Eliminating corruption in India will also require Indian businesses to demand anti-corruption laws

On June 11, 2012, in India, by Sanjeev Sabhlok

Anti-corruption movements typically tend to focus on bribe receivers. This focus is well placed. Without dealing with the drivers of corruption (basically, socialist policy), no country can successfully deal with this problem.

However, there is another side to corruption, as well: the giving of bribes.

Potential givers of bribes face three choices:

a) Do not bribe and face possible loss of business

b) Bribe through an agent in a manner that can't be traced to the business

c) Bribe directly and record it as a legitimate expense of doing business.

When even the smallest "inspector" has the power to shut down your business, (a) is not a real choice. It is not a real choice when the truck you are driving has been stopped by police at a checkpost and they won't let you through till you pay them a bribe (else they may even beat you up). In India, most small businesses don't really have a choice to not pay a bribe.

But big businesses do have a choice. They CAN stop paying bribes if they really want to. But they don't. There are reasons for that, as well.

When late Chief Minister Hiteswar Saikia shunted me out from my role as Director, Rural Development, Assam because I refused to award a large cement contract to a private company that was not the lowest bidder, there were two basic problems involved: The TOTAL corruption of the (socialist) Congress party, but also the willingness of that private company to pay Congress a bribe to obtain an illegitimate business advantage.

A big company has the ability to not pay bribes but such companies know that if they don't pay bribes, then other large companies will do so, and their business will go bust, particularly where government is a large buyer.

At one time, option (c) was available to international companies that operated in India. They could officially record their bribes as a business expense. That option has now been removed through various amendments to Western country laws that forbid the payment of bribes.

Some big prosecutions have occurred in this area (e.g. of Siemens), thereby helping reduce the tendency of Western companies to bribe developing country public officials.

Such whole-of-business perspective is necessary, else corruption won't be controlled.

Therefore, it is necessary to bring in legislation in India that will severely punish companies that GIVE bribes. Only companies with turnover larger than Rs.10 crores should be roped in at this stage, since there are just too many small businesses which simply can't survive without paying bribes on a daily basis.

Bring such legislation into effect would ensure that (a) becomes a real choice for big Indian companies.

I wonder if big Indian companies would be willing to come together and demand such legislation. It will be in their interest to do so.

FTI would be (probably) be happy to help draft such legislation.

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Tagged with: Corrupt India

7 Responses to “Eliminating corruption in India will also require Indian businesses to demand anti-corruption laws”

Sanjeev Sabhlok says:

June 10, 2012 at 11:04 pm

Eliminating corruption in #India will also require Indian businesses to demand anti… http://t.co/S4IL1yuJ
All Indian Blogs says:

June 10, 2012 at 11:53 pm

Eliminating corruption in India will also require Indian businesses to demand anti-corruption… http://t.co/jVGpMtC5
Polevaulter Donkeyman says:

June 11, 2012 at 9:31 am

Sanjeev–

Is there a paucity of laws in India punishing bribe givers? India has:

1. The Prevention of Corruption Act, 1988
2. The Benami Transactions (Prohibition) Act, 1988 to prohibit benami transactions.
3. Prevention of Money Laundering Act, 2002
4. CVC, CBI and plethora of enforcement agencies

Have they made any difference to the incidence of the corruption? How severely do you want to punish offenders? Death Penalty?

I would recommend you read this paper by Kaushik Basu: Why, for a Class of Bribes, the Act of Giving a Bribe should be Treated as Legal. He is GoI’s chief economic adviser.

Here is a summary:

The reasoning he offers involves game theory, which tries to analyze how players will act in situations where the outcome also depends on the behavior of others. He suggests that once the law is altered in this manner, the interests of the bribe giver and the bribe taker will be at odds—and that will help reduce corruption.

In theory, once a demand for a bribe has been satisfied—and the service received, one presumes—the bribe giver may be interested in cooperating in getting the bribe taker caught, knowing that he or she will not face any punishment. That possibility could deter the bribe taker from taking a bribe in the first place. Right now, the interests of both converge, since both payer and taker face punishment if caught, and so the payer has a reduced interest in uncovering bribery.

In his postulation, Mr. Basu clarifies that the act of bribe taking is still considered illegal, and the total punishment meted out for bribery may still be the same. He says that if under the existing system, the bribe giver and the bribe taker are fined x rupees each if caught, under his proposed regime the bribe taker should pay the full amount if caught and the bribe giver nil.
Sanjeev Sabhlok says:

June 11, 2012 at 10:01 am

Thanks, PD

I’m aware of these laws, and also of Basu’s proposal. See my comments on his proposal at Marginal Revolution, cited here:
http://sabhlokcity.com/2011/05/et-tu-basu/. I entirely disagree with Basu’s proposal.

I’m recommending something MUCH stronger than what India has. E.g. see this:
http://www.crimeprevention.gov.au/Financialcrime/Pages/InformationandAwarenesspack.aspx

Note that enforcement will need to be significantly improved, as well.

s
Polevaulter Donkeyman says:

June 11, 2012 at 3:54 pm

Sanjeev–

As for your criticism of Basu’s proposal, you state:

1. Game theoretic. The idea of exposing the bribe-taker will not arise in a repeated game scenario of crony-capitalism that is typical of India

Basu addresses this in his paper:

It is worth being clear that giving immunity to the bribe giver, even when this is restricted to harassment bribes, will not cause bribery to vanish altogether. This is because of the interests of the serial bribe giver, that is, a person who regularly meets with government officials and is asked or offers to pay a bribe or the agent who acts as go between in crimes of bribery. For such a bribe giver, reputation is a matter of great importance, as game theory emphasizes and people with common sense know. In other words, a serial bribe giver, planning to aid the judiciary in trapping a bribe taker, will have to weigh the cost of his loss of credibility among the officials with whom he interacts repeatedly and gives bribes to against the gain of getting her bribe money back.

I think this a valuable path to take. A big reason for inertia in the struggle for corruption is the notion in most Indians’s mind is that giving a bribe is the only way to get things done. By reducing the incidence the corruption at this lower level this could also decrease the tolerance of corruption at the upper levels.

2. Hopeless justice system … What was the result? In each case the bribe-giver paid off the ‘system

Note that this objection would be valid for any other system you propose such as stronger laws and punishment. If existing laws are not enforced why will future hypothetical laws?

One of the reasons why bribery works in India is that both the bribe giver’s and taker’s incentives are aligned and therefore they can trust each other. WHen you introduce mistrust into this relationship, you break the alignment of incentives and thus make the bribery relationship less workable and successful.

No doubt that reduction in corruption would be greatest by adopting public policy which minimises incentives for corruption and encourages good people to tneter into politics. But that would take a long time to implement. Basu’s proposal would work faster with no significant downsides.
Sanjeev Sabhlok says:

June 11, 2012 at 5:28 pm

Dear PD

Basu’s proposal is wrong for many reasons. This is an atrocious idea to “regularise” bribe giving. Let’s not even discuss it further. It beggars belief that such people call themselves economists. They bring great shame to the discipline. Without an ethical foundation, such “economics” has become a big joke.

I’m all for “regularising” corruption through systems that identify the issue through economic analysis and fix it in an open and transparent way.

I’d like big businesses that pay (BIG money) to be severely punished. Basu’s idea is deplorable and must be condemned. Let him focus on system reform. On that he has come out with a big ZERO after his many years in government.

s
Pulkit mohan singla says:

November 9, 2012 at 8:52 am

Eliminating corruption in India will also require Indian businesses to demand anti-corruption laws http://t.co/OItCPdPf via @sabhlok

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