Roots of corruption in modern India

Corruption: Dishonest or illegal behavior especially by powerful 

people.

Power corrupts & absolute power corrupts absolutely. History shows us that some of the most powerful rulers and organizations had fallen for the trap of corruption due to greed or circumstances which would have left them no option but to embrace corruption. India is no exception and the phenomenon of corruption dates back to the earliest civilizations and has been mentioned even in holy scriptures like the Vedas:
http://www.karmayog.org/anticorruption/anticorruption_17784.htm

In politics, it would come as a surprise to find that Mahatma Gandhi was frustrated due to the rampant corruption of congress and had openly admitted in 1930s.

1939 news article excerpt

However, corruption in modern India from a common man’s perspective is about paying bribes in everyday lives to work around the system and get some work done (approvals, sanctions etc) from Govt officers (Sarkari Babus). It is a well acknowledged fact that in India, even the most honest citizens & businessmen who want to follow rules, are sometimes forced to cough out money to sustain. Why is it rampant in India but not in other countries like US/UK/Singapore? In order to find out how this kind of corruption came into being in India, one has to go back by a few decades and understand the economic model adopted after independence.

During the freedom struggle in 1930s & 40s, most of our leaders had their own idea of the kind of India they wanted to witness after independence. Three of the most prominent leaders i.e Mahatma Gandhi, Jawaharlal Nehru & Sardar Patel, had 3 completely different economic ideologies. While the Mahatma believed in an India full of self sufficient villages with minimal Govt interference, and Nehru believed in Govt controlled economy detesting private companies, Sardar Patel believed in a mixed economy which involved public private partnership for economic development. Only one of these ideas would materialize and that depended on who would become the first PM.

Just a few months before independence, there was an election within the Congress party to elect their PM candidate in which majority of the votes went to Sardar Patel and almost none to Nehru. For reasons unknown till date, Mahatma Gandhi asked Sardar Patel to step down from the race due to which Nehru became the undisputed leader of Congress. The following video clip from the movie “Sardar” dramatizes the event pretty well:
http://www.youtube.com/watch?v=trx0AUOgaPw

Nehru & Mahalanobis

After independence and first general election which brought Nehru to the centre stage as the first PM, the onus was on him to chalk out an economic model for India. Nehru was of the belief/opinion that private companies always prioritized profit over national interests and hence despised the private sector. With inputs from a renowned statistician named Mahalanobis, he chalked out a detailed plan of a socialistic economic model where private players were suppressed and Govt had complete control of everything including trade & commerce.

One of the first things he did was to bring all the heavy industries under Govt control (Coal, mining, steel, machinery, infrastructure and so on). Next, all the small scale industries (& private companies) were licensed and hence indirectly under Govt control. Nehru was against competition between players and had once exclaimed “Why do we need nineteen brands of toothpaste?”. He believed that just a single brand (or 2-3 at max) of toothpaste would suffice and Govt knew what was best for its people. He assumed that Govt knew how much of toothpaste a customer would need everyday, how many would brush their teeth everyday and hence accordingly calculated the quantity of toothpaste usage for the nation (lets say 100 tons). This quantity would be licensed accordingly to private company/companies and no company was allowed to manufacture more than what it was licensed. (If a company was permitted to manufacture 50 tons of toothpaste per month, it was not allowed to produce even a single kilo extra).

Excerpt from “Chindia Rising: How China and India Will Benefit Your Business”

Nehru believed in State Control & Licensing for industries

This economic model which was based on licensing was venomously criticized by eminent leaders like C.Rajagopalachari who even went to the extent of coining a phrase for it: “License Raj”. (The imperial rule was popularly referred to as “British Raj”).

In addition to the licensing, there were regulatory bodies like MRTP (Monopolies and Restrictive Trade Practices) to penalize/punish companies which manufactured more than the stipulated licenses even if there was severe demand from consumers. For example, old timers would recollect that after booking a Bajaj Chetak, one had to wait for 2-5 years for delivery because severe limitations were imposed by the Govt on Bajaj to manufacture scooters which led to a supply-demand mismatch (very high demand but relatively less licenses from Govt) & hence delays. However, there was an instance when Mr. Bajaj violated the norm and produced more scooters, facing the wrath of the Govt, but his spontaneous & patriotic reply to the Govt helped him escape punishment.

Excerpt from “India Unbound” by Gurcharan Das

Since such a system suppressed productivity & competition, there was no incentive for improvement nor innovation which in turn led to shoddy goods & unreliable products. Apart from the limitation on productivity, such a centrally planned economic model involved lots of approvals, several layers of bureaucracy, regulations and red tape due to which it was almost impossible for a private player to start a company and sustain.

Hundreds of approvals were required to sustain a business

Such licensing rules were not only absurd but impractical as well which forced Indians to work around the system by unethical means which led to corruption in the system. Let me explain it using a simple illustration. Suppose the year is 1965 and you are an enthusiastic entrepreneur who wants to start a beverage business. You apply for a license to start a fruit juice company called “Maaza” and in parallel, apply for approval to import a machine to produce fruit juice. As per the Govt rules, you are allowed to import a juice machine which costs a maximum of Rs 25,000 but unfortunately, the price of such a machine actually starts from Rs 50,000 and goes upto Rs 1 lakh depending on quality. So what are you supposed to do now? Simple. Either bribe the bureaucrat who will allow you to violate the rule or quote a false invoice which is unethical but the only option if you are against bribe. Either ways, you are forced to follow a corrupt method due to the system.

After several approvals (and bribing) officials, you finally manage to import the juice machine but you are surprised to find that you are granted a license to produce only 1000 liters of juice a month whereas the machine has the capacity to produce 10,000 liters per month. So, what do you do now? There is a workaround for that. You can start a bogus company with some other name, with the same proprietor and address and this company can get the machine from “Maaza” for rent. This bogus company is also permitted a license to produce 1000 liters per month. Similarly, create 9 such bogus companies and you finally have 1 original company producing 1000 liters and 9 bogus companies producing 1000 liters each i.e 10,000 liter in total, thereby utilizing the complete capacity of the imported machine. So, this way, you are forced to follow a corrupt method (starting bogus companies is immoral and in some cases, illegal as well).

The above example of a juice company license is simple & straightforward for purpose of illustration but there were highly complex rules which had much complex workarounds which required businessmen to follow corrupt means to survive.

This was the root of corruption in our country. This kind of bribes for transactions were not only between businessmen & bureaucrats but also between common man and Govt officers. This trickled down from the highest levels of the system down to the lowest levels to peons as well.

(For example, A high level officer, upon bribing would approve an illegal license and a peon would accept a bribe to move your application form to the top for faster processing and so on).

After Nehru, Indira Gandhi continued this closed economic model (although it had become pretty clear by then that such a model was not in the interest of the nation and actually favored politicians & bureaucrats rather than the common man), and strengthened it further by imposing much severe regulations & restrictions which pushed India into economic dark age leading to further increased corruption. Indira Gandhi had openly supported and even encouraged corruption in the system. In fact, Indira Gandhi had once proudly claimed “Corruption is a universal phenomenon”!!

Excerpt from “Consumerism, Crime, and Corruption”

Indira Gandhi approving files & licenses

It was only in early 1990s when a slew of reforms (Economic liberalization), initiated by Congress party stalwart P.V.Narasimha Rao, Prime Minister of India, along with Dr. Manmohan Singh as Finance Minister, which changed India from a closed economy to a mixed economy which not only decreased corruption in bureaucracy but also triggered an economic revolution resulting in high growth rates & revolutions including the software revolution.

Such an economic transformation & reform was indeed challenging because it not only questioned the status quo but also went against the DNA of Congress (PVN’s own pary), which was obsessed with Nehruvian economy. To find out how P.V.Narasimha Rao courageously initiated the reforms (during crisis), check the following link:
http://guruprasad.net/posts/p-v-narasimha-rao-the-forgotten-hero-and-architect-of-modern-india/

Here is a consolidated video (10 mins) which gives a quick summary of the economy of India from 1947 to 1991:
http://www.youtube.com/watch?v=iWufFRnelkM