Has Narendra Modi cleaned up India?

Narendra Modi won power promising to root out corruption. He has not got very far.
April 22, 2015

Narendra Modi stood on the walls of New Delhi’s Red Fort on a blustery morning last August, a man at the height of his recently-acquired powers. It was his first Independence Day speech, and also the first given by an Indian Prime Minister born after the end of colonial rule in 1947. Coming just a few short months after his thumping victory in national elections in May, it provided Modi with the most prominent stage afforded to any Indian leader to outline his plans for the nation.

Not a man known for modesty, he began humbly enough, painting himself “not as the Prime Minister, but as the Prime Servant.” Dressed in a white kurta and flamboyant, flowing red polka-dot turban, he stressed his separation from India’s establishment, too: “Brothers and sisters, I am an outsider for Delhi... I have no idea about the administration and working of this place.” His hands jabbing the air for emphasis, he even made brief nods toward harmony between India’s many religions, and the importance of the rights of women—mentions that drew modest praise from anxious liberals worried that Modi might prove to be a right-wing firebrand, in hoc to the Hindu nationalist base of his Bharatiya Janata Party (BJP).

Beyond the showmanship, there were hints of substance. As wind whipped around the ramparts, Modi laid out themes that would define his early period in power: an economic revival after years of stagnation; transforming India into a Chinese-style manufacturing powerhouse; and a focus on the concerns of the poor, from building toilets to sprucing up squalid streets. Yet on one issue—indeed, perhaps the most important that lay behind his electoral landslide—Modi had surprisingly little to say: corruption.

This was odd. India’s previous Congress Party-led government had wilted under a wave of lurid scandals, battering the otherwise honest reputation of former Prime Minister Manmohan Singh. Billions went missing from budgets for the Commonwealth Games in New Delhi in 2010. A toxic mix of bribery and cajolery is alleged to have led to a number of valuable consessions being gifted to prominent industrial tycoons, at gigantic losses to the exchequer. Myriad other scams dominated the headlines, involving everything from bent public housing schemes to dodgy airport projects. Problems of day-to-day graft became more prominent too. India was placed dismally in global corruption surveys. Polls suggested more than nine in 10 Indians thought their country corrupt, and getting more so. More than half admitted to paying bribes.

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Vigorous protests sprang up, bringing millions onto the streets and spawning a new generation of populist crusaders: Anna Hazare, an aged ascetic with a faintly Gandhian air, who first led the movement in 2011; then Arvind Kejriwal, a feisty organiser who made the new Aam Aadmi [Common Man] party its focus. The AAP banged on relentlessly about crony capitalism, hammering home a sense that cushy political treatment had led wealthy industrialists to grow overly mighty, since India opened up its economy in the early 1990s. A sense of fear gripped New Delhi, with accusations of corruption paralysing India’s bureaucracy, in turn gumming up its economy and prompting a collapse in industrial investment. At its worst moments, this lost decade of scandals led anxious Indian observers to ponder whether their country might go the way of Russia—a democracy deformed by oligarchs and kleptocrats—rather than more modern east Asian economies such as Japan and South Korea.

Modi’s attitude to these issues had always been somewhat ambiguous. Like Singh, he enjoyed a reputation for  personal probity. The state of Gujarat, where he served as Chief Minister for more than a decade, has an enviable record for brisk growth and bribe-free bureaucracy. Yet Modi also enjoyed close relationships with select industrial tycoons, and showed few signs of wanting fundamentally to change the links between India’s political and business elites. His party was strongly backed by business interests too. Even so, the BJP leader tapped into India’s mood of popular umbrage, offering a break with the Congress Party’s dithering and dishonesty, and castigating his opponents in mesmerising stump speeches. Election polls confirmed corruption as one of the two issues which most concerned Indian voters. (The other was rising prices.) Ultimately, Modi was elected with a clear mandate to end the graft and cronyism that had hobbled India’s economy and besmirched its reputation abroad.

As he approaches his first anniversary, Modi boasts a reasonable enough record. India’s economy is recovering. Next year it will surpass China, becoming the world’s fastest-growing emerging market. Its international position has improved too, with Modi’s vigorous diplomacy earning him a place alongside China’s Xi Jinping and Shinzo Abe of Japan in a new troika of strongman Asian nationalists whose interplay will define the continent’s future. Critics tend to focus on his modest progress bringing about structural economic reforms, pointing out that his majority in India’s lower house of parliament ought to permit more than gradualism. But much the same criticism is true of a leader who rode to victory on a wave of disgust over corruption. Modi campaigned on the slogan “minimum government, maximum governance,” and often uses talk of better governance as code for curbing graft. (“Good governance is the only way” to economic development, he said in Delhi.) Judged against this standard, his progress has been ponderous.

The clearest sign of public frustration came in February’s state elections in New Delhi, when Modi’s BJP was unexpectedly and heavily defeated by a resurgent AAP. The result had many causes, but was at least partly due to the AAP’s portrayal of Modi as an out-of-touch ally of major tycoons who had also done little to protect voters from bribe-hungry bureaucrats. More generally, Modi has moved slowly to address the deeper factors that lie behind India’s malaise, from the under-the-table cash that bloats its democracy to the excessively-close relationship between the state and prominent billionaire industrialists. Most developing countries have suffered periods dogged by corruption. Many of India’s neighbours, such as South Korea, also managed to leave that stage behind, just as developed economies such as Britain and the United States did before them. Whether India can now do the same remains an entirely open question.

Raghuram Rajan is a man known for questioning orthodoxies, notably in a 2005 speech as Chief Economist of the International Monetary Fund, in which he was credited with foreseeing important elements of the global financial crisis. After being appointed as Governor of India’s central bank in 2013, however, Rajan has been more circumspect, pushing a quietly radical agenda of financial openness, but not allowing himself to be painted as a proselytising liberal, out of step with his cautious paymasters in New Delhi. Yet Rajan’s intellectual curiosity—which won him a place in the top 10 of Prospect’s 2014 list of leading world thinkers—still shows through in occasional, thoughtful speeches that stray far outside his remit as central bank head. A few days before Modi’s Independence Day remarks in August, Rajan made just one such intervention, laying out “a hypothesis on the persistence of crony capitalism” in India. His remarks made no mention of Modi. But his intent was clear enough: to explain the structural problems any government wanting to rid India of corruption needs to tackle, especially those rooted in its local democracy.

India’s public services are threadbare, Rajan argued. Citizens cannot rely on the state. Welfare entitlements supposedly provided for the poor mysteriously never appear. State schools and hospitals are dismal. Public goods like water and road repairs are absent too. “This is where the crooked but savvy politician fits in,” Rajan said. “While the poor do not have the money to ‘purchase’ public services that are their right, they have a vote that the politician wants. The politician does a little bit to make life a little more tolerable for his poor constituents—a government job here, a [police report] registered there, a land right honored somewhere else. For this, he gets the gratitude of his voters, and more important, their vote.”

Rajan explained his thesis to me not long afterwards, sitting in his favoured meeting room on the 18th floor of the Reserve Bank of India, where the large windows provide sweeping views over the hubbub of downtown Mumbai below. His inspiration had come during his time in academia, he explained , and in particular from reading Richard Hofstadter, the US liberal historian. Hofstadter’s book The Age of Reform examined the path taken by America, as it first endured and eventually overcame its own era of “robber barons” in the late 19th century. This was a period in which the US looked oddly like contemporary India—a “gilded age” marked by rapid industrial growth, helter-skelter urbanisation, wealthy tycoons and rampant municipal corruption.

Hofstadter, Rajan said, had shown that, in the US, a combination of corruption crack-downs and basic improvements in public services eventually reasserted good governance, culminating in the New Deal of the 1930s. But in contemporary India, at the local level at least, there are few mechanisms of accountability to stop political leaders extorting cash to fund services that should be provided by the state. “Obviously, to do some of this, some of these guys need resources,” Rajan told me. “And where do you get resources from? You get resources from business. So it’s sort of an unholy nexus, so to speak. Poor public services, politician fills the gap; politician gets the resources from the businessman, politician gets re-elected by the electorate for whom he’s filling the gap; and electorate turns a blind eye to the deals done with the businessman.”

The picture Rajan paints of entrepreneurial municipal corruption is one found in almost every corner of modern India. It is also much the same phenomenon portrayed by American author Katherine Boo in her 2013 book Behind the Beautiful Forevers. Here, Boo provides a notably vivid portrait of Asha, the mother of another main character, who rises to become a minor power-player in the area in which she and her family live, a wretched slum lying on the fringes of Mumbai’s international airport. Asha gradually insinuates herself with the Shiv Sena, a grisly local political party, becoming a fixer and gate-keeper, a provider of favours and solver of problems, an ally of thuggish politicians and crooked police, and a channeler of such meagre resources as the slum’s residents receive from government coffers or gullible international charities.

Asha provides just one small example of a much wider problem, in which almost any area of Indian life that provides the opportunity to syphon off money can becomes a locus for corruption: from the distribution of land or zoning rights for industrial projects to contracts for outsourced services and subsidised food grains. To be fair to Modi, such municipal services are generally controlled by state and local authorities, not the central government in New Delhi. But India has also suffered from a wider and equally depressing interplay between politics and criminality, in which those with links to illegal activity have sought elected office, often simply to protect their business affairs. Around one third of the members of India’s parliament now have criminal cases pending against them. And at a deeper level, this problem flows right up to the top of the political system. India’s vast election are notoriously expensive—one estimate suggested that last year’s poll cost political parties in the region of $5bn. Almost all of this is given covertly, the majority from wealthy businesses.
"India probably now has a higher proportion of national wealth in the hands of its billionaire class than any other major emerging economy, with the exception of Russia"
Rajan’s argument makes clear the difficulties facing any leader who aims to clean up Indian politics. But there are other, equally thorny problems that fall more directly under the label of crony capitalism, stemming from different links between businesses and the state. Unlike in China, India boasts a thriving private sector economy. Its leading companies rank alongside the best in the industrialised world. Many have excellent governance, notably in industries not closely intertwined with government, such as technology outsourcing and consumer goods. Other sectors are less fortunate, however. Large swathes of its industrial economy require resources only the government can provide—an issue that lurked behind many of its recent corruption furores.

These are problems that Vinod Rai, the country’s former government auditor, came to know well. His organisation published a series of withering reports exposing wrongdoing in the allocation of resources such as mining rights and telecoms spectrum, which were handed out to businesses in ways that were at best murky, and at worst riddled with back-handers. In the process the silver-haired and softly-spoken auditor became a somewhat improbable public hero—even if he admits that he was never able to pin down precisely the quantity of corruption involved. “It was going into their pockets, that is for certain,” Rai, who retired from his job two years ago, told me recently. Companies seeking resources would hand money to middle-men and lobbyists, he explained, who would pass it onto the politicians. “For every 100 rupees the [politician] might give 70 to his party and keep 30 for himself. Or he might have kept 70 and given the party 30, who can tell... but the sums were large.”

Losses to the public purse were easier to calculate, however. On coal, for instance, Rai produced a report in 2012 estimating that India could have raised more than $30bn, had it auctioned mining rights, rather than gifting them to the private sector. At the time, such estimates were widely criticised as excessive. (An earlier leaked draft of the report had carried a far higher figure of $210bn). Since then, however, Rai’s estimates have been roughly vindicated: two dozen coal mines mentioned in his report were re-auctioned over recent months, raising around $33bn in royalties.

The scandals Rai identified are largely a function of India’s own economic rise. Before liberalisation, corruption was a small bore affair. But as the country opened up to globalisation, so the value of scarce resources like land and mineral rights rocketed. Access to such things also often lay behind the rise of a new generation of billionaire industrialists, whose fabulous wealth has seen them described as latter-day Maharajas. Many of these figures and those working for them prospered in what Harvard academic Michael Walton describes as “rent thick” sectors of India’s economy such as real estate, infrastructure or mining—meaning those in which income (or “rent”) often comes via influence-peddling, rather than fair competition. The end result has been the creation in India of a small but powerful class of near-oligarchs, who prosper at least in part through the crafty cultivation of political relationships. It also means, according to Walton’s research, that India probably now has a higher proportion of national wealth in the hands of its billionaire class than any other major emerging economy, with the exception of Russia.

The Indian state, in the broadest sense, lies behind corruption problems in other ways too, not all linked to business. Public subsidies are one example. For critics, such as Surjit Bhalla, a New Delhi-based economist, the country’s system of agricultural support allows nearly $5bn worth of food grains to rot in government warehouses each year, while also encouraging widespread graft. “Subsidies and otherwise inefficient policies such as direct transfers, that almost beg to be perverted by corruption, have been at the heart of the Indian welfare state,” Bhalla wrote recently in a report for the Carnegie Endowment, arguing that India’s intricate web of food subsidies and rural income support should be gradually scrapped.

In other areas, the problem is less the provision of services by the state, but the organisations that dominate it. Despite its thriving private sector, large swathes of India’s economy—banking, for example, or mining and energy—remain dominated by large and powerful state-backed enterprises. Most of these bodies are inefficient. But many also suffer from deep-rooted corruption. Appointments to senior roles are said to change hands for eye-catching sums, especially those that come with the ability to funnel or redirect funds. In banking, many of the bad loans that still bog down India’s economy date back to excessively friendly state-backed lenders providing mysteriously lenient financing to big industrialists.

Facing such entrenched problems, Modi’s admirers insist that he has made a decent start. No major scams have emerged. Almost no senior BJP politicians are suspected of having their hand in the till. There is a new sense of administrative vim, embodied by possibly apocryphal stories of civil servants at their desks early and leaving late, forbidden from slinking off for afternoon entertainments on the genteel lawns of Delhi Golf Club. Modi has kept a cautious distance from prominent tycoons, avoiding most charges of favouritism, the brickbats thrown in New Delhi’s recent election notwithstanding. Separately, India even managed to creep up a few places to 85th position in the latest Transparency International ranking of national corruption perceptions, although this mostly reflected changes under its last government.

There have been more substantial changes too. New online applications for environmental and industrial permits should remove discretion for bribery. A nationwide value added tax, to be introduced next year, ought to cut graft as goods move around the country. Plans to provide benefits directly to poorer citizens through a mixture of new bank accounts, unique identification numbers and mobile phones could cut subsidy fraud dramatically, although the model is largely untested. Most significant of all, India now plans to auction off all mineral rights, beginning with this year’s lucrative coal licence sale—a radical move that should preclude major new natural resources scandals.

Such measures have helped to create a broader sense that India’s sorry spell of mega-scams is now over. The scandals of the last decade galvanised courts and public auditors, helped along by a rambunctious media. Politicians are now watched more carefully, making more difficult the type of grand larceny that came to light over the last decade. “If anyone now wants to do what happened 10 years back, it will be very, very difficult,” Rai told me .“I am reasonably certain that this kind of thing will not happen in India in the same way again, the scrutiny is now too great.”

Yet all this hardly amounts to a guarantee, or a systematic agenda to curb corruption. Swathes of Indian life remain dogged by kickbacks and payoffs, from land acquisition and municipal contracts to the operation of its public sector giants. And India’s state and local governments are especially problematic. Probes into older scandals drag on. Industrialists who grew wealthy exploiting government favours are untouched. Those who piled up excessive debts, succoured by public sector banks, have suffered few consequences. There is scant evidence that ordinary folk now pay fewer bribes. If India hopes to make a break from its own version of America’s Gilded Age, the process has barely begun.

The reasons for Modi’s relative timidity are unclear. It could simply be an extension of his disappointingly gradualist approach to reform more generally: taking action where he can; avoiding symbolic battles he feels he cannot win; and supposedly laying the ground work for far-reaching measures to be taken at unspecified future dates. There may be questions of priorities, too: Modi’s main aim is to get India’s economy moving, an area where picking fights with industrialists, for instance, could prove disruptive, in the short term at least. Yet the suspicion remains that Modi’s caution stems from an unwillingness to disturb powerful, entrenched interests. Put more simply, India’s Prime Minister wants to win re-election in 2019, in what is certain to be the most expensive campaign in Indian history. That will require money. Lots of money. Any action that might affect political funding, in particular, is likely to be avoided.

What could be done to bring India’s age of crony capitalism more quickly to an end is a complex question. There is much to criticise about China’s present anti-corruption witch hunts under Xi Jinping. But it is notable that there has been no comparable effort to target India’s “tigers” and “flies”—meaning senior politicians and lowly bureaucrats up to no good. Much the same is true with business leaders: the sight of a few billionaires on their way to jail would not end the country’s problems of corruption, but it would at least suggest that India’s era of plutocratic impunity had begun to close. Introducing much tougher jail terms and confiscation-of-property penalties for bribery or other business-related offences would be a start—so long as they were properly enforced.

In practical terms, Modi’s plans to auction natural resources and provide direct benefit transfers are part of the solution. New technologies can also help, by making government more transparent. But in the longer term, as Rajan suggests, extending the reach of the state to provide reasonable and properly-funded public services is an equally important route to better governance. Stricter rules on the conduct of politicians, for instance over conflicts of interest, would also help. Elsewhere, radical changes to public sector organisations are needed, for instance to ensure merit-based appointments, alongside shifting many state-backed organisations into private ownership. There is also the example of a country like Georgia, which made dramatic progress with a big bang clean-up of its police force and court system. Most importantly, India needs to change the way it pays for its gigantic democracy, starting with auditing political party finances and ending with some kind of transparent or public funding system.

Most of these steps would be controversial, but a more aggressive and confrontational approach to corruption ought to be in Modi’s interest. Most analysts assume he will romp to re-election in 2019, partly because of the collapse of the opposition Congress Party. But the recent elections in New Delhi serve as a reminder that India’s voters are a demanding bunch. It is also worth noting that this is a particularly important moment to ramp up the fight against cronyism. Despite early signs of an economic recovery, corporate India has still barely begun to invest in the new energy plants, steel mills and ports that will power the next phase of its growth. When it does, these will be precisely the type of developments that can underpin a rebirth in corruption, given that scandals so often piggyback on major investment projects—a point Rajan himself made in 2013, noting that “opportunities for grand corruption… increased as growth has picked up.”

All of this matters for reasons far beyond Modi’s narrow political prospects, however. India is the world’s largest democracy, and perhaps its most unlikely. No country has sustained democratic rule while being as poor. India carries with it much broader hopes that it might continue to build a model of democracy and broadly liberal capitalism that other emerging economies might follow. Comparisons between India and China were common in the late-2000s, the last time optimism bubbled about the former country’s prospects. Back in 2010, the economist Lawrence Summers, at the time a senior advisor to President Barack Obama, even pushed the notion of a “Mumbai consensus,” arguing in effect that India’s “democratic developmental state” could challenge China’s autocratic statism. Such comparisons lost all credibility as India’s economy crumbled over the last five years. But with China slowing and India reviving, they will soon begin again.

Yet if India is to have any prospect of justifying such hopes, it must clean up its system of government. With luck, its recent period of rollicking scams will indeed not be repeated, banishing talk of a gradual Russification marked by rising criminality and deepening inequality. But without far-reaching reform, there remains a risk that its hopes of double digit economic growth will be de-railed. India’s reputation as a superpower in the making barely survived one personally honest Prime Minister who failed to act firmly to combat corruption. It cannot afford to make the same mistake again.