‘Inspector Raj' still rules

IFR India Special Report 2011
12 min read

For all its promises to address the perennial problems of inadequate infrastructure and bureaucratic red tape, the Indian Government is failing to convince its population that it is open for business.

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It is July in Mumbai and the mercury is well into the 90s, as is the humidity. It is early in the monsoon season in India’s financial capital and everything is coated with a light sheen of moisture. Sanjiv, the manager of one of the city’s leading textile stores, mops his brow and shakes his head wearily. “We just finished one inspection [income tax, as it turns out] and already we have another [fire safety] starting tomorrow. It just never ends.”

Sanjiv is not the type to curse, which is just as well. Already this year, he has been inspected nine times by various, generously moustachioed, bureaucrats. Eight more checks are set for 2011 alone, including electricity consumption, salary levels, union representation, and race-in-employment quotas (ensuring a firm hires staff from across India’s caste system). “I don’t mind the last one,” he says with a smile, “but all of this” – and here he spreads his arms wide – “is done to help business-hating civil servants line their pockets and hinder our progress.”

It is a common lament in India, a nation of two faces. One, smiling and genial, is turned to the world. It beckons banks and IT giants in search of low-cost engineers and English-speaking support staff, as befitting a country central to the “Bric” grouping of emerging-market nations. “We think the ’India story’ is very much intact, with potential growth in excess of 8% per annum expected this year,” notes Paul Gruenwald, chief economist for Asia Pacific at ANZ.

This face, says Nitin Rakesh, chief executive officer at wealth manager Motilal Oswal Asset Management, is the India of “Aspirers” and “Seekers”, a robust and fast-expanding middle class, with cash to spend on real estate, automobiles, and all manner of consumer staples.” It is the India benefiting from an almost unique historical demographic dividend, where around half of all the nation’s 1.2bn people have yet to reach 25 years of age.

However, that face has a darker flip side. This is the India of Sanjiv and a million other business owners that view their own government with distrust and even hostility.

An increasing number of Indians openly despise their political leaders. Forget, for a minute, that a staggering number of elected politicians (three in every 10 officials elected to the Lok Sabha, India’s lower house, in the 2009 elections) have faced criminal charges, including 84 cases of murder. This fact merely promotes the perception that local strongmen can trade money for power.

An unusual plea

The greater problem is that beneath the self-important governing elite squats a sclerotic bureaucracy with little interest in changing anything for the better. In recent years, Premier Manmohan Singh has made belated attempts to push through a reform agenda aimed at cutting red tape, slashing bureaucratic middle management, and turning the intra-government decision-making process clearer and more transparent.

Nothing of the type has happened. Sir Mark Tully, a veteran journalist, who headed the BBC’s New Delhi office for more than two decades, believes there are “huge vested interests with having no reforms at all”. Indeed, he adds, “there is increasingly a general feeling here that India is closed for business”.

This feeling has so pervaded India that Singh, a lame-duck leader bullied by his ministers and wielding authority on behalf of India’s real powerbroker, the Italian-born Indian National Congress party chief Sonia Gandhi, was forced to summon leading members of the business and media communities to his office this summer.

Singh, desperate to drive the debate, enjoined chief executives and editors to buy into the story that India’s political leaders were committed to their stated reform agenda. The journalists and CEOs listened politely, then left, unconvinced. As one leading editor present at the meeting remembers: “Singh was trying to be tough, which doesn’t come naturally to him. He talked a lot about the retail industry opening up to greater competition, and the insurance industry, but he seemed distracted, as though he was talking to us only because someone, somewhere, had told him to.”

School children dressed as military soldiers sit in Chandigarh

Source: Reuters/Ajay Verma

School children dressed as military soldiers sit in Chandigarh

“Real” reform still seems to be a pipedream, whatever leading officials say. Foreign multi-product retailers, such as Walmart, Tesco, Carrefour, are still largely banned from India. Foreign insurers are allowed to own no more than 26% of their local joint ventures. Global banks are allowed to open new branches at a painfully slow rate, and face an increasingly hostile foe in the (mostly respected) Reserve Bank of India.

Global IT giants are allowed full access to the market, but “only because the government doesn’t understand technology”, notes one technology analyst. Ministers’ desks are piled high with forms filled out in triplicate – unintentionally mocking Singh’s hopes for a paperless government.

However, it is beyond the bland confines of the Lok Sabha that one sees how this lack of political will harm Indian business. Singh and his cronies could tackle the “Inspector Raj” system bemoaned by the store-owner Sanjiv and his fellow business leaders, but he does not. His enfeebled government simply would not know where to start.

Instead, Indians put up with petty corruption at all levels, every day, by all manner of public officials, ranging from hospital staff demanding “security money” from first-time parents to policemen creating spurious reasons to slap penalties on perfectly good, roadworthy cars.

Towards India 3.0

This corruption and incompetence affects business and trade. India’s rutted highways, crowded rail system and sweltering airports are visually unappealing. However, they are also economically damaging. Fresh produce takes longer to get from the inland states to coastal cities, as do manufactured goods. This raises the point-of-sale price of every conceivable Indian-made good, exacerbating an inflation rate that has been stuck at around 9%–10% for most of the past year. A plan to create a new freight-train link connecting India’s great cities is proceeding, aptly, but inevitably, at a painfully slow pace.

It also affects government itself. A vast and complex corruption case is inching its way through parliament, asking why so little was charged for 122 new second-generation telecoms licences granted in 2007 and 2008 – many to firms with no history in the sector. India’s Central Bureau of Investigation reckons that the exchequer lost up to US$39bn due to undercharging for licences. The clear charge is that licences were handed out at a fraction of their “real” price in exchange for kickbacks.

Many ask why India’s business leaders do not take their political leaders to task. Politicians, after all, depend on the taxes corporates and citizens pay for their own income. “Business leaders have the whip hand here as they are the ones driving growth,” notes the journalist Tully. “Yet, they are not pushing for good governance, and the answer they give is that they are afraid of the government – of the inspection bodies, of the police, of income tax, all of which the state can misuse to harass people they think are their enemies.”

If that seems a little far-fetched, consider the August 2011 arrest of Anna Hazare, an activist, who had planned a hunger strike to protest against rampant corruption.

There was astonishment around the world that a democracy like India, one founded on the principles of Mahatma Gandhi – who denied himself food and water on several occasions in protest against British occupation – should act this way.

However, herein lies the problem. Many believe that India, at its core, has not really moved on fully from its colonial era.

The “Licence Raj” era may be over. It was a period between independence in 1949 and India’s near-bankruptcy following the first Gulf War, when trading licences were handed to a narrow and super-wealthy business elite the government favoured.

However, the “Inspector Raj” mindset is still here, in all of its unwholesome forms. India’s police force is widely seen as the plaything of politicians. Poorly paid, endemically corrupt, they do what New Delhi tells them, leading to events like the baffling arrest of the activist Hazare.

Hazare’s jailing, though, has created a new phenomenon. Middle-class citizens, previously viewed as politically apathetic, have finally found some motivation. Many took to the streets after Hazare’s arrest, demanding that their elected officials, and their security officials, be accountable to those who ultimately pay their wages.

This may be the push that India desperately needs. Action is required – to tackle the infrastructure deficit, rampant corruption, and a government disinclined to do anything that challenges the status quo. ANZ’s Gruenwald, who is broadly bullish on India, notes that poor infrastructure is a “constraint on growth [that will] need to be addressed forcefully, as well as financed, if India is to reach Chinese levels of growth”.

As an Indian saying goes, a cyst has to ripen before there is an operation. Many now believe that this cyst, festered by a million petty crimes committed against defenceless people, is about to burst.

That cannot be a bad thing. Gruenwald of ANZ says that “issues like the ease of doing business, and corruption, need to be tackled in order for India to move to the next level”. Motilal Oswal’s Rakesh, meanwhile, believes his nation has gone through three distinct stages: the pre- and post- Licence Raj eras, the latter running between 1991 and the present day. The third, he believes, will be “India 3.0”, as the nation enters warily into a “very challenging period that will prove very positive in the long run”.

“The Indian Government,” adds Rakesh, “needs a compelling motive to stimulate the next stage of growth, to create an environment that is motivated by business. This could be created by something as simple as a hunger strike. Perhaps, social activism is needed in the short term in order to push through a much stricter and tougher reform agenda. Maybe, this is the best thing for all of us.”

If it is, for a million Indian businessmen, and a billion Indian citizens, including storeowner Sanjiv, it cannot come quickly enough.

By Elliot Wilson, freelance reporter