Economy | Mon Feb 21, 2011 3:30pm IST

BREAKINGVIEWS - India corruption travails could presage catharsis

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

By Hugo Dixon

LONDON (Reuters Breakingviews) - It's easy to see why investors in India are running scared. Two top tycoons have been hauled in by investigators in connection with a mounting telecoms scandal, inflation is rampant and the government seems paralysed.

The Sensex has dropped 11 percent this year. And the shares of Reliance Communications, chaired by Anil Ambani, one of the two tycoons questioned by police, have been hammered: they are down 36 percent. The other is Prashant Ruia, chief executive of Essar Group. Neither has been charged.

But endemic corruption, which is estimated to drag economic growth down by 1 to 2 percentage points a year, is an old story. What's new is that there has been an outcry about it. The urban middle classes seem fed up and the media is hounding the story. The Supreme Court, meanwhile, has criticised Prime Minister Manmohan Singh for his slow response and put steel in the spine of the police, telling them to question even billionaires.

Singh now looks likely to agree to a cross-party parliamentary probe into the scandal which is estimated to have cost the government up to $39 billion in lost revenues. Weeks of public hearings would keep up the pressure for reform. Campaigners are also calling for the government's proposed anti-corruption law, which many consider to be toothless, to be replaced by something stronger.

Of course, corruption isn't going to be uprooted overnight. There are too many factors entrenching it -- not least, the need to divide up ministerial posts between different political parties to stitch together elaborate coalitions in this hugely diverse country.

And India has other problems that won't just vanish. Singh's government lacks oomph but there's no quick way to improve on it. Meanwhile, inflation is being driven by a mixture of global commodity prices (which Delhi can't influence) and structural rigidities (which would take years to solve even with dynamic leadership).

Nevertheless, the vigour with which anti-corruption probes are now being pursued offers the best chance, albeit no guarantee, of a catharsis which could ultimately boost India's long-term growth potential.

CONTEXT NEWS

-- Two top Indian businessmen, Anil Ambani and Prashant Ruia, were questioned by police investigators last week in connection with a mounting telecoms corruption scandal. Neither has been charged. Ambani, chairman of Reliance Communications, and Ruia, chief executive of Essar Group, didn't return calls.

-- Meanwhile, Manmohan Singh, the Indian prime minister, is reported to be close to agreeing to a cross-party parliamentary investigation into the scandal. The country's auditor estimates that India may have lost up to $39 billion when the telecoms ministry gave out licences at below-market prices in 2007/2008. The opposition boycotted the last parliamentary session because Singh was refusing to agree to such a probe.

-- India's government will battle both inflation and corruption, president Patibha Patil told the country's parliament on Feb. 21.

-- "My government stands committed to improving the quality of government and enhancing transparency, probity and integrity in public life," Patil said. "A Group of Ministers is considering all measures, including legislative and administrative, to tackle corruption and improve transparency."

-- Reliance Communications' shares have fallen 36 percent this year. The Sensex has dropped 11 percent.

(Editing by Rob Cox and David Evans)

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