Indian economy's biggest challenge

By Kaushik Basu Professor of economics, Cornell University

The nuclear deal with US divided the polity

Seldom are parliamentary proceedings in India as exciting as they were last month when the Congress-led government survived a no-confidence motion against it, after its Communist allies pulled out support and a motley group of smaller parties stepped in.

The nation watched the parliamentary debate and the vote with an attention that is usually reserved for cricket matches.

At the heart of the controversy was the '123 Agreement' between India and the US, which requires India to open up its civilian nuclear facilities for international inspection and, in return, the US and other members of the Nuclear Suppliers Group (NSG) to lift the blockade that was placed on India in 1974, following India's testing of a nuclear device.

The blockade prevents India from importing uranium and other 'dual-use' materials and machines that can be used for the production of nuclear weapons, even if India wishes to use them for peaceful purpose.

Desirable agreement

This meant that India could not expand the production of nuclear energy.

From India's point of view this agreement seems eminently desirable.

One of the most distressing features of the Indian economy is corruption Your comments on Kaushik Basu's article

It is, therefore, not surprising, that the Indian parliament finally signalled its approval of the agreement by defeating the no-confidence motion.

There are a few more steps to be taken by the international community before the agreement takes force. If and when that happens, it will figure as one of the most major breakthroughs of this government.

India's energy demands are soaring

It will be a de-facto recognition of India as a nuclear power but that is not what I am referring to (and it is not clear that that is a reason for celebration).

To me what is more important is that the agreement can have a huge impact on the economy.

Expectations have been raised in many quarters that, without the restraining effects of the Communists, the Congress-led government will now usher in important economic reforms.

Domestic lobby

I do not think that one should expect much to happen on this front.

Maybe some small banking and insurance reforms will go through but not much else can be expected in the short run.

For one, it is foolish to think that all restraints to reform were coming from the left.

There is still a large lobby of domestic firms that is against foreign corporations coming into India. And this force is not about to vanish.

Second, with elections round the corner the government is unlikely to attempt any major reform just now.

The main boost will come from the fact of India having the option to produce nuclear energy and also from the signal-value of the lifting of the blockade to the world of India being a recognised global player.

If the price of oil climbs very high and our effort to produce solar energy continues to be frustrated, nuclear energy can jump to a major source of power.

Once the big worry shadowing India's growth curve, namely, the possibility of power shortages, is somewhat allayed, the nation could see a sharp rise in foreign and domestic investment in the form of start-ups and industrial expansion, and be able to concentrate on other important reforms.

Corruption afflicts the real estate industry in India

For ordinary Indians, one of the most distressing features of the Indian economy is corruption.

Rightly so. Corruption is morally degrading, eats into the fabric of society and hurts economic development. A government that can credibly promise to deliver on this will gain instant support.

This is where the present government can leverage its recent victory in parliament and make a difference to the nation.

The Indian Prime Minister, Manmohan Singh, is one of those rare politicians, whose power comes largely from his honesty and decency. He is in a position to spearhead a move to curb corruption.

This will not be easy since large vested interests have developed in the present system and there will be resistance.

There are some sectors, such as housing and real estate, where corruption is so endemic that a law to book all corrupt persons will cause an intolerable disruption of business.

The design of corruption control is a subject on which a large literature has developed.

The plan has to combine moral commitment with intelligent design.

If this government can start on such a program now and deliver on it over the next five years, this will go down in independent India's history as a change as significant as the reforms of the early nineties and maybe more.

Here is a selection of readers' comments

A very hard hitting and precise article. I do agree major stumbling block(s) for India to grow is India itself! Corruption is rampant, population even though growing less astronomically is still a major concern, the major metros are bulging and buckling under the influx of immigrants and honestly we are still a divided society. We are still fighting amongst ourselves whether on religious front or now amongst the states. In order for us to move forward in the 21st Century we would have to adapt to western economies give or take few reservations. Its important to note China, the neighbouring giant, has risen to epic proportions in just last 20 years. India can do the same by educating its population, making the infrastructure strong, providing benefits and conditions for every person and start pushing technological achievements within its own country. This is not something which a government alone can do but a collective effort by individuals of my country.
Rohit K. Bhatnagar, United States

A great article and it also shows the level of corruption in India at every facet of life. The last time when the opposition parties walked out, they were brought back with promises and actual cash. The biggest challenge that India has is via corruption that is totally out of control, and the place to clamp is at the top and not at the bottom.
Chandru Narayan, USA

It is common to talk about corruption slowing business in India. It does to some extent, but it is also a lubricant to business. Things which don't get done because officers are not interested in putting effort, get done with greased palms.
Shriniwasckale, India

I couldn't agree more! Corruption is the strong thread woven around India and Indians. I used to think that younger generation which does not have vested interests will be the locomotive to tear bit by bit of this fabric, but alas I'm only a dreamer. I'm also a victim of corruption and feel sad that India can never take its rightful place in the comity of industrial nations so long corruption lasts to the current magnitude.
Vin Surendran, USA

You have identified the challenge rightly but I disagree with your proposed solution. We Indians have a lot of freedom in this democratic set-up but we get what we deserve. I have seen leaders who have done a lot of development in their constituency lose elections to criminals and corrupt politicians just because of casteism. This is true in Uttar Pradesh and may be true in other states although reason could be different- communalism, regionalism etc.
Vatsheel Singh, India

This article misses the point that the nuclear deal is nothing but conceding to America's power and a vindication that Indian science and technology is not good enough to solve its nuclear power problem. It has long been known that India's thorium reserves are among the largest on Earth, but in 60 years India has failed to develop a technology to create power from it. So now we have to rely on American technology to do the same with uranium and increase our ever-increasing need for imports. What a shame and what a disaster for India's environment and society this whole "economic growth in the name of progress" is having.
Procheta Mallik, UK

While writer is spot-on about Indian economy's problem, his grasp of Indian politics is doubtful as he thinks its the PM who's running the country. In the present government, its the old horses like Arjun Singh et al (too many to name). Who are the very people responsible for this state and who benefit from status quo. If Congress fighting for corruption is akin to OPEC bringing down the oil prices. Good in theory but impossible in this lifetime.
Anupam Gupta, Newcastle UK

There are three major impediments for increasing the trust and confidence of investors in India. These is corruption in some sectors of the economy, the potential for political interference in the economy, and too much influence of the leftists in the government. These leftists essentially have no interest in the economic progress and self-reliance of India, and they are still clinging to their outdated cold-war era world-view. UPA government's recent bold step has somewhat controlled this roadblock to progress and economic expansion (at least for the time being).
D Sinha, USA

In the US or UK you have to pay a bribe to get an official to do something illegal or morally reprehensible. Therefore, these are developed-corruption countries. In India and other transition societies citizens have to bribe officials also to give them their legal entitlements. Therefore, these are developing-corruption countries. Intelligent design of corruption control is about moving countries from the second category to the first.
S Venkatas, United States

In 1992 Bill Clinton had a slogan, "I am starting with the man in the mirror", a Michael Jackson song he used for his campaign. While there are many philosophers in India who preached a similar attitude, vast majority of Indian population today have developed a whining attitude of simply pointing fingers at politicians, rich businessmen, etc. While the fact is an average Indian today have given up on moral values, ethics, honesty, and you will find almost every Indian being dishonest, deceiving, corrupt, unreliable, as that has become part of life, struggle to stay alive, a dog-eat-dog environment. Can you trust a doctor who would misdiagnose and remove your kidney, can you trust your lawyer who can be bribed Rs.5000 and betray you, can you trust your sales person who will sell all your customer list to competitor, can you trust a cab driver who will manipulate meter, can you trust a ticket vendor who will give short change, can you trust a milk man who will adulterate milk, can you trust a college degree that can be bought for Rs 100,000 without ever attending college. It is unfortunately a degrading environment. And it will take major revamp to reverse the process.
Vashishtha, India

The article depicts the state of affairs as Indians know it and as the world over knows. What then is the purpose of the article? Coming from a Professor of Economics, the opportunity to write on BBC website, on Indian matters, would have been better justified if the article dwelled on proposals for change rather than reiterating the status quo.
Venkata, USA

Corruption? It is all a matter of supply and demand. The country has a large population and fewer resources. There is continuous struggle for the resources. Thus the inevitable corruption in every walk of life, whether it is malnutrition, farmer suicides or whatever. This has been the story of the country for the past 5000 years. About 10-15% of the population will do well and the rest will do poorly.
Hanji, USA

With a sudden focus in last few years that India has a future and a vibrant economy, nationalism is becoming a populist theory among the Indians living in cities. This is where you can see the optimism of a future. However, this is feeling which comes out in a cricket match or on a national day. Rest of the time, it is all about 'me'. Regrettably most of us Indians are so 'I' centric that we have stopped looking beyond our family in to the society. Accepted corruption as way of life, derelict infrastructure is the norm, corrupt politicians and an administration that is best known for its inactivity. We have to start looking beyond 'me' and look at gradually improving the fabric of the society - little by little - be it in their own neighbourhood. That is when true change will start.
Vivek Seth, UAE

Kaushik Basu has neither understood the nuclear deal nor the significance of the trust vote. The nuclear deal which will allow import of uranium and nuclear reactors by India contains conditionalities which will make India's foreign policy aligned to that of the US. That is thoroughly undesirable. And the way Manmohan Singh has won the trust vote, has eroded his credibility and moral standing. Manmohan Singh is leading the Congress Party into a ruin in the forthcoming elections.
Abhay Kumar, India

Indian cannot stand erect until corruption stops. In my opinion the only person who can help India straighten its backbone is the present Prime Minister. Dr Singh I hope you are listening and will take action for "my dream to come true".
Serouze Kazamani, USA

The day an Indian government musters enough courage to take on the vested interests of entrenched business lobbies, who would rather not change anything, there would be hope. Let the reforms in finance, insurance proceed on one hand and ensure the independence of judiciary on the other with meaningful support. Take some risks with labour law changes and we have added enough punch to the prospects of success in future. Of course, we would need at least a few more like Dr Singh to come forward and deliver. Not everything is lost. Things would take a turn for the better if there is a will.
Kanwal Chopra, Australia

I feel Manmohan Singh could have brought in major governance reforms, but for the major obstacles which could have placed in his path by senior Congress leaders, who have much to lose from such changes. Having said that I feel Singh has made major compromises and lost his moral standing as a result of the trust vote. Moreover, it is well known that during debates with the Left on the economy, he and Chidambaram were known to have adhered to a strong uncompromising 'neo liberal' stand on increasing the minimum wages etc. The problem of corruption is correctly diagnosed as something arising out of severe inequalities in Indian society. But any serious contextual analysis will also find that it also quite related to the lack of internal democracy, transparency in funding and accountability within political parties in India. Politicians from most parties are judged by their ability to mobilize funds for the party. And they find their access to ministerial positions or local government positions just grants them the right to buy their way through the party hierarchy. Some of them have even refused to file their income tax returns.
Bharat, Canada

It is a great article and many original ideas presented quite eloquently. I like the role that corruption eradication as paramount to India's economic development. However, the article failed to provide a long term solution to corruption. In my opinion, investment in quality education is crucial in tackling the root causes of corruption. Education is never a major political agenda for Indian political parties in their election campaigns. I see a real need for building the fabric of morality which is becoming a rare commodity with all South Asian leaders. A strong emphasis on quality education at all levels and more so at the elementary (primary) level is of utmost importance to fight corruption. It is not just institutional reforms but real hard core investment decisions that help to build Indian human resources that is crucial for its economic development.
Tika Adhikari, Canada, Canada

I read these comments and not the many from outside of India. It's simple, if a county that wanted and won independence over 50 years ago is not developed than it's likely to mean that this is it's position for the future. Like the Dalit born into his caste it is almost impossible for him to be anything else. For me India is now a "mature and developed" country. We just don't have the visionary people to run it. We have mobile phones, plasma screens, shopping malls and hi-tech global firms. But just ask any educated Indian to which county he would like to live and India will probably not be the answer.
Karsan, UK

In some ways, Basu's article is innocent. Like most Indians he sees corruption as an aberration, external and solvable issue. It is far deeper than that. It is intertwined with social, religious and structural inequalities and disparities in India, which have become so much a natural part of our lives that we never notice them. It is absolutely wrong to see to corruption outside these. The only way it can be tackled is by removing deeply entrenched inequalities at the level of caste, religion, ethnicity, class, economic opportunities (as in Europe). For example, India could ban use of caste names as surnames. Nothing significant will happen save superficial and cosmetic changes because it will require some sort of benevolent dictatorship to do it. And Indians are far too slippery and cunning to let go of any privileges.
Owais Aftab, India

I think that all these suggestions about the importance of fixing corruption are nice. If we accept the thesis that India is a democratic country, then we determine who the leaders (in the main) are. The police officers and IAS bureaucrats are also chosen among us. Then isn't asking the government to fix corruption a little like drug addict parents asking their spoilt kids to fix the neighbourhood's drug problem? The fact is that we are morally rotten at the core. Our whining about the state of affairs just says that we are pretty short-sighted too. How many people have you seen who throw their household trash out in the street, keep their house clean and then complain about how the city is too lazy to clean up after them? This is not something that is unique to us, I think (except the whining part, maybe). You just need to see Gangs of New York to see what the US was like when it was about as poor as India is today (I mean India on the street, not the rarefied India of the stock market and IITs). Maybe these things will sort themselves out when we get richer.
M Singh, USA

In India we have all the laws in place to curb corruption but the enforcement of these laws is missing. We need a revolution for this enforcement to happen from both people of India and the government of India. In US and other nations this enforcement is strictly in place, Hence the level of corruption is low. The desire to eliminate corruption should come from both people and government. For this to happen people need to sacrifice their personal lives and comforts by not entertaining corrupt people to get their work done, even if it takes generation to eliminate corruption. This will allow at least the future generations to live a quality life in peace and harmony. The question is when is this going to happen, will it ever happen, can we sacrifice little bit of our comforts for the sake of the better lives of our children? Even the corrupt people should be aware that they are affected by the same corrupt practices they are following and it will affected their children and the generations to come. Any country is never a super power until it has good amenities for quality living.
Ramprasad, India

Corruption and government harassment was the main reason for my emigrating from India. No small businesses can operate and prosper without greasing the palms of bureaucracy. Corruption is also responsible for the brain drain from India as talented people are more intolerant of corruption.
Munir Gilani, Canada

Yes every Indian known the corruption and population are big issue for Indian. But who is responsible for it. Who chooses government? Ourselves? Instead of blaming system we should blame ourselves? Most of us gives bribe to get our work done? Whom should we blame officials or ourselves?
Manjunath, India

Kaushik Basu is indulging in stereotypical finger pointing. No I am not quite in agreement. Major problem of India is not its corruption. Corruption exists in different hues in varied intensity all across the world. Society has learnt to live with corruption and progressed in spite of it. Indians are no exceptions, they have also learnt to live and excel in the prevailing environment. In my opinion what India needs today is infrastructure. Let there be corruption in deals for infrastructure projects, let it take shape irrespective. India has reasonably superior and hugely affordable communication infrastructure. The economic advancement that we see and experience today is largely due to that. Now let there be roads, roads and more roads, let there be airports, improved railways, India will reach destination it deserves. Yes, Dr Singh is one rare exception, but please appreciate; today Indians take democracy as a license to perform any and every act. On a typical day's work Dr Singh needs to deal with a host of them, appeasing them towards the aim of survival of his govt. I am sure he personally would not be in agreement with many of those decisions. Finally one of Dr Singh's not so worthy predecessors inflicted a near fatal blow on this nation by instigating and resurrecting caste politics. I know not when and how India will get rid of cast and religion based politics in its present form.
Prabir Chakraborty, India

Interesting to see that most of these comments are from those who are based outside India, including the writer itself! Though this in itself does not disqualify anyone's thoughts, it does nonetheless lead me to take the outsiders' views with a pinch of salt. I am assuming of course that they are no longer exposed to India on a day-to-day basis.
Aditya Baa, UK

I think the present government of India should deal with corrupt officials first and at the same time more reforms are needed and build its infrastructure
Suraj Kumar Ratti, England

Corruption is a symptom rather than a cause of obstacles to progress. Some of the causes have already been pointed out by some of the readers. The best way out is that all persons living in India and dealing with organisations in India be professional in their dealings. One can make a start with the persons who are reading this article and the responses. Let them do their best to follow the rules and encourage others to follow the rules - even if it turns out to be inconvenient to them. Also, it will be good if the morally strong and professionally competent persons start getting back to India and contribute directly by living and working here to help it become a more prosperous country. This will be a far more worthwhile contribution than analysing and recommending remedies sitting in other countries (as is evident from many in the list of responses you have posted).
S Sundar Kumar Iyer, India

The author is absolutely right in saying controlling bureaucracy and corruption is more important than anything else in India. My vote goes for such a political party but I cant find that in India! But everything is not yet lost still there is lot of hope if we make a beginning today.
Keshav, UK

I think only leader like Manmohan Singh who does not fall under regular politicians can do this kind of clean up reforms.
Siva S Palaparthi, USA

Kaushik, your column is becoming to stereotypical, having the same pessimistic tone and texture to your India related articles.
Percy B, UK

Corruption, bureaucracy, lack of infrastructure spending are just some of the problems often cited as roadblocks to India's growth. Questions are also asked about what kind of growth (sustainable, equitable, rapid)? Growth for whom? What about some of the less visible but no less tangible problems with respect to growth generally? What about the desires of the certain portions of the middle class to escape into "gated communities" and forget they live in a developing country? What about that inevitable frustration that will come in the wake of bombastic descriptions of the country as "Shining", books like "India Superstar", "Planet India" or "India Unbound" from both those poorer Indians and those whose dreams of India as a Superpower send them crashing back to reality?
Randeep, Canada

I agree that Manmohan Singh was an honest and decent man free from any corruption charges. However, the political realities of Indian politics have made him take support from MPs convicted of murder to save his government. Politicians accused of severe corruption charges are (were) ministers in his cabinet. The recent win in the parliament is so murky that there are very grave allegations against the UPA government and also the opposition. All these raise question marks on his honesty and his abilities to bring about the changes. Having said that perhaps you are right when you say the government which gets rid of corruption in India would go down in the history as the government that changed India forever.
Datta, USA

Corruption is the fact of life in India and one has to accept it. It's included in the package deal of "Democracy". I mean, come on, to manage 1.1 billion (110 crore) people from the most diverse of the background is not easy. Plus, the fact that we are only 61. It takes time for any nation to fix itself and India with her history and number of people, it's especially hard. One always overlooks the most important fact that India has been a "Successful Democracy" through out her history. There are so many sub-casts in India, religious sub-casts, social sub-casts, economic sub-casts, political sub-casts. I would like to congratulate India and Indians on her 61st birthday. Needless to say, "Proud to be an Indian". We have one thing that others don't have and that is "Hope". Hope for a better tomorrow
Viki Shah, USA

Its funny you talked about this government and corruption and mentioned absolutely nothing about the RTI act. And Mr. Basu, you once again wear your neo-liberal jacket, you highlight corruption in real estate and housing but said absolutely nothing about the huge amount of corruption in basic amenities which affects most Indians.
Vikram, India

The same old story "How corrupt is India!" repeated! No one, not even an eminent economist like Mr. Basu(with the exception of Amartya Sen and a few on the Left), seem to understand that problems like corruption are a by-product of large deprivations that exist in the Indian society and economy, which have only worsened in recent years - thanks to the government's blind adherence to neo-liberalism. Child malnutrition, farmer suicides, agrarian distress are the real problems that face the economy today. When shall we, if ever, get out of this partisan mindset that 'good economics' is all about making your economy attractive to foreign investors while paying the least attention to existing deprivations and miseries?
Ajit C Lahiri, USA

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