Thoughts on economics and liberty

Tag: Corrupt India

Most people in the West cheat when possible. Yet Western bureaucracies are honest. How?

It is the failure of basic economics education in India that makes it suffer so badly.

Most Indians believe that there is something wrong with the fundamental Indian character. They are wrong.

The Indian is no more nor any less susceptible to opportunism than any other human being in this world.

The difference is that Western thinkers have realised that most of them are natural born cheaters, and have developed theories, models, and systems to control such behaviour. In India, however, we have UTTER FOOLS (socialists) who believe in exhortation against corruption. Exhortation is the WORST method to bring integrity into public life. It always backfires. Chanakya understood that better than anyone. The West, too, understands it well enough.

Gordon Tullock is one of the most brilliant economists alive. I'm extracting a short section from my copy of his book, The New World of Economics. This book is a must-read (and must have) for anyone who wants to understand the world. Also, here's a free PDF of a book co-authored by Tullock: Government Failure: A Primer in Public Choice.


Cheating is a continual problem in all educational institutions. Exactly how much cheating is likely to go on across a university campus is unclear at this point, but we do have several very inter­esting studies.
Charles Tittle and Alan Rowe, both sociologists, de­signed a study to determine the influence that moral appeal and threat of sanction had on the amount of cheating that went on in their classes.
To do this, they gave weekly quizzes to their students; the instructors took the quizzes, graded them without marking the papers, and then, at the next class meeting, returned them to the students for them to grade. Without any appeal being made to the students that they were on their honor to grade them correctly, the students in one test group took 31 percent of all opportunities to cheat; the other test group took 41 percent of all opportunities.
Next the instructors made an appeal to the students' sense of morality in grading the papers, and the instructors concluded that "emphasiz­ing the moral principle involved in grading the quizzes was also ineffectual. A moral appeal had no effect whatsoever in reducing the incidence of cheating."' In fact, in one of the test groups, the amount of cheating went up substantially after the appeal was made.
AUDITS WORK! (As Chanakya said)
Finally the instructors threatened to spot check the quizzes for cheating, and the amount of cheating fell sharply from the 41-percent range to 13 percent in one class and from 43 percent to 32 percent in the other.
They also concluded from the study that the instructor who had a reputation of being "lovable and understanding" had the greater amount of cheating in his class, and they found that " . . . Those who were most in need of points were willing to take greater risks (that is, cheated more). This is consistent with the theory that the greater the utility of an act, the greater the potential punishment required to deter it. And perhaps it shows the futility of a moral appeal in a social context where all individuals are not successful."
One of the authors of this book replicated the above study in a somewhat different form and, in this case, for a slightly different purpose. He wanted to see how many students would cheat on a test which the students were told would not be considered in their grades.
He gave his classes in Principles of Economics a test on the first day of the term; he had their answer sheets photocopied and the copies graded by a graduate student. During the next class session, his secretary gave back the original answer sheets and called out the correct answers. Later, by comparing the copy and the original answer sheet, it was found that 15 percent of the students cheated, and this was on something that had no bearing on their grades.
As a point of interest, one student was rather ingenious in the way in which he cheated. In taking the test, he had left the last eight answers blank; when he was given a chance to correct his own, he filled in the answers. Because he apparently did not want it to appear too obvious what he had done, he intentionally missed three of them and marked them wrong like all the others that he had missed!
This is no new development. Several decades ago, Hartshorne and May undertook a study of several thousand children in the fourth through eighth grades. Their study, which has not been seriously disputed, is considered a classic within the psychology profession. One of their tests was to give the students a set of examinations in which the students could cheat with ease but the instructor would always know that they had cheated.
Approximately 97 percent of the students cheated at least once. The Hartshorne and May conclusion is striking: "No one is honest or dishonest by nature."
[Sanjeev: If Arvind Kejriwal could understand just this much, he would STOP his stupid mindless activity, and get serious about learning good policy.]
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Do not extend definition of corruption into private interactions

It is crucial that the definition of corruption be always understood to be this: the act of influencing, through economic incentives, a government decision. That's what it has meant throughout history, and the reason why we care about such economic incentives is because is prevents the rule of law – the uniform application of laws to everyone – from being distorted through "corruption".

However, it now appears that the Indian government is extending the definition of corruption into WITHIN-private-sector transactions.

That's merely a ploy to allow the government to say: "Look, we are not the only corrupt people, the WHOLE country is corrupt!"

In the private sector if someone is indulging in "corrupt" practice, the organisation can fire the relevant person, or otherwise organise corrective steps – including self-regulatory mechanisms.

To criminise "corruption" in the private sector would be to entirely distort the PURPOSE of seeing "normal" corruption as a crime.

I disagree entirely to the idea of extending the definition of corruption into the private sector.

Let the private sector deal with its internal corruption through its own self-regulatory means.

This is a management problem for the private industry, NOT a criminal issue.

If this law is allowed to go through, the government will shift its limited anti-corruption resources to the private sector, thereby further increasing corruption in government. Apart from giving bureaucrats YET ANOTHER lever to arm twist businesses – for corrupt money!

Why is Indian business allowing the government to enter their factories on YET ANOTHER pretext?

India Inc calls for criminalising corruption in private sector

India Inc has supported a proposed law to criminalise private sector bribery saying such an attempt would help in checking corruption.

Federation of Indian Chambers of Commerce and Industry (FICCI) has noted with approval the government attempt to amend the Indian Penal Code (IPC) to make corruption in private sector a criminal offence.

"We believe that such a provision could be an effective deterrent and help curb corruption," it said.

The Central government has proposed to make bribery in private sector — both giving and accepting it — a criminal offence by amending the IPC.

However, FICCI, said that it was necessary to ensure that the amended law does not cause undue harassment to businessmen in the country.

"It is imperative that such a law be implemented only after a thorough cleansing of the existing regulations and legal provisions…

"It is also important to ensure that the amended law does not cause undue harassment to private businessmen in the country," the industry body said.

The government's move was also supported by the Associated Chambers of Commerce and Industry of India (Assocham). Assocham Secretary General D S Rawat said that the body favours such a law which was the need of the country.

Whereas, the Confederation of Indian Industry (CII) said it was "examining the matter internally".

The draft Indian Penal Code (Amendments) Bill, 2011, circulated to states and Union Territories by the Centre for their comments, would cover graft by an individual, firm, society, trust, association of individuals, company, whether incorporated or not, which undertakes any economic or financial or commercial activity.

At present, there are no legal provisions to check graft in the private sector.

As per the draft law, whoever in the course of economic, financial or commercial activity promises, offers or gives, directly or indirectly, any gratification, in any capacity, for a private sector entity, for the person himself or for another person shall be punishable.

The Centre has asked all States and UT administrations to give their views on the proposed amendments in the IPC.

According to an expert of Pricewaterhouse Coopers (PwC), a consultancy firm, penalising errant private firms could be a way to check corruption.

"Strengthening of corporate governance norms and increasing disclosure requirements thereby creating a market mechanism to penalise errant private firms could be a way to check corruption," said Kunal R Gupta, Associate Director, PwC India.

He also cited a US Law which deals with foreign bribery saying it had a "tremendous impact" in the manner in which companies and persons in that country do business.

"We understand that in the US context US Foreign Corruption Practices Act (FCPA) of 1977 which, in a slightly different context of foreign bribery, deals with the supply side of bribery, has had a tremendous impact in the manner in which the US companies and persons do business and on their compliance policies," Gupta said.

The expert hinted support to a regulatory body close on the lines of the US's Securities and Exchange Commission (SEC) and the UK's Financial Services Authority (FSA).

"Purely based on our experience and information available in public domain, SEC in the US and FSA in the UK have had a discernible impact on the corruption in private sector," the expert said when asked whether there was a need to have a regulatory body to check corruption in the private sector.

The Securities and Exchange Board of India (SEBI) has oflate declined to play a CVC-like role to check corruption in private firms saying it was not its mandate.

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If only Anna could understand this simple 1975 lecture by B.R. Shenoy on the causes of corruption

Economic illiterates are running rampant in India. 

Although Anna Hazare (who only studied till class 7) developed the capacity to lead a major movement for reform in India, he has never understood the basics of economics.

Arvind Kejriwal, a graduate of IIT, has NO excuse, however, for his MAMMOTH ignorance of basic economics.

I suggest that these people try to read and understand this SIMPLE lecture by India's greatest economist, B.R. Shenoy. (Shenoy gave this lecture in February 1975 at the H A College of Commerce, Ahmedabad.)

If its leaders don't understand BASIC economics, India is doomed.

Economics of Corruption

In the outside world — unfortunately, not in India — there are two dis­tinct camps in economics: interventionists and non-interventionists. Communists represent the extreme case of interventionists. Interventionists of the socialist hue were in control when we came to direct our own economic-political affairs after Independence in 1947; and with the growth in economic chaos which attended the pursuit of socialist policies, communists have been on the ascendant through infiltration and the propagation of their theory which blames capitalism on the growing chaos. Their strategists argue that there is no hope whatever of any escape from the chaos other than via the adoption of communism.
There is little indication of any shift to non-interventionism among econ­omists in the academies, in government and its agencies, in business firms and in chambers of commerce. This applies, too, to publicists and intellec­tuals, though there is increasing recognition of the failure of socialist poli­cies. Strange as it may seem, the strongest opposition to a policy U-turn would be mounted by the chambers of commerce and industry.
It is not widely known in India that interventionism has invariably undermined the viability and progress of all breadline economies which adopted interventionist policies, and that no country, whether developed or underdeveloped, which entrusted the direction of its economic affairs to the price-market mechanism, has had anything but bumper returns. If we are to be saved from economic-political disaster, it is time that we aban­doned ideological predilections and subjected our policies to a basic trans­formation.
Both theory and experience have shown that corruption is among the inevitable by-products of the policy of interventionism. Corruption neces­sarily grows as these policies progress. Indian is a classic illustration of the functional link between corruption and interventionism.
Some people have stated that corrup­tion is an age-old institution in India, that it goes back to the Mughal days. We are told that, in the Punjab and else­where, when the income of a young offi­cial of marriageable age is considered by interested parties, due note is taken not only of his recorded income but also of the unrecorded — though nonethe­less real — income opportunities which his official position offers. Corruption certainly dates back to the Public Works Department of the British days.
We will not linger on this argument. Corruption and its ally inflation do not hurt us any less because they are old and universal ailments — they undermine character and mass well-being all the same. Our concern here is the effect of corruption on mass well-being. And this effect is considerable.
Corrupt payments financed by monopolies
Now, what is corruption? The corrupt incomes we are concerned with are illicit payments made to officials and politicians in power, or payments to party funds, for monopoly documents which bring windfall monopoly incomes. It is a matter of detail whether the payments are made directly, through intermediaries, or indirectly, as contributions to election funds or payments at fantastic rates for advertisements in the souvenirs issued on the occasion of party functions. Payments are made by the recipients of the monopoly documents to those who issue these documents, i.e., the officials who work under the general or specific directives of politicians in office.
It follows that corrupt payments are part of the monopoly gains. If monopolies did not exist, there would be no monopoly gains, and the ques­tion of this category of corruption does not arise. Monopoly gains are unearned windfalls, payments are made to gain those windfalls; and, look­ing at the phenomenon from the standpoint of accounts they debited, by the recipients of monopoly documents to the monopoly incomes. The net gain from the monopoly documents is the windfalls less the corrupt pay­ments made for acquiring the documents. The transactions being illicit are, of course, not recorded.
Corruption from import licensing
The most highly sought after monopoly instruments are import licenses, as the total amount of the windfalls they bring are enormous. Total imports in 1972-73 amounted to Rs 2,150 crore, of which Rs 780 crore (36.3 per cent) were on private account and Rs 1,370 crore (63.7 per cent) on government account.
The 'premium' that a license fetches continues to be enormous. In the case of copper, the market price is over 3.5 times the landed cost. The con­trolled price (which is based on the landed cost) is Rs 10,000 per ton, the market price Rs 36,000 per ton. The price of copper import licenses would therefore be of an order of 2.5 times the face value of the licenses. The prices of or 'premiums' on import licenses may vary from 30 to 35 per cent to five times or more of the landed costs. This means that, on an average, imports worth Rs 10crore bring windfall profits ranging from Rs 3 to Rs 50 crore, depending on the commodity. At an average premium of 75 per cent, the monopoly gain from private sector imports alone will amount to an annu­al order of Rs 585 crore.
IT IS NOT AS IF nationalisation of imports eliminates the windfalls and the corruption. So long as the windfalls obtain, corruption will go with it. Nationalisation may shift the recipients of the corrupt payments. If the cor­rupt among the officials and politicians controlling the operation of the State Trading Corporation (STC) are no longer in a position to claim the payments, corruption may change form. The windfalls may get absorbed in over-staffing, raw material leakages (which are but a variant of corruption) or production inefficiencies:
As a rule, licenses are non-transferable, so transactions in the market for import licenses are not legal. The Alladin's lamp of import licensing pro­duces fortunes as though from nowhere for a large community of importers and dealers in import licenses. The cost of production of import licenses being zero, the premiums they fetch are windfalls, and when to the gains from private sector imports are added the gains from the nationalised import trade, the total amount of the windfall gains may be of an order of Rs 1,600 crore annually.
Unearned monopoly gains on so large a scale cannot be wholly retained by the recipients of the import licenses. The inevitable competition to acquire the import licenses would necessarily bring a share to those respon­sible for issuing the licenses — the administrators and the politicians. As a practical matter, there is nothing that anyone can do to prevent this.
If Mr Afrom among those responsible for the issue of the import licens­es is beyond corruption, the only outcome will be that Mr A will forgo his share of the corrupt payments. Possibly, the shares of B,C,D and the rest who collaborate in the issue of the licenses, would go up. The chances are that these others would conspire to have Mr A transferred to another department, in order to make things safe for them. The possibility of the entire body of people, including politicians, responsible for the issue of import licenses being beyond corruption is too unreal to merit any analyti­cal notice.
Corruption from public sector contracts
Import licenses are not the only goldmine of corruption. Government contracts and contracts in public sector undertakings are among the other doc­uments in great demand for the fabulous incomes which they yield. When Rs 100 crore is accounted to have been 'invested' in public sector projects, the whole of it does not go into the projects concerned. At some places, the amount actually invested would be at 60 per cent, others at 80 per cent.
What happens to the balance? The balance is the windfall of the contrac­tor. For the same reason that the windfalls from import licenses cannot be all kept by the recipients of these licenses, the windfalls from public sector contracts cannot be all retained by the contractors. They have to share a part with the persons whose responsibility it is to accept and issue these con­tracts. Contractors have to make corrupt payment to the administrators, engineers and politicians concerned before they may get the  contracts,
What are the amounts involved? The RBI Report on Currency and Finance for 1973-74 places total public sector plan outlays in 1972-73 at Rs 3,960 crore. If contractors have to distribute 10 per cent of these amounts to get the contracts, the total corrupt payments under this head are of the order of Rs 400 crore. If they have to distribute 15 per cent, corrupt payments in 1972-73 were of the order of Rs 600 crore.
Corruption from smuggling and other illicit transactions
To this must be added corrupt payments on account of:
  1. Other control measures — every control creates monopolies, and payments are demanded and made for acquiring the monopolies concerned
  2. International trade — smuggling in gold, watches, radios, razor blades, cloth, art-silk yarn and other such goods, and smuggling out silver, rice and the like
  3. Internal trade — smuggling, mainly of rice and wheat, from the sur plus to the deficit state and urban areas
  4. Various administrative services, hurdles or penalties — petty or large bribes paid for pushing files and to the income-tax, customs and police officials.
By the very nature of things, the total amounts of the corrupt payments are not known or ascertainable, even their orders of magnitude. The actual amounts in each corrupt deal can be known only to the two parties to the deal and the intermediaries. But, quite obviously, the totals would not be tens of crores of rupees but several hundreds of crores of rupees.
By far the largest amounts of the corrupt payments would be from import licenses, public sector contracts, and smuggling.
Any administration exposed to these Himalayan corruption potentiali­ties would succumb to the temptation. With so much money to be had, even the German civil service, reputed for its integrity and efficiency, may fall a victim.
If I may quote notorious smuggler Haji Mastan Mirza's statement: "Smuggled goods do not rain from the heavens, they move on roads." They cannot move so freely without the active co-operation of the officers of the various customs and excise departments.
Eradicating corruption
How can corruption be prevented when an import license — a piece of paper which costs nothing but the signature of the concerned official to produce — authorising the import of, say, copper worth Rs 5 crore fetches in the market over Rs 12 crore?
Competition for the document would neces­sarily bring into being corrupt payments. Schemes to prevent this are not worth a moment's notice. The various reform schemes will only shift the parties receiving the corrupt payments. Corruption will continue. If, for instance, the issue of import licenses is entrusted to an independent board of men of the highest integrity, corrupt activity will move from the government departments concerned to the independent Board and its staff.
The only hope of eradication of corruption on the current scale is a com­plete U-turn in our policies — abolition of import control and exchange restrictions, a drastic scaling down of public sector outlays, auctioning away to the highest bidders in the private sector the existing public sector undertakings, removal of the system of permits, licenses and quotas as Professor Erhard did in Germany and limiting government activities to their natural sphere.
There is, however, little hope of any U-turn in our policies. Prime min­ister Indira Gandhi, addressing a public meeting at Mangalore on 11 January 1975, declared that she would not budge from her party's policies merely for political exigency. She added, "We have not done it and we will not do it. We feel strongly about our policies and we are not going to listen to anybody." Corruption being a by-product of the prevailing policies, this means that corruption will continue; this will not only undermine national character but also economic growth and social progress.
Black market incomes
Import licenses, government contracts and other instruments of statist con­trol over the economy yield phenomenal illicit incomes to the recipients of these instruments. Their total magnitude can be placed at an order of Rs 750 crore annually. The largest bulk of it — of an order of Rs 460 crore — ensued from the traffic in import licenses; an order of Rs 260 crore from contracts in public sector undertakings and other programs of 'development', and the rest from price controls, permits and concessions.
This phenomenon adds unduly to the undeclared cash transactions in the economy as distinguished from transactions paid for by cheque. First,the recipient of an import license who has incurred illicit payments for acquiring it cannot enter these payments in his books. But being part of his costs, he has somehow to recover the amount  from      the sales of the goods imported against the license; he arranges to get some of his receipts in unaccounted form, i.e. cash. This may take the form of fictitious inter-sales to non-existent parties or receipts of payments partly in cash and partly by cheque, the receipt being made out only for the latter.

Secondly, being illicit earnings, they cannot be entered in the books or figure in the income-tax returns. The earnings must be held in cash — not as deposits with a bank — and payments from them, whether for consumption or for invest-merit, must be in cash.
The amount of the black incomes being so considerable, the attendant necessity for cash transactions has, in recent years, altered the currency component of the Indian monetary circulation. The amount of currency with the public has risen relatively to the amount of bank money. In 1951¬52, the amount of currency with the public represented 69.5 per cent of the total monetary circulation. Since then the industrial sector of the economy, where the banking habits of the people are better developed than in the rural sector, has expanded by 92 per cent, or at an annual rate of 9.2 per cent.

ORDINARILY, THIS SHOULD have led to an increase in the ratio of bank money — cheque currency — to the total monetary circulation. Yet, it is the currency part of the monetary circulation that has gone up; the latter has fluctuated upward with the intensification of statist economic policies, the ratio of currency to the total money at the close of 1961-62 being 73.2 per cent. The currency part of the circulation has grown to meet the pronounced increase in black market transactions.
The annual accruals of illicit incomes are much more than the annual average increase (Rs 470 crore) in the Indian national income of the decade ending 1960-61. If such large incomes were to remain permanently illicit, their cumulative effect might soon become intolerable, through black market transactions growing in extent and volume. But 'black' incomes are being continually converted into 'white incomes. We may briefly recall some of the devices though which this is effected.
Probably the most common device — because it is the simplest to operate — is to understate domestic expenditures. If a black marketeer's household expenditure is Rs 3,000 per month, it may be shown in the books as, say, Rs 1,000 per month. This would permit monthly overdrafts on black incomes of Rs 2,000 to meet household expenditures. Equivalent open incomes being thereby left unspent, they take the place of the black incomes utilised for household expenditure: we have here a case of the conversion of black earnings into white. But the amounts that may be transferred into white incomes in this manner are limited by the magnitude of domestic expenditure, and one would have to wait for a long time to transform large amounts of black money.
The application of this technique to marriage expenditures and to the costs of buildings and equipment might enable larger sums to be redeemed from the black label. One is often struck by the comparatively low declared costs of impressive residential structures put up by businessmen and cor­rupt state officials. The explanation frequently is that a house costing, say, Rs 150,000 is accounted to have cost but Rs 60,000; the balance represents payments from black income. This is a case of Rs 90,000 of black money being baptised into white money, through the former now becoming an openly marketable asset — a residential building.
Considerable amounts of illicit earnings may be converted into white with the collusion of bullion dealers. An individual Bulchand with illicit earnings ofRs 200,000 may engage in a fictitious 'sale' of 'ancestral jewelry' of this value to a bullion dealer, Chimanlal. Chimanlal will then make an entry in his books of purchase of Rs 200,000 of jewelry from Bulchand and of payment to the latter of Rs 200,000, thereby converting black funds into white. He can now deposit the amount in a bank, entering it in his books as the proceeds of the sale of inherited jewelry.
But the transaction presents a problem to Chimanlal, the bullion dealer. His accounts will show a purchase of non-existent jewelry. The security of his position from the clutches of income-tax authorities requires that the 'purchase' must be balanced by equivalent 'sales'. To make the fiction real­istic, Chimanlal gets the jewelry 'melted' at a refinery or goldsmith, the costs of such melting being duly entered in the books of Chimanlal and of the refinery or goldsmith, this operation calling for collusion of the latter. Having 'melted' the jewelry into bullion, Chimanlal straightens out the position in his books by showing in it 'sales' of bullion to numerous benarni parties (fictitious individuals). Once the purchase is cancelled by such sales, Chimanlal's position is well fortified.
For the services thus rendered by Chimanlal to Bulchand, the former charges the latter a commission at the market rates for such services, the current rates being placed at 8 to 10 per cent of the sums involved. This covers the payments for 'melting' the jewelry paid to the refinery or the goldsmith.
SINCE HOUSE CONSTRUCTION cannot go beyond needs and 'ancestral jewelry' may have limits, black-marketers may resort to other techniques of changing the label of their earnings. One such is to 'purchase' the business losses of individuals. This is a rather complicated operation and needs clarification. A businessman Premchand, who has suffered a business loss of Rs 200,000 may 'sell' this loss to another businessman Mansukhlal, who has black money for conversion into white. Premchand would then make after-the-event entries in his books to show that the losses suffered by him represented the balancing profits of Mansukhlal; the relative transaction being stated to have been effected with the latter. This fiction would enable Mansukhlal to bring out his black funds into the open, as they would be now declared as business profits. Forward transactions, especially on the stock exchange, are rather easily amenable to the application of this tech­nique. It is believed to be in vogue extensively, the transactions being put through specialist brokers and go-betweens who have come into existence to meet the large demand for such services.
Considerable demand exists, too, for the concealment of open incomes, the chief motivation behind this being tax evasion, as the tax rates on the upper income slabs are exorbitant. We have developed police-proof techniques to bring this about — these latter are generally the reverse of the techniques for converting black money into white. They include overstatement of domestic and marriage expenditure and of cost of buildings and equipment, and 'purchase' of business profits.
With two decades of experience behind us, the needs of the black mar­ket have been by now well institutionalised. As has been aptly remarked by one writer, the black market sector of the Indian economy today is well past the take-off stage of development. The phenomenon is revolting to the national conscience, and there is no remedy to it other than to strike at its roots — abandonment of the policies of statism. So long as statist policies remain, corruption too will remain.
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Remembering B R Lall and his crusade against corruption

I came to know only today that Mr B R Lall passed away in November 2011.

B R Lall made many useful contributions to India.

The first time he came to public notice was with the Jain Havala case. Here's a description from the jacket of his book:

The author as a Joint Director in the CBI piloted the investigations of many important cases including the famous 'Jain Hawala Case'. It was a God-sent opportunity for the CBI to clean the dirty stables of Indian politics and administration as the case had necessary potential as also the mandate of the Supreme Court to investigate the high and mighty. The CBI Director Vijay Rama Rao wanted to close the investigations by filing bogus chargesheets against some bureaucrats and subsequently included the names of certain politicians in the list, but the author refused to oblige. Later the director asked for chargesheeting certain high profile politicians from both the ruling and the opposition parties including L.K Advani; but the author resisted any blanket chargesheet without requisite evidence and instead advocated complete investigation, including searches for looking into the assets of all including the heavy weights like Union Ministers (serving and the former), leaders from other than the ruling parties, serving Prime Minister Narasimha Rao and also the former PM Rajiv Gandhi as their names had occurred in the diaries and the statements of Jains. The case was taken away from his charge and the chargesheets, devoid of any substance, were filed knowing fully well that these would fall at the very outset. The author warned the director in black and white that he was "scuttling the scam and betraying the nation".

The relentless fight of the author for truth and transparency in the CBI brought him in sharp confrontation with Director Joginder Singh, who defined the law for every individual differently and applied the tools of discipline to force the desired results out of the investigators. The author raised these tricky questions in the CBI conference with the then Prime Minister, Deve Gowda. Gowda listened to the author, but he rediculed him and all the agencies who claimed to work against corruption. No wonder, the author was jettisoned not only out of the CBI, but from the Government of India itself, as if the biggest threat to Government emanated from the truth that he advocated.

I met B R Lall only once – at a talk that I gave in February 2010 to retired IAS/IPS officers and generals at Palam Vihar, hoping to get them to support FTI.

My focus on economic policies and incentives didn't ring a bell with most of those present. Indian officials blame things either on corrupt politicians or corrupt bureaucrats. Things are very simple: PUNISH THE BAD. There is not much appreciation of the role played by institutions (rules) and incentives.

After my talk, B.R. Lall and I kept on the discussion for a while. His was a largely a "penalty-oriented" approach – which I don't disagree with, but to which I would like to add another key variable: incentives. Despite our disagreement on matters of detail, Lall's commitment to integrity in public life shone through very clearly.

Let me end by saying that in November last year India lost a powerful advocate for integrity in public life.

Lall will be remembered for not giving up till the end.


Please note: By publishing these here, I affirm support for the goals that Lall supported, not necessarily his precise recommendations.

Jan 14, 2011
An open letter to PM from BR Lall. Seven steps to rid India of SoniaRaj, Scandal Raj, Corruption Raj, Chamcha Raj.

1) Establish a high power “Independent Commission Against Corruption” that will cover all shades of public servants, including the highest politician, as also the people from the private sector. The commission would be absolutely free from any governmental control and will submerge into it the functions of the proposed Lokpal, the existing CVC, the CBI and the enforcement directorate as also of the government as at present in relation to corruption cases.

2) Repeal the provisions of section 26 of the CVC Act as the registration and investigation of a crime should not require any permission from anyone for any criminal charged with an offence of corruption even if he be a constitutional functionary or a legislator of any description.

3) Similarly repeal section 19 of Prevention of Corruption Act. This is a requirement of a colonial power and not of the democracy that boasts of Rule of Law.

4) Amend Prevention of Corruption Act to provide for more stringent punishments. As of now a person amassing even thousands of crores of rupees through corruption does not attract a punishment beyond 7 years. It should extend upto punishment for whole of life for corruption or amassing assets beyond certain level.  Do away with the notional fines; a provision need be made to confiscate any of his properties or those of the family members to recover the amount equivalent to misappropriation alongwith penalties.

5) Make Tax evasion a cognizable crime punishable with a Jail term that should be commensurate with the amount evaded.

6) Amend Representation of People`s Act to debar all the chargesheeted persons from fighting elections or from holding any office in the government or in any registered political party. The persons convicted for any term, of course, cannot find any place.

7) Rules under the Benami Property Transactions Act 1988 be framed and promulgated immediately.

Other measures can closely follow in the 2nd and 3rd phases, but in any case if we mean business the whole spectrum of laws and the enforcement need be recast and implemented without any distinction or favour, equally amongst all like the advanced countries.

And finally, on Lokpal bill:

Break stalemate on Lok Pal Bill

B R Lall

A fierce controversy is raging in the country regarding the creation of Lok Pal as an effective agency to check corruption and black money that have been ruling the roost ever since  the drawn of independence. Gandhiji in 1947, A.D. Gorwala committee in 1951, Santhanam committee in 1963 and also D Sanjiviya, the Congress President in 1963, all presented frightening accounts of corruption and black money, the country was steeped in. However all these warning signals were ignored.

There have been scams agalore regularly, but unfortunately the problem received no attention.  There is no doubt that corruption exists in all the societies, as basically it is nothing but expression of greed about which Gandhiji said'…the world is not enough for one man`s greed…….."  So unless checked by the strong arm of law it will always be there to menacing extent. Countries under colonial rule always suffer from corruption very badly, but take strong steps on attaining independence as happened in USA in 1789 and Singapore in 1959, the very years in which they won their respective independence.  In all the well meaning countries around the globe it is only the strong arm of law accompanied with strong enforcement that has made difference to corruption and its progeny the black money, but we have scrupulously been avoiding such action. The enforcement and anti-corruption agencies have remained under the tight control of the same government that they were supposed to investigate. Obviously the slaves (investigators) never investigated the masters. Corruption and black money have been treated as perquisites by the elite and the governing classes, so that no laws/procedures that could check them were ever enacted/ enforced.  Lok Pal bill is one such glaring instance.  On the recommendation of Santhanam Committee report of 1964 and subsequent to the recommendation of the first administrative Reforms Commission 1966, the Lok Pal Bill was introduced in the Parliament in 1968 but care was taken not to pass it.  It lapsed with the Parliament completing its term.  Subsequently, it was introduced for 7 times more in every house of Lok Sabha except the last one despite the fast undertaken by the great living Gandhian Shambhu Dutt Sharma.  The present effort by the civil society is continuation of that.

The focal issue has been to free the investigating agencies from the control of the executive both administrative and political. The Jan Lokpal is a step towards that direction and has attracted public attention from April when Anna Hazarre undertook fast unto death. The public response was tremendous. The shaken government came down on its knees to break the momentum that it had gathered, but by now it is absolutely clear that the government is not prepared for autonomy for the investigating agency that the Jan Lok Pal bill basically asked for, besides the other issues.  By now very marked differences are obvious.

The first issue is to take out the PM from the ambit of the Lokpal.  As per the government the PM has to take quick decisions of enormous import, especially in the existing security scenario, that the PM is accountable to law so there is no reason for him to be accountable to anyone else, that the PM can be prosecuted if he is found to be corrupt after he demits the office and Kapil Sibal  put a counter question that in which country the ruling PM is prosecuted. It has further been argued that some undesirable elements may make false complaints in order to harass or to blackmail.

All the higher functionaries are subject to the same and work in the similar circumstances. It is not understood, what is the relation between corruption by a PM and the existing security scenario, or his taking quick and important decisions. Does it all give him a licence to be corrupt?  The laws of corruption, it must be made very clear, do not permit a corrupt practice even by the PM and under our constitution the PM is not above law. Further, it is a ridiculous proposition that the PM should be prosecuted after he demits office.  PM by his central position exercises unfathomed discretion, which at the hands of a corrupt person even for a single day can be catastrophic.  How can action against corruption that too a PM wait till his retirement and he be given free hand to loot and bleed the country. If so, let all others charged of corruption be tried after they retire or demit office.Why should A Raja be made to resign prematurely.   Sibbal is absolutely wrong in contending that in no country the serving Prime Minister is prosecuted.  The facts are just the opposite as Berlusconi the sitting Prime Minister of Italy is being prosecuted at the moment.  Prosecution against Fuji Mori of Peru commenced when he was still the President.  In Japan during Lockheed Scandal Prime Minister Kakuei Tanaka was forced to resign in 1974 immediately after the  allegations of corruption appeared in public though he was chargesheeted in 1976, what to say of being proved guilty and all that. Clinton of USA and Shavernadze of Georgia were dealt with while in office. If Kapil Sibbal thinks that way then let the Prime Minister resign whenever there is some prima facie truth in the allegation against him so that he demits office immediately and the investigations and prosecution can pick up.

Argument that PM is accountable to law coming from a distinguished lawyer is unbelievable and disastrous as everybody else is also equally accountable to law.  In any case the Lok Pal becomes relevant only if there is corruption angle and in that case the Lok Pal is the visible arm of law. Under the Lokpal or any other investigative agency the PM is only made accountable to law. If a corrupt Prime Minister is allowed to continue, writing on the wall is clear that the PMO will become the seat of Mafia and this country will be worse of than today as corruption is decentralised today whereas with a Prime Minister beyond any accountability it will get centralised as no action will be possible under the shade of the great umbrella.

Another argument that was also supported by Justice J.S. Verma and Justice Venktachaliya, the retired distinguished Chief Justices of the Supreme Court, is the stability factor arguing that in States there is provision for President's rule under the Constitution but at Centre there is no such provision.  As such there will a vacuum in the administration in the intervening period if PM were to be removed.  Corruption is a permanent destabilising factor for the society in that it leads to social, economic and political unrest.  As compared to that the destabilisation that is likely to occur because of the resignation of a serving PM is nothing.  Also the Cabinet is a continuing factor and as per Constituition the responsibility lies on the Cabinet as a whole and not only the PM.  The outgoing Prime Minister can be replaced by the senior most member of the Cabinet till such time the regular Prime Minister is elected once again.  What happens when nature chooses to remove the serving Prime Minister.  After all Nehru, Shastri, Indira Gandhi all died while in office and the No.2 person did take over.  If in those crisis situations there was no problem what problem can arise if an undesirable Prime Minister is replaced.  That will only save the country from the rot.  By exit of such a Prime Minister the country and the society has only to lose its chain of corruption in which it would be tightly held by a corrupt Prime Minister and his team.

The next major issue pertains to judiciary. The case of judiciary is different in that the judiciary in a democracy is the final adjudicator and the interpreter of laws. As such they need not be under the watch of the Lokpal. But at the same time they have to be fully accountable to a different mechanism, the National Judicial Commission that should be constituted immediately and its decisions should be final and non-appealable in any court.

Perhaps the only valid argument advanced by the opponents of the Jan-Lokpal bill is that the Lok Pal has powers of investigation, prosecution, vigilance, administration as also the punishment.  At present most of these powers are combined in the governments as they control the enquiry, the registration, the investigation, the prosecution as also the withdrawal.  It is these powers that have made and perpetuated the government to be corrupt and uncontrollable.  There appears to be merit in the contention of the government that Jan Lok Pal bill will turn the Lok Pal into an autocratic body which will not be in the interest of the country.

Another connected issue is dividing the Public Servants into two categories. Those above the level of Joint Secretary to government will be the subject of the Lok Pal and others will continue under the present arrangement of CBI investigations. It needs be appreciated that all the big cases of corruption involve various ranks simultaneously. Compartmentalisation as proposed will only frustrate the investigations and help the corrupt. We have enough experience of this trick in the single directive that protected the Joint Secretary and the seniors and under that shield all the investigations were evaded.

There is the proposal to split the CBI by taking away the anti-corruption wing of the CBI to Lok Pal and leaving out the economic offences wing.  Economic offences wing cannot be separated from the anti-corruption wing as the two are interwoven. Corruption is by the government agencies and bungling by the private sector will be covered by economic offences wing basically.  The statistics from GFI suggest that the corruption accounts for only 5% of the off-shore deposits whereas 30% comes from the Drugs and Terrorist crime etc and 65% of the money comes from economic offences only.  Though the corruption may contribute just 5%, but is the enabling factor for the remaining 95%.  In India also it has been studied by the Transparency International that the truck operating agency pays a bribe of Rs.22, 000 crores to various government departments of which the basic payments are for allowing over loading.  The overloading, as per their data, works out to Rs 8-10 lacs crores. Corruption is just the 2.5% and the remaining is in the domain of economic offences, but it accrues as a consequence of corruption.  If there was no corruption this generation of black money to the tune of Rs.8 to 10 lacs crores on which tax evasion would be over Rs.2 lacs crores, would not have arisen.  The economic offences wing and the anti-corruption wing should move together either to Lok Pal or should remain in the domain of CBI which should not be split and for that some alternate structure be found out.  If the economic offences wing is left in the hands of the government, the investigations will not be comprehensive as CBI will not be able to go whole length as at present.  Rather there is need to bring the Enforcement Directorate as also the Fraud Squad also under the same umbrella.

The basic premise was to free the agencies from the control of the government, their re-arrangement is secondary.  Incidentally I had raised the issue of functional autonomy for CBI as early as 1996 through my article titled "HOW TO MAKE CBI A FREE AGENCY" in Hindustan Times on 1.3.96.  I had clearly brought out that the CBI tightly held under the control of the same executive whom it was investigating, cannot deliver goods.  That was perhaps the beginning of the fight.  This end can be achieved without concentrating powers in the hands of the single institution called the Lok Pal, by strengthening both the institutions the CBI and the Lok Pal as the arrangements exists in other countries.  Lok Pal is essentially the Ombudsman of Scandinavian countries in early 20th century  and now exists practically everywhere in the world under different names.  In USA it is enshrined in the institution of Inspector General but its opinion and recommendation is heard unlike in our country where the effective Lokayukut exists only in Karnataka and Madhya Pradesh.  It is the Karnataka Lokayukt only that enjoys sound legal infrastructure and see how beautifully it encircled the mining Mafia and brought the mighty Chief Minister on his knees.  However, nowhere in the world the investigation is with the Ombudsman.  It is only the preliminary investigation or the enquiry that the Ombudsman conducts.  We can follow similar arrangement in India as detailed below.

CBI should continue as it is but should be brought under a statue and made accountable to an independent body that shall be constituted outside the Govt and should function free from the control of the Government functionally as also financially.  I had visualised an independent board for CBI in my article of 1996 as referred to above and reiterated in my book "Who Owns CBI: The Naked Truth". The essence was that all the members were to be thrown up by the system automatically so that they are not beholden to anyone in the government or outside.  Secondly, after their term, they were not allowed to take any job or profession so that they don't have interest to follow.  Third they were all people retired from positions of respectability.  Even if one of them had any weakness that will be prevented, neutralised or diluted by their collective actions.  Lok Pal on the other hand would combine the functions of Vigilance, the grievance redressal and such like other functions and the moment it comes to investigations, it should transfer the case to CBI with its recommendation. It should be binding on CBI to register such a case if recommended by the Lok Pal and investigate. This arrangement will also meet with all the objections that Lokpal will be an unmanageable body, or will have diabolical concentration of powers.

It has been argued from the side of Government as also some other groups in the media that small groups like the Anna team cannot hijack the fight against corruption, as they do not represent the entire society. Further that they were trying to bye-pass the parliament and thereby thwart the democratic process and hence the democracy. The Aam Aadmi now asks whom such groups and the government are befooling.  For 43 long years they did not pass even the lame Lok Pal Bill that was proposed in 1968.  Have not the citizens waited for over four decades. What were the great champions of democracy doing all these years?  When Anna Hazare gave a call in April, was not the response widespread everywhere in the country that had unnerved the government that it was compelled to ask Anna's team for negotiations.   They may or may not be the elected representatives, but they have been thrown up and given respectability by the voice of the people.  Even if a few persons say a right thing why not consider and adopt.  Does whole of India not want corruption to be tackled?  If any proof is required the Government can hold a referendum and let me assure that the voting in favour of tackling corruption effectively will be near 100%. It does not matter if the term Referendum does not occur in the Constitution as has been opined by some experts in the TV debates.  Alternatively shall we wait for clouds to build Yemen or Egypt style or are we waiting for the Georgian experience where the people invaded the Parliament house.  The President Shavernadze who was addressing the house had to run for his life.  It was depicted by someone on the internet that the President nearing 80 was sprinting at his age chased by the crowds.  It is the police that saved the life of the President, but he had to tender his resignation there itself to save his life and not to throw the country in violent struggle.  Will that only mean the opinion of the people for our government and our shallow thinkers?  Let me warn that if necessary steps are not taken, that day will not be far off.  Now Anna Hazare wlll be prevented from  fast in Delhi from 16th August or people accompanying Baba Ram Dev could be attacked in their sleep but imagine the consequences if 50 lacs people were to converge on Delhi from all the sides as it happened in Georgia, who can stop them lawfully or even by coercion.  Let us avoid such catastrophe and establish financial order in place of financial terrorism that the present economic and administrative and political managements have led us into.

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