In the bad old days, promoters of private sector firms in India systematically looted the public companies that they were in charge of. They collected kickbacks on imported equipment and transferred the funds to Swiss accounts. They would not account for a substantial portion of the production of factories, especially if the goods involved high excise duties and would sell these goods in ‘black’ lining their personal accounts. They would sell company real estate — vacant lands, office buildings or apartments at a fraction of the market price on the official books and pocket the difference in cash from the buyer in ‘black’. They would drive companies to bankruptcy and powerless banks were saddled with ever-growing non-performing assets. Today the same promoters book legitimate revenues and report high quarterly earnings. What has made the difference? Simple. The incentives have changed. When you paid wealth tax on your shareholdings and 97 per cent income tax on your dividends, it made no sense to pay dividends or improve your share price. It was better to earn untaxed money and stash it in Switzerland. When your heirs had to pay huge amounts of estate duty, why leave them a legitimate inheritance? Hoarded cash and money outside the country beyond the grasp of the taxman were the best bequests. Making profits and paying dividends today is good for the financial health of the promoters. Presto, that is what they want to do! As promoters realise that quality accounting, more transparency, independent directors all help increase their share price, they go for it. Of course, not everyone does. But many who realise that wealth creation on a large scale is best done by good governance opt for it. It is not that people have become more moral; the system rewards you for being moral. While our private sector goes from strength to strength (primarily because of sensible incentives, not because the players are inherently honest), our state sector suffers. Most private offices you walk into are world-class facilities, comparable to the best in the world. Every government-managed road you drive on is worse than the roads of sub-Saharan Africa. Clearly this is because we have the wrong incentives in place. Can the situation change such that the concerned actors get rewarded for building good quality roads, water works, sewage plants and parks and for building them in months, not in decades? How can we align the interests of contractors, civil servants and elected officials such that they escape from their equivalent albatrosses of high taxes and estate duties? How can we make it ‘profitable’ for them to deliver quality public goods in a timely manner? If we crack this, we reduce corruption and improve their performance as we have done with our erstwhile immoral promoters. Over the years, we have developed excellent think-tanks in Public Policy. The Centre for Policy Research is a good example. As a result, we have a broad consensus on policy issues. Everyone is agreed that inclusive growth is a must. Leaving the majority of the country abysmally poor (in absolute, not just relative terms) is morally obnoxious; those who are not troubled by morals will relate to the fact that a large sullen underclass represents a danger to private prosperity inside high-rises or gated communities. Besides it is an entirely avoidable tragedy to have a nice home (with world class audio and video equipment) and then to have to step out on to pot-holed garbage dumps that pass for roads. We know the answers in policy terms. We need better roads, better sanitation, water supply and public health facilities. We need better and more accessible education for larger numbers of people. We also know that mere increase in public expenditure is not the solution. This only enriches crooked contractors and their accomplices within state institutions. It does not improve our public spaces or help our poor. What we need is more effective public expenditure. The economists Jensen, Meckling and Fama have done extensive research on the behaviour of company promoters. While no less a person than the distinguished Nobel-laureate George Stigler has developed insights into the behaviour of public officials, more needs to be done. We also need detailed prescriptions on the precise mechanisms to be introduced into the state sector. The Bangalore-based NGO, Janaagraha, has argued that we should focus on public participation and transparency at local government levels — not just at state governments and municipalities, which are remote and citizen-unfriendly, but at ward and precinct levels. This is a worthwhile endeavour. Our Constitution gives a lot of power to state governments. Unfortunately, our state leaders do not see any direct benefit to the leaders themselves from good quality public works. Good roads or efficient sewage systems are not seen either as vote-winners or as financially attractive to the leaders themselves. (The rhetoric in Gujarat is too loud for us to conclude that things have changed.) While corruption among public officials is common worldwide, nowhere is this impacting citizens with such pathetic public services as in India. Cairo and Manila (which are not exactly corruption-free) have better roads and sanitation than Indian cities.Much as we may be opposed to centralisation, corruption is least in our Central government. It is ironic, but Delhi at least has good intentions and some honest attempts are made. Most state capitals have an atmosphere where organised loot (and given the short-term horizons of our leaders, loot with great speed) is the only mantra that prevails. Should we then leverage the residual integrity left in Delhi to influence behaviour in states, cities and towns? If so, how do we go about doing it? We are in need of think-tanks that are focused, not on policy objectives, where there is more unanimity than we give credit for, but on the mechanics, processes, systems and incentive signals for implementation and execution. The beneficiaries of high growth in India’s private sector need to rise to this challenge. Dealing with this challenge will determine what kind of India we bequeath to our children. The writer is a student and observer of the contemporary Indian scenejerry.rao@expressindia.com
