Advocates of liberalisation argue that by reducing state intervention and increasing transparency economic reform reduces corruption. Recent allegations of corruption suggest that this may not be true.

In a season for scandal, allegations of large scale corruption have captured political India's attention. The instances to which such allegations relate are many, varying from the sale of 2G spectrum and the mobilisation and/or disposal of land and mining resources to purchases made as part of large and concentrated public expenditures (as in the case of the Commonwealth Games). If even partly true, these allegations that corruption may have increased in scale, overwhelm the evidence of small scale corruption among petty bureaucrats and local government functionaries.

Associated with such instances of the possible misuse of powers held by state functionaries for substantial private gain is huge profit for some of the richest individuals and for leading domestic and foreign business groups. This leads to surplus accumulation among two groups. The first is among those serving the state apparatus in high positions. The suspicion that this could be occurring is strengthened by the growing nexus between politics and business and the huge increases over time in the assets reported by individuals contesting elections to parliament and the legislatures. The second set of potential beneficiaries consists of the business groups which derive gains from the purchase of pecuniary benefits for a small price. If we go by the Comptroller and Auditor General's estimate, the loss of revenues to the state from the mispricing of 2G spectrum alone is Rs. 1.76 lakh crore or close to 10 per cent of Gross Fixed Capital Formation in the economy in 2008-09. If a large share of that loss is being transferred to those acquiring spectrum it points to huge benefits.

It needs to be noted that transfers of this kind to private capital are not always the result of corrupt practices. There have been many instances where sections of the private sector have made huge gains through means that are “unfair,” even if not illegitimate and not associated with credible allegations of corruption. One such, involving spectrum again, was the implicit bail out of investors who made irrational bids for cellular bandwidth during the first round of auctions. Though these bids were irrational, the government helped the bidders meet their initial commitments by allowing them to retain a few of the multiple circles in which they had, not surprisingly, won licences. However, when these bidders turned operators, they discovered that they could not operate profitably if they were actually required to pay the amounts they had bid to obtain even these licences. The government, therefore, allowed them to migrate to a revenue sharing regime rather than a specific licence fee system, allowing them to make huge profits subsequently.

The point to note is that the irrational bids made by these operators had kept out a number of rational bidders who may have been more efficient suppliers. Yet, by allowing the irrational bidders to substantially reduce their commitments the government rewarded them. This was to say the least unfair, even if not illegitimate because no clear evidence of corruption emerged. This was one more instance where unfair business practices and state patronage at the expense of the exchequer permitted sections of the private sector to garner huge profits. But no allegations of corruption were involved.

It is to be expected that such instances would increase under liberalisation since the state increasingly dilutes or gives up its role as an agent influencing and regulating the nature and scale of private activity to take on that of being a facilitator of private investment. In fact, the very process of transition to a more “liberal” regime is fraught with potential instances of corruption, as the allegations of under-pricing of public assets in the process of disinvestment of public enterprises illustrates. The process of decontrol and deregulation is also accompanied by efforts at promotion of private investment, involving public-private partnerships and help to the private sector to acquire land and material and financial resources. As a result, besides the old type of corruption where state functionaries demand a price for favouring individual firms with purchase orders or permissions and exemptions, there is a new form in which those benefiting from state support could be called upon to share the transfers they receive with the decision makers involved.

Advocates of liberalisation have argued that by reducing state intervention and increasing transparency economic reform would reduce corruption. The allegations of large scale corruption suggest that this is not true. Liberalisation does not mean that the state withdraws from intervention but merely that there is a change in the form of state intervention, which also enables the state to deliver illegitimate gains to individuals and private players.

The flip side of this process is that there are new avenues through which the private sector can garner windfall gains that raise private profits, increase internal resources and allow for an acceleration of private capital accumulation. There is ample evidence of a substantial increase in private profitability, corporate savings and private wealth since the launch of liberalisation and especially during this decade. But this has been attributed to the entrepreneurial energy released by liberalisation, with no role given to the benefits from transfers engineered by the state. In fact, when discussions of corruption occur, the possibility that it serves as a mechanism for private aggrandisement receives little attention. The tenor of the discourse is that the virus of corruption afflicts only the government officials and politicians who control and misuse state power. But increasingly corruption appears to reflect payments made by the private sector to realise illegitimate gains that are not merely violative of fair practice and/or the law, but damaging from the development, environmental or fiscal points of view. Given the large amounts that can be garnered in this fashion the state seems to be turning into an important site for primitive accumulation for the private sector during the phase of liberalisation and economic reform. If true, this makes the private sector not just complicit but a participant in the acts of corruption, if any, involved.

Those making illegitimate or excessively large windfall gains may need to evade the tax and/or other laws of the country. This encourages the illicit transfer of wealth out of the country which too is facilitated by liberalisation. According to a recent estimate by the Global Financial Integrity programme of the Centre for International Policy, the money that had illicitly flown out of India to accounts abroad over its post-Independence history stretching from 1948 through 2008 was around $213 billion, the present value of which equals 36 per cent of India's GDP in 2008. Interestingly, there are signs that the outflow has increased substantially. According to the report titled The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, “68 percent of India's aggregate illicit capital loss occurred after India's economic reforms in 1991, indicating that deregulation and trade liberalization actually contributed to/accelerated the transfer of illicit money abroad.”

Thus, a feature of the new liberalised economic environment is an increase in the instances of alleged corruption. But this feature tends to be missed. In a world where profit making and the accumulation of wealth is celebrated and rewarded, where it is the “bottom line” that finally matters, unless circumstances lead to the detection of fraud or a violation of the law, an increase in the wealth of a private sector player is normally seen as a virtue and a reflection of “entrepreneurship” and “innovation.”

This does limit the degree to which the problem of corruption can be addressed. If corruption tends to be embedded in the process of accumulation it is expected that it would be far more present than would otherwise be the case. Whenever allegations of corruption emerge because of “leaks” possibly triggered by corporate or political rivalry, controversy ensues and investigations begin, but little of significance results. This makes the demand for better ways of investigating and awarding punishment in proven cases of corruption eminently sensible. But this alone would not do. What is required is a change in the policy regime that legitimises the conversion of the state into a site for the primitive accumulation of capital. Also required is caution when celebrating evidence of quick and substantial enrichment of sections of the private sector.

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