Feedback on India

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Feedback from our visit to India. Think you’re going to make a fortune by investing in Indian stocks? We remind readers that ignorance and absurdity increase by the square of the distance you are from the facts…and by the cube of the complexity.

Browsing through some Indian blogs, we came across these posts by economist Atanu Dey:

“My brother came to visit me at our offices in Lower Parel in Mumbai this afternoon.

“‘What brings you to Mumbai?’ I asked. He was here to attend the wedding of the son of a high-ranking official of XYZ (a loss-making state-owned enterprise which I will not identify to protect my brother’s life). It was a grand affair attended by high-profile political figures. ‘How can an official of XYZ, however high-ranking, afford such a grand affair?’ I asked. After all, these people have a salary of about $250 a month (plus some modest perks). ‘It is all part of a system,’ my brother replied.

“The chief engineer of XYZ makes about $2 million a year in kick-backs from suppliers because the going rate is about 10% of the budget that the chief engineer controls. Just to put that figure in perspective, that is about 500 times the per capita GDP of India. When promoted to ‘technical director’ from the rank of a chief engineer, the annual take of the person goes up to $5 million. Which is why the going rate for the promotion is about $3 million. Merely having one’s tenure as the technical director extended by six months costs about $1 million.

“The private sector suppliers of these public-sector monopoly enterprises compete amongst themselves and the competition is primarily based on how much they are willing and able to give back in kick-backs to just be awarded the contracts that often range from a low $5 million to upwards of a $100 million. Merely being awarded contracts is not the end of the game. Getting paid for work done and material supplied is also a huge challenge. Without regular kick-backs, payments can take years and could easily doom the private sector supplier.

“The question that I persistently seek the answer to is this: Why is India so abjectly poor? There is no single factor, of course. But pervasive corruption has to be one of the most important factor among the mix of factors such as a poor culture, questionable ethical standards, a cargo-cult democracy, widespread illiteracy, stupid economic policies, and so on.

“India is rated as one of the most corrupt countries with a “corruption perception index” (CPI) of 2.8 and is tied in the 90th place (out of 145 surveyed) with countries such as Gambia, Malawi, Mozambique, Russia, Nepal, and Tanzania according to Transparency International Corruption Perceptions Index 2004 which notes that “corruption is rampant in 60 countries, and the public sector is plagued by bribery”. Finland, New Zealand, Denmark, Iceland, Singapore, Sweden, Switzerland, Norway, Australia, and the Netherlands hold the first ten positions as the least corrupt countries. Haiti and Bangladesh are tied at rank 145 as the most corrupt countries.

“One cannot fail to appreciate the correlation between how corrupt a country is and how poor it is. Are corrupt countries corrupt because they are poor, or is it that they are poor because they are corrupt? Perhaps there is some circularity in the causal chain and poverty and corruption are mutually cause and consequence.

“Public sector monopolies represent a resource sink precisely because they are ridden with corruption from top (the bureaucrats and politicians who appoint the high-ranking public sector officials) to the bottom (the clerk who will not push your file to the next desk without being paid his Rs 100).

“Here is my proposition. Let it be known that any corruption above a certain figure (say, $1 million) is an offense that will attract the death penalty. Between half a million to a quarter million, it will be a mandatory 20-year rigorous imprisonment. Then every month, take the harsh step of convicting about ten and hang them. In a year, the number of people who find corruption in the millions of dollars attractive will fall. This is simple economics: when the price goes up (death), the demand for the thing (getting one more million dollar in one’s Swiss bank account) goes down.”

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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