There is perhaps none who does not rail against corruption and its baneful impact on the country’s economy as well as on its social fabric. Governments pledge to stop and eradicate it, middle class drawing rooms discuss its baneful influence on national life, the press continues to expose its prevalence, religious leaders and moralists preach against it, while courts of law and the police express their inability to stamp it out. From the helper in a Government office to some of the top functionaries of our Governments, almost everyone seems implicated. Paul Wolfowitz, the soon-to-be-past president of the World Bank, has surely helped to underline the universality of this scourge across country and ethnicity.
It was in fact a World Bank study which put the value of all the bribes paid all over the world in 2003 at over US $ 1,000 billion (or one trillion). Some experts consider this a gross underestimation. A study of corruption in India by noted economist Arun Kumar some years ago estimated that the country’s “black economy” accounted for as much as 50% of the national GDP. At today’s figures, this proportion would mean that India’s black economy is approximately US $ 500 billion a year.
According to the global corruption index produced by Transparency International (TI), the foremost corruption monitoring body internationally, most South Asian countries fall far below the watershed 5 point mark on their 10 point scale. A 10 on this scale implies a total absence of any corruption, while 0 indicates a completely corrupt economy and society. India is at 3.3 points, Sri Lanka at 3.1 points, Nepal at 2.5 points and Pakistan is at 2.2. Bangladesh with 2.0 points is at the bottom of this table for South Asia while Bhutan at 6.0 points is the only honourable exception. This means that if anything, corruption is deeper and more widespread in South Asia when compared to other parts of the world, including the third world.
Even if we take Prof. Arun Kumar’s estimate of the “black economy” being half the size of the legal economy in India as representative of South Asian economies in general (though TI data indicates that other countries are more corrupt and therefore their black economies may be bigger), it would imply that the size of Pakistan’s black economy is at least US $ 62 billion, given that its GDP for 2006 is estimated at US $ 124 billion; Bangladesh’s black economy is at least US $ 31 billion at its 2006 GDP of US $ 62 billion; Sri Lanka’s black economy is US $ 47 billion with its 2006 GDP of US $ 94 billion; Nepal’s black economy would be US $ 4 billion given that its GDP in 2006 was just US $ 7 billion+. So by conservative estimates, and remember these are merely estimates, the size of the illegal economy in South Asia would be in excess of about US $ 650 billion a year. While the size of India’s black economy (like its legal economy too) dwarf’s that of its neighbours, the very fact that these economies are that much smaller indicates that the political power of their black economies could be much greater than in India.
The mind boggles at the size of corruption. While everyone seems to rant and rage against it, corruption only gets bigger and deeper with each passing year. Unfortunately, solutions to corruption have fallen into broadly two categories. The first strategy has been of moral strictures and ethical exhortations by religious heads, by those with moral authority in our societies and by State functionaries. The second strategy has been of enacting laws, establishing rules and framing policies by Governments and public authorities to curb corruption. While the first has been a spectacular failure, the latter too has floundered in most cases.
The reason for the relative failure of all measures to fight corruption has to be found, as with all successes and failures in our societies, in a class analysis of the situation by discovering which class is placed where in relation to corruption and who benefits in what manner.
It would be instructive to refresh the demographic structure of our societies before we continue with the discussion. Let us take India again as an example. A third of our population of 1.1 billion people live in cities and other urban areas. Of the urban population, about half would comprise the working class and “lumpen proletariat” of micro-traders, beggars, layabouts, etc. These are normally not part of the black economy and their economic presence is negligible. One half of the urban population, or about 15% of India’s total population would be involved in government jobs, trades, businesses, professions and private sector employment. This is the demographic section which is most deeply implicated in the black economy as a social class.
Of the rural population, that section of the rich peasantry and landlords who have managed to integrate successfully with the market would also contribute to the black economy but their total contribution, given the low productivity of agriculture and its share in the GDP pie (about 20% of GDP), can be ignored for the time being in our financial calculation, though it plays a politically significant role.
Prof. Kumar’s study of India’s black economy estimates that black money is concentrated in the top few percent of the population based on income. He estimates that it is concentrated in the top 3%. Even if we expand the ambit of the stakeholders of this illegal economy to include the entire class of urban employees, businessmen, professionals and industrialists, it would comprise about 15% of India’s top population by income. According to a study, India’s top 10% of households earn 33.5 % of its income, while the top 20% of its households earn 46.1% of the total income. The bottom 40% of the household earned less than 20% of the total income. If we combine the figures of this study with Prof. Kumar’s, it would suggest that the top 10% of the households, apart from earning a third of the legal income, also control an extra-legal economy with a GDP of US $ 500 billion a year! Given that the 2001 Census showed up 192 million households in India, this mean that the top 19 million Indian households have a combined annual income in excess of US $ 800 billion, while the remaining 173 million households have an income of about US $ 600 billion. If we take Prof. Kumar’s estimates, it implies a much greater concentration of wealth, with 33 million Indian holding much of the black economy assets.
It is necessary to put this black economy in some perspective as to its size, political influence as well as its implications for the character of the Indian ruling class. When Harshad Mehta, the infamous stock broker, was caught in the early 1990s, I remember that the income tax calculated on what was discovered of his unaccounted for wealth came to approximately the same as the Government of India’s entire education budget for that year! Even granting for the meagre levels of Government spending on education in India, this is surely big. Earlier this year, Hasan Ali a horse breeder in Pune, who was supposed to be fronting for four national politicians, siphoned off about US $ 8 billion from India to Swiss Banks using the hawala routes. That is as much as the total FII (foreign institutional investments) into the Indian capital markets in 2006-07.
Very little of this money is actually kept hidden as most of it is poured back into profitable economic activities. The main difference of the black economy with the legal one is that there is no legal control over this money and no public scrutiny. No taxes are paid for this and it is not part of the larger wealth which society can use for public purposes. It truly is “private” capital outside of all public control, other than that, this money is as much capital as any other legal wealth. If we accept this definition of black money, then it implies that at present the ruling classes of India hold much of their capital outside of any State control.
With no agricultural income tax, the rich peasants and landlords “legally” hold their incomes outside State control, but the existence of this thriving black economy implies that much of India’s middle class too holds its wealth outside of State control. While a part of the capital of the industrial bourgeoisie is also held in black, much of it is per-force in the legal economy due to the very structure of industrial capital.
Let us now see what implications does this have to our discussion on corruption in India. There are mainly two ways in which this black money is generated.
One, is by siphoning off money from Government schemes and payments. Former India prime minister, Rajiv Gandhi, once famously said that out of every rupee which the Government spends on welfare schemes only 14 paise reaches the actual beneficiary. Even in other Government expenditure, whether it be infrastructure or defence, money is siphoned off. This is a veritable open secret, even though the Government would never accept it.
Government expenditure on welfare is a direct concession to the demands of the poor. It is the “subsidy” which our Governments purportedly give to the poor to keep them quiet. These allocations are made in our budget but much of the money does not reach the poor. So while the poor are pacified by the announcement of huge schemes with massive financial outlays, the income redistribution they are meant to effect never really happens. This money, siphoned off by Government officials, contractors and other middlemen who form the bulk of our middle classes is nothing but a financial transfer from the State to those classes on whose ideological and professional services the State survives. They provide the legal, religious, educational, media and other services which sustains the hegemony of the State among the working classes and peasantry.
There is a political aspect to this siphoning off of Government funds, specially those which are meant for social welfare and infrastructure. These funds are directed towards shoring up the economic, social and educational condition of the poor and marginalised populations. In a country like India such development of the poor and marginalised classes would pose a direct challenge to the Indian middle class’s position as a member of the ruling class alliance, as this position depends entirely on their monopoly in providing managerial, cultural and ideological services to the industrial bourgeoisie. It is therefore, a clear material interest of the Indian middle class to deny the poor and marginalised the possibility of rising to levels where they can challenge the former’s hegemony. Therefore, we find that the Indian middle class is at the epicentre of both corruption (which is a material way of denying even partial benefits to the poor and marginalised) as well as the desi variant of fascism (which is an ideological method of keeping the poor and marginalised down).
The second way in which black money is generated is through tax evasion and keeping goods and services out of the ambit of legal transactions. This reduces one, the amount of revenues generated by the State which could be used for public purposes, and two, it reduces public control over a very large part of the economy. Therefore, I have suggested that the black economy is truly “private” capital without any State control.
While this class arrangement is well workable under low growth economic regimes, it becomes difficult to sustain when the economy starts globalising successfully. Today Indian capital wants its State to be as powerful as possible. Corruption, while it allows the present ruling class alliance to thrive, weakens the State. No card-carrying member of the present imperialist caucus can sustain the levels of black economy that India boasts of at present. It is therefore, not surprising that India’s most visionary neo-liberal finance minister, the present incumbent, P. Chidambaram has brought in a slew of measures which actually hit hard at the generation of black money. The introduction of VAT not only helps make India a truly seamless single market, it also helps curb black money generation. Similarly, the strong disincentive to perks and non-financial benefits to employees through the ‘Fringe Benefit Tax’ and the tax on cash withdrawal. Maybe small, but surefooted, steps towards a more “transparent” economy. No wonder India has been among the best improvers in Transparency International’s global index of corruption!
South Asian States, whether democracies or tyrannies, have had to make large populist concessions to the poor and marginalised who live within their national boundaries. The specific form of that populism has varied greatly, but some form of populism has been invariant in all our countries. On the other hand, again despite great variation, the ruling classes have been, as ruling classes often are, loathe to give up their power, position and share of national wealth.
Corruption, or the siphoning off of public money and keeping a large part of the economy outside of public scrutiny, has been one of the most effective tools of our ruling classes to, one, reduce income distribution to the minimum necessary level, and two, keep a significant part of their capital “private”. Unless a significant transformation of social and political power is effected in our societies, it would be impossible to make a dent in corruption as it has entrenched itself as one of the most important ways in which our ruling classes effect accumulation of capital.
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A much shorter version of this was published in The Post on 23 May, 2007.