Corruption threatens India's high growth momentum - KPMG

NEW DELHI Mon Mar 14, 2011 7:29pm IST

School students shout slogans during a protest against a corruption case in Jammu February 12, 2011. Endemic corruption in India has grown in scale and represents billions of dollars, with the potential to discourage investors and derail growth prospects, consultancy firm KMPG said in a survey published on Monday. REUTERS/Mukesh Gupta/Files

School students shout slogans during a protest against a corruption case in Jammu February 12, 2011. Endemic corruption in India has grown in scale and represents billions of dollars, with the potential to discourage investors and derail growth prospects, consultancy firm KMPG said in a survey published on Monday.

Credit: Reuters/Mukesh Gupta/Files

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NEW DELHI (Reuters) - Endemic corruption in India has grown in scale and represents billions of dollars, with the potential to discourage investors and derail growth prospects, consultancy firm KMPG said in a survey published on Monday.

The survey of 100 leading domestic and foreign businesses was published as Prime Minister Manmohan Singh's government struggles to defend itself against graft cases ranging from a $39 billion telecoms scandal to houses for war widows diverted to bureaucrats.

The scams, exposed in recent months, point to a pervasive culture of corruption in Singh's administration, prompting a man once seen as India's most honest politician to defend his leadership and scramble to keep the ruling coalition intact.

And the graft riddling Asia's third-largest economy was no longer confined to bribing government officials for passports or telephone connections from the state provider, the report said.

"Today India is faced with a different kind of challenge," the report said. "It is not about petty bribes (`bakshish') any more, but scams to the tune of thousands of crores (billions of rupees) that highlight a political/industry nexus which, if not checked, could have a far reaching impact."

Most businesses surveyed said they were committed to their positions in one of the world's fastest growing economies with a rapidly growing, and wealthier, middle class, the survey showed.

More than two-thirds of those surveyed said corruption prevented India from moving beyond the 9 percent growth expected in the next fiscal year starting April 1. Just over half said graft would make the country less attractive to foreign investors.

"Corruption poses a risk to India's projected 9 percent GDP growth and may result in a volatile political and economic environment," the report said.

The murkiest sectors were real estate and construction - a focus for India as it plans to spend $1.5 trillion over a decade to overhaul creaky infrastructure - followed by telecommunications where the state was still heavily involved and the stakes high.

The scandals have created a sense of regulatory uncertainty, especially in the telecoms sector, which has come under heavy scrutiny after faulty allocation processes were said to have cost the government up to $39 billion in lost revenue.

Several big businessmen, including billionaire Anil Ambani, were questioned by federal police, and even Singh had to defend his conduct to the Supreme Court, unprecedented events in a country where the business and political elite were sometimes seen as above the law.

"India has at last realised that one of the major reasons for most of the large scale corruption incidents has been due to the empowered discretion that the government has had," Surjit Bhalla, the head of Oxus Investments, wrote in the preface to the report.

BUSINESS CLIMATE

British Prime Minister David Cameron wrote to Singh in February warning that India's unpredictable and non-transparent business climate could derail bilateral trade ties.

Ratan Tata, one of India's most prominent industrialists, in November recounted a conversation with a fellow businessmen in which the latter detailed the hefty bribes the government demanded from players in the airlines business.

The Hindustan Times said in a report on Monday that envoys from eight countries, including Britain, wrote to Finance Minister Pranab Mukherjee to complain about unpaid bills of more than $74 million owed to firms from their nations from contracts relating to the Commonwealth Games.

The sporting extravaganza last October, which cost up to $6 billion, was also dogged by several cases of alleged corruption, including the purchase of equipment and issuing contracts.

Regulatory delays over London-listed Cairn Energy's $9.6 billion asset sale to India's Vedanta Resources, and legal wrangling over India's $2.6 billion Vodafone tax demand were raised by Cameron to Singh.

Trade Minister Stephen Green told Reuters in New Delhi that Britain wanted more predictability and transparency in India's business climate and would raise concerns from British firms during a visit this week.

Asked whether he would raise the Cairn-Vedanta deal and Vodafone tax issue, Green said he would discuss "specific business situations which are under examination.

"I think we'll see a significant increase in investment in both directions. In order to facilitate that ... we need to have predictability, transparency on both sides," he said.

But despite the murky regulatory environment, business remained engaged in India, with more than half of those surveyed by KPMG saying they were unaffected by corruption.

More than 80 percent of respondents disagreed that corruption had reduced their ability to access domestic or foreign funds, while 55 percent disagreed that corruption had impacted their business.

That would appear to chime with remarks on Monday by General Electric Co Chief Executive Jeff Immelt who, on a visit to New Delhi, brushed off concerns over the investment climate.

"We're long-term players in India," Immelt said.

(Additional reporting by Paul de Bendern and C.J. Kuncheria; editing by Sanjeev Miglani and Miral Fahmy)

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