Economic growth, globalisation, the Right to Information (RTI), urbanisation and the penetration of social media have changed the nature of how India’s corporations and governments engage each other. Businesses that try to create and exploit loopholes have a greater chance of being exposed, with the attendant loss to reputation and valuation. Like their counterparts in mature democracies, Indian businesses will have to engage in public affairs in cleaner, more professional, and transparent ways.

This can only happen if we allow the lobbying industry to function within the law. It is far better to regulate it rather than drive it underground. Indian democracy will be better served by placing the lobbying industry in a regulatory environment that requires companies to declare their lobbying activities and expenses, lobbying firms to disclose their activities and lobbyists to adhere to professional codes of practice. This is what the United States does. It’s not a silver bullet, but certainly an improvement over hypocritically persisting with a sanctimonious moral blindfold and pretending to be surprised that odious things happen in our country.

Copyright © 2012. Business Standard. All rights reserved.

No kangaroos in Karnataka

The zeal to prosecute corrupt public officials must be matched with tight adherence to the law

You might have missed it in the din surrounding the recent state assembly elections but the Karnataka High Court’s decision in B S Yeddyurappa v. The Lokayukta of Karnataka and others provides an important counterpoint to the clamour for a Lok Pal.

Mr Yeddyurappa had filed a writ petition challenging the Lokayukta’s filing of corruption charges against him, on account of which he was forced to step down as chief minister of Karnataka. Earlier this week, the Karnataka High Court allowed this petition because in its view, Mr Yeddyurappa “was condemned unheard and there is serious violation of the principles of natural justice..”. Now you can go into the text of the judgement for the details but the jaw drops considering the High Court held that the Lokayukta did not follow one of the most basic legal processes.

The High Court further noted that “there is no material placed on record to establish that the petitioner has shown any official favour to the companies” and “suspicion cannot be a ground to tarnish the image and reputation of a person holding a constitutional post”. The jaw drops further.

There are three issues here: first, that the state ombudsman did not give the accused a chance to defend himself. Second, that it didn’t even produce enough evidence for a prima facie case to be registered against him. Third, by leaking its report to the media “a lot of dust was created in the political circle” causing Mr Yeddyurappa to resign as chief minister.

This is not about whether Mr Yeddyurappa is truly guilty of corruption or not. This is not about whether public opinion believes him to be corrupt or not. This is about whether a quasi-judicial entity entrusted with being an anti-corruption watchdog could produce evidence and follow due process to establish his guilt. This is about whether its zeal was matched by its competence, meticulousness and respect for the principles of natural justice.

Now Justice Santosh Hegde, the high-profile Lokayukta who indicted Mr Yeddyurappa is both a experienced judge and an upright person. If the ombudsman could make such a mistake under him, we can only imagine how bad a less experienced and less upright person can be. All it would need to get rid of public officials would be public opinion, a leaked report and a compliant, complicit or conniving governor. Since people believe that all politicians are corrupt, the media loves to conduct trials and governors are loyal servants of the ruling party in New Delhi, it is not difficult to see that a “strong” Lokayukta, untrammeled by the higher judiciary, will be just another political plaything.

Mr Hegde’s own reaction to the High Court verdict is unfortunate. Claiming that his professional experience gives him the knowledge of what constitutes natural justice and when to give the accused a chance to defend themselves, he said “There were three Chief Ministers, two ministers and 797 officers who were indicted in the report. If I was legally required to issue notices to them, it would have stretched on like the Ayodhya case.”

It is hard not to be disturbed by Mr Hegde’s comments. However learned, experienced and well-meaning a person he is, it cannot be left to an individual to decide when an accused should have the right to defend himself. Also, to argue that cases will take too long to conclude if everyone was allowed to defend themselves takes us into kangaroo territory. Whatever the levels of outrage in the media and public discourse over corruption, you can’t dispense with the principles of natural justice.

This episode should remind us, once again, that there are no short cuts or miracle cures to fighting corruption. The populist demand for the Lok Pal comes with a thinly disguised contempt for constitutional processes and legal niceties. Attractive as it may appear to the outraged, once you destroy the latter, you lose the basis to distinguish the legitimate from the illegitimate, but with powerful inquisitors at large. It is a far better idea for us to insist that watchdogs and prosectors match their zeal with competence, humility and meticulous attention to legal processes.

Middle India’s political game-changer

Why the Annawalas must endorse individual candidates in the coming elections

This is the original draft of today’s DNA column.

Anna’s candidates

It’s the season for game-changers. Everyone is proposing one. Here’s mine.

After ending his fast at New Delhi’s Ramlila Maidan last month, Anna Hazare announced that “electoral reforms would be next on his agenda, followed by issues of decentralisation of power, education reforms, labour and farmers’ issues.” If that sounds like a political manifesto, it is. For that reason it must be pursued politically.

Now, Hazare said he can’t afford to stand in elections because he can’t buy votes. Whatever that says about his attitude towards electoral democracy and whatever it says about the claim that the whole nation is behind him, he is entitled to stay outside the ring. His new colleagues, the leaders of the India Against Corruption (IAC) movement, say that they do not intend for it to become a political party. Which too is fine, for there is value in a non-partisan nationwide movement that eschews identity politics and demands good governance. Will they perhaps endorse a political party? After all, with the UPA government brazening it over a series of huge corruption scandals, will they say “let’s give the BJP a chance”? It is unclear if the IAC or its leaders intend to endorse any political party, but we should not be surprised if they decide not to. Perhaps some of the people on the stage at Ramlila Maidan will contest elections but that’s not going to make a big difference.

The real game changer is this: the IAC should announce that it will endorse one candidate in every single Lok Sabha and state assembly constituency. Not on the basis of party affiliations, but on the basis of its assessment of who among all the candidates is the best choice. Continue reading “Middle India’s political game-changer”

The Great Middle Indian Churning of 2011

Where do we go from here?

Here’s a piece that I wrote for The Atlantic online last week:

India’s Great Middle-Class Moment
After decades on the sidelines, the growing ranks of Middle India are starting to find their voice. But can the political system respond?

NEW DELHI, India — What should the world make of the remarkable political churning in India this year? People around the world are braving bullets for the right to vote but here we were, turning out in the streets in large numbers, supporting demands made by such self-appointed leaders of civil society as the hunger-striking Anna Hazare for a draconian anti-corruption law.

Parallels with an “Arab Spring” in India don’t fit, not least because we last did that kind of anti-regime business in August 1942, when Indian nationalists mobilized non-violent protests to get the British to quit India. And when Indira Gandhi dispensed with constitutional niceties and assumed dictatorial powers in the mid-1970s, we threw her regime out in 1977 not by shouting her down in the town square but by voting her out at the polling booth. Her return to power a couple of years later, again through the electoral route, proved the regime changing power of India’s electoral democracy.

India’s political churning this year probably heralds a new phase in Indian politics, with the urban middle-class joining the political process. For a long time, this group has seen politics as a spectator sport, to be watched on television in between cricket and Bollywood. Repulsed by the choices on offer in the political menu, unenthused by the anachronistic agenda of mainstream parties and therefore unwilling to spend the time to go out and vote, the middle class Indian has, in terms of political involvement, practically seceded from the Indian republic. Meanwhile, economic growth has propelled ever-greater numbers of people into the middle class, inflating its numbers and amplifying its expectations from the Indian state.

The mainstream political parties missed the plot entirely. The Indian National Congress-led United Progressive Alliance (UPA) coalition government, which first came to power in 2004, set back the process of economic liberalization, by stalling on economic reforms, ostensibly in the name of the “common man.” This led to cronyism on the top — the last decade saw the expansion of family-held conglomerates rather than the start-up successes of the ’90s. It also led to rampant corruption in sectors of the economy that were untouched by reforms. The Congress and its allies purchased electoral mileage by introducing entitlements for the rural poor, but Middle India was too rich to be bought off and too poor to be sold to. The Bharatiya Janata Party (BJP), which demonstrated a reformist outlook when it led a coalition government at the turn of century, has since become loath to challenge the Congress party’s economic idiom, even after this approach failed it in the 2009 elections.

For the Middle Indian, stalled reform, cynical manipulation of constitutional institutions by the UPA government, and the entrenchment of an entitlement economy all meant inflation, corruption, and insecurity. Continue reading “The Great Middle Indian Churning of 2011”

Sunday Levity: Paid views

The Sicilian women who offered this blogger $150m to oppose Anna Hazare

An excerpt of my short article in OPEN magazine on the wages of making unpopular points:

If the political establishment didn’t know how to respond to Anna Hazare, the mindless thousands who supported him—largely from in front of their television and computer screens— were clueless how to handle criticism of their ephemeral hero.

Now, one of the ordinary joys of non-partisanship is being called a ‘Congress hack’ or a ‘Hindutva-type’ from time to time. It gets even better when you manage being both at the same time on the same issue. Political debate in India is about labels attacking other labels, personalities attacking other personalities and parties attacking other parties. Watch a news debate on mute, and you still won’t miss anything.

But Hazare’s hazaars were extraordinary. Righteous outrage, sanctimony, the free period between two cricket tournaments and the predilection for online rudeness came together and pummelled anyone who dared point out that maybe the boon that Hazare was asking for was really more of a curse. [Read the rest at OPEN]

From the archive: August 2005 – The Best Brickbats

Justice Sawant’s remarks on Anna Hazare

“When the social power is used irresponsibly, or to subvert the constitutional authority, it is hardly distinguishable from terror.”

The Maharashtra state government instituted a Commission of Inquiry under Justice P B Sawant, in September 2003 to inquire into allegations of corruption and maladministration against several people, among them Anna Hazare. The Commission submitted its report on February 22, 2005 and has been placed online (by Sampath Bulusu on June 8, 2010).

It goes into the minutae of the allegations and a cursory reading suggests how the enormity of red tape might cause people—like Anna Hazare—acting in good faith to commit technical violations of the law. Justice Sawant dismisses most of the allegations against Mr Hazare, but finds his trust acting illegally in at least one matter (see pages 269-271). The message is clear and ironic in the light of Mr Hazare’s demand for more bureaucracy and more laws: government encroachment on the citizen’s economic freedom creates a cesspool that criminalises ordinary citizens, that in turn breeds official corruption.

If we see Mr Hazare as an ordinary person—as this blog does—these transgressions are minor, excusable and should not cause us to doubt his personal integrity. Those who believe in the extraordinariness of Mr Hazare, however, should introspect.

That apart, Justice Sawant’s comments on Mr Hazare’s method of fighting corruption need more attention. Given that the latter is at the forefront of a movement to create an all-powerful super-watchdog, it is germane to look into his previous record.

6. There is no doubt that the participation in elections is not the end-all of the citizen’s role in democracy. The mere fact that the citizens have the power to change the government or to replace their representative by another in the next election, does not prevent them from exercising their other democratic rights during the period between the two elections. It is a mistake to believe that the only duty of the citizens in the democratic governance is to exercise their right to vote. The right to vote is only one of the democratic rights of the citizens. The citizens have a fundamental right to participate in the day to day governance of the society.

The mode and manner such participation may vary and may include all peaceful activities from petitioning to the government to taking out processions to register protests or to demand particular actions. The citizens may also undertake constructive activities, with or without the assistance of the government to improve the conditions and quality of the social life. Both the agitational and the constructive activities have become necessary in the present democratic societies, since the so-called democratic societies have limited democracy and that too only in their political life. Beyond the right to vote and the right to contest in the elections,the political democracy confers no other right. In the absence of the social and economic democracy, even the rights to elect and to get elected remain on paper for a majority of the people. With the enormous social and economic inequalities which are growing everyday, the right to vote itself may be manipulated, while the right to contest elections has become the preserve of the wealthy few. Thus, the equality, which is the basis of democracy, does not exist even in the formal political process.

7. This is because the so-called democracy as has been practised, has made no change to the class-structure of the society. On the other hand,it has deepened and widened the class distinctions. The ruling class is not interested in bringing about the social and economic democracy. On the other hand, since it can survive and thrive only on social and economic inequalities, it is interested in perpetuating them. Hence,the work by the civil organisations aimed at reducing the inequalities and their harsh social consequences, becomes all the more necessary.

The agitational activities have however to be carried on by observing certain norms. Not only have they to be peaceful, but also legal. A care has also to be taken to see that they do not lead to anti-social activities or become extra-constitutional centres of power. Such a development will itself encourage lawlessness and spell out the end of the rule of law. The mode of agitation has further to vary according to its object and the social conditions obtaining at the time. Else,it will not only not achieve its object but will prove counter-productive. It has to be remembered that the agitational activities also constitute a social power, which is as much liable to be abused as the political power. When the social power is used irresponsibly, or to subvert the constitutional authority, it is hardly distinguishable from terror.

8. When instead of the system, the individuals are targeted by the public agitation, several untoward consequences follow. As the present inquiry has revealed, while making the allegations of corruption,the complainant Shri. Hajare relies exclusively on the information supplied to him by his workers or on the contents of the representations made to him by the discontented. The information thus made available may not all be disinterested and may be motivated by various considerations, including personal, political and corrupt. In any case, such information coming from whatever source it may, has to be verified at least by giving an opportunity to the person against whom the complaint is made. This is an elementary precaution which has to be taken before making the individual a target of agitation.

As has been admitted by Shri. Hajare, the persons against whom he receives complaints, are not even intimated by him about them. They have, therefore, no opportunity to reply to the charges in the complaints. Shri. Hajare gave two reasons for dispensing with the said basic requirement viz. that this Andolan has no funds to call for the explanations from the concerned individuals, and secondly, his team of lawyers clears the complaints before the agitation is started. The first reason is both strange and indefensible, while the second is as much unjustified.

If the movement against corruption, which he has started, does not have sufficient funds even for the postal correspondence with the persons concerned, certainly he cannot make the targeted individuals suffer on that account. It is further not his case that even his lawyers give an opportunity to the persons concerned to explain the charges against them before they clear the complaints for agitation.

It must be realised that when persons like Shri. Hajare who have come to be respected by the society on account of their laudable work in other fields, publicly accuse any person for his misdemeanour, the people come to believe it intrinsically, and the person concerned earns a social odium for life-time, even if later he comes to be cleared of the charges. There have been cases where persons have been victimised either by public or private complaints, at the strategic moments in their life and career. The blackmailers, in particular, take advantage of such situation.The adequate precautions, which even otherwise are a must, become all the more necessary in such movements.The social power should not become or allowed to become an engine of oppression of the innocent. [Justice G B Sawant Report pp22-24, emphasis added]

Societies with greater economic freedom have lower corruption

And India must focus on economic freedom

In the light of the current debate over the solution to corruption, here’s something to think about. There is a correlation between higher levels of economic freedom and lower perceptions of corruption. Here’s an old chart that shows the relationship. It uses 2006 data, but it should hold with newer data as well (Update: Barbarindian has a chart with the latest data, LT @centerofright).

Economic Freedom vs Corruption Perceptions
High economic freedom correlates with low corruption

(Click on the chart to enlarge it.)

This chart shows a correlation. And correlation does not mean causation (OMIPP alert!). In other words, from these data alone, we cannot conclude that higher economic freedom causes lower corruption. We can, however, conclude that wherever there is greater economic freedom, perceptions of corruption are lower, and vice versa,

The question is: which variable should we focus on? There are enough rules, laws and agencies to investigate and prosecute corrupt officials. Clearly, there is overwhelming dissatisfaction over the efficacy of this method. There’s nothing to prove that one more super rule, super law and super agency will do the trick where so many others have failed. Indeed, it is likely to worsen the problem by adding to the red tape and logjam.

It therefore makes sense to shift focus to economic freedom. It’s worked to reduce corruption in India in some fields. You don’t have to bribe the telecom department officer and the line-man to get a phone connection anymore. That’s because there is relatively more economic freedom in the sector: from infrastructure to services, from retail to equipment, there are multiple providers. You have the freedom to choose, the freedom to switch and the freedom to reject phones, plans and providers.

But when the UPA government sought to curb economic freedom—by the blatant abuse of executive power—there was massive corruption.

Indeed, in sectors where there is relatively more economic freedom, corruption has generally been “kicked upstairs”, as this article in Pragati shows. In the 2G spectrum case, it was not prevented and punished in time by a man of well-known integrity. This should be an indictment of that man rather than the system.

Related Link: The 2011 Economic Freedom of the States of India shows how states that have greater economic freedom do better in a wide range of governance outcomes.