BREAKINGVIEWS - India can't afford to be soft on corruption

Activists of Communist Party of India Marxist CPI (M) hold a cartoon placard portraying Indian Prime Minister Manmohan Singh during a protest against the telecom corruption scandal in New Delhi December 10, 2010.

-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Hugo Dixon

LONDON (Reuters Breakingviews) - India can't afford to be soft on corruption. The government's lacklustre response to a series of scandals isn't just woeful; it is symptomatic of a general lack of reformist zeal which could drag down the country's medium-term growth.

India's big success in the past two decades has been to put behind it what used to be called the Hindu rate of growth, roughly 3.5 percent a year. The country achieved an average 9 percent growth in the four years running up to the financial crisis. That dipped to 6.7 percent and 7.4 percent in the last two financial years, but is now back to nearly 9 percent. At some time over the next few years, India's growth could outpace even China's, as the Middle Kingdom starts to slow.

Manmohan Singh, the prime minister, can take some of the credit for this -- for spearheading India's first dose of free-market reforms in the early 1990s as finance minister. But since his election as PM in 2004 -- and his re-election in 2008 -- there has been little reform of note, although the government did navigate the financial crisis well.

The biggest stain on the government's copybook has been corruption. Long a problem in India, this has reared its head in two high-profile cases. First, there was a scandal over the award of mobile telecoms licences which, according to a government audit, may have short-changed taxpayers by as much as $39 billion. Then there were last year's Commonwealth Games, which were over budget and shoddily staged. Singh was slow to react to the telecoms scandal and is refusing to allow a parliamentary probe into the matter.

The fact that the government is a coalition is used as an excuse by some to explain its failure to act decisively on a whole range of issues. But in Singh's first term of office, there was also a coalition -- and that was reliant on the Communists. Without the need to rely on them, Singh should have had an easier task.

The government seemingly descended into complacency after its re-election. Planned reforms have not been pushed through -- or only in a diluted form. For example, a promised radical sales tax reform is stuck in a constitutional wrangle; and a promise to free up diesel prices has yet to be acted upon, although the less politically charged petrol prices have been liberalised.

The government has admittedly pushed ahead with more free trade deals with East Asian countries - which is good because growing openness to trade is one of the things that has boosted India's growth since the early 1990s. But the government has not been willing to liberalise the highly regulated labour and financial services markets, in part because of vested interests in the unions and the banks.

If India could afford to rest on its laurels, this might not matter too much. But it is still a poor country. Structural reform today would keep growth going in the second half of this decade and beyond. This is important given that there are headwinds which will tend to slow the economy down -- in particular, the multifarious environmental challenges caused by a booming and rapidly urbanising population.

Cracking down on corruption is probably the single biggest priority. A common guesstimate is that this is costing the economy 1-2 percent of growth each year. Singh, a 78-year-old technocrat, doesn't appear strong enough to tackle it. The real power in the country lies with Sonia Gandhi, President of the Congress Party and standard-bearer of the Nehru/Gandhi dynasty which has ruled India for most of the post-independence era.

The silver lining is that the corruption scandals have provoked an outcry. The opposition is up in arms, the media is continually shining a spotlight on murky practices and many ordinary people seem outraged. The telecoms minister has resigned and multiple investigations are under way. Maybe this hoo-ha will be the trigger for reform. But there is a lot of scepticism that nothing will change. If so, the outlook is bleak as corrupt individuals will then be emboldened to pillage on an even more extensive scale.

CONTEXT NEWS

-- A group called India Against Corruption is holding a rally in Delhi on Jan. 30 to push for an anti-corruption bill. The body, backed by a number of high-profile members of civil society, has complained that the new anti-corruption body proposed in a draft government bill would lack jurisdiction over the bureaucracy and judiciary.

-- The group's protest follows two high-profile scandals, one involving the award of telecoms licences in 2008 and the other concerning last year's Commonwealth Games -- both of which are currently being investigated. Andimuthu Raja, the telecoms minister, resigned in November; and Suresh Kalmadi, who ran the Commonwealth Games, was fired as parliamentary secretary of the Congress Party, the leading party in the government.

-- Parliament has been paralysed in recent weeks after the opposition demanded an investigation of the telecoms scandal by a joint parliamentary committee.

-- India is the world's ninth most corrupt country, with 54 percent of the population paying a bribe in the last 12 months, according to a report by Transparency International. Meanwhile, the Global Corruption Barometer 2010 showed that 74 percent of Indians think corruption in the country has increased over the past 12 months with political parties, parliament and the police force seen as the most corrupt sectors of society.

-- India Against Corruption: www.indiaagainstcorruption.org

(Editing by John Foley and David Evans)