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Sunday, November 21, 2010

Blind-folded TI cannot see India's massive corruption in telecom sector alone.....

Transparency International seems to have special love for Pakistan but it looks the other way when stories of mass corruption in India are unearthed. One instance of corruption of $ 39 billion in telecom sector alone is enough to cost Indian Congress its government. It was of such a huge proportion that Indian Supreme Court had to take a notice of it leading to embarrassment of the ruling party and of Prime Minister Manmohan Singh. Mr. Singh stands out among Indian politicians for his impeccable reputation for probity. And no-one is suggesting that he in any way benefited from the tainted 2008 second-generation spectrum allotment that has led to dramatic revelations in the past few weeks and forced the resignation last weekend of the telecommunications minister, Andimuthu Raja.

But the Supreme Court's direct criticism of the prime minister for failing to take quicker action over a request for a probe into the allotment process has brought a whiff of scandal to Mr. Singh's doorstep for the first time since he assumed power in 2004. Although he is a noted economist famous for introducing India's market-led reforms in 1991, much of Mr. Singh's political support rests on the perception that he is above reproach in administrative matters and abhors any suggestion of corruption in his ministerial ranks.

This shows how misleading are Transparency International corruption perception indices pertaining to Pakistan. TI seems to have special love for Pakistan which is reflected in the light TI keeps Pakistan in on perennial basis. TI seems to have no clue to the volume of ill-gotten wealth in India. Putting a number on corruption in India may be tough, but a new report by a U.S.-based non-profit group tries to do just that. So, how much has India lost from corruption since independence? Well, Global Financial Integrity says $213 billion, or at least $462 billion at today’s prices, was illegally transferred overseas between 1948 and 2008.

The figure is unlikely to account for all money from corruption as some is kept onshore, reports Wall Street Journal quoting GFI source. But the number is likely to feed debate in India, where the media and ordinary citizens are getting angrier than usual about graft. Graft is as old as the hills, but alleged corruption scandals surrounding the Commonwealth Games in October appear to have given a focus to citizens’ wrath in recent weeks.
The Congress Party’s leadership has responded by pushing for the resignations of a number of top lieutenants. These include Telecoms Minister Andimuthu Raja, who stood down at the weekend amid allegations of improprieties in his handling of a mobile phone spectrum auction. Mr. Raja denies wrongdoing. GFI’s report finds that illegal capital flight accelerated after India’s financial deregulation and trade liberalization in the early 1990s and was aided by the expansion of secretive offshore financial centers in the Caribbean and elsewhere. It also claims a statistically significant link between this uptick in capital flight and an increase in income inequality in India, which is fueling the public’s discontent. Measuring malfeasance is by necessity an inexact science. But here’s how Dev Kar, a GFI economist who wrote the report, went about it.

Rich individuals, criminal bosses and corrupt government officials in India prefer to stash their ill-gotten gains offshore, where it’s safer from the prying eyes of local authorities. To estimate the size of these outflows, Mr. Kar looked at India’s recorded source of funds and its use of funds. Sources of funds include money coming into the country through net foreign direct investment and additions to the public sector’s stock of borrowing from overseas. A country can use these funds to finance its current account deficit (when total imports of goods services and transfers is greater than exports) and to build up its foreign reserves.

In a case where the recorded sources of funds is greater than recorded use of funds there must be illicit outflows of capital.(Conversely, when use of funds exceeds sources of funds there must be illicit inflows.) Mr. Kar makes a number of complicated adjustments to this model, but those are the basics. He arrives at $213 billion in illicit outflows between 1948 and 2008. He then uses the rate of return on a short-term U.S. Treasury bill as a proxy for a return on this capital over the years. The present value of the outflows, or the current value of India’s illicit assets held abroad, is $462 billion, Mr. Kar surmises.

Another study cited by Mr. Kar forecast India’s underground economy to be worth about $640 billion at the end of 2008, or half of India’s recorded Gross Domestic Product. So, India’s stock of assets held illegally overseas may account for almost three-quarters of the country’s underground economy. As Mr. Kar says, “the desire to amass wealth illegally without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital.”

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