Dialogue  April-June, 2006, Volume 7  No. 4

Economic Growth and Issues of Governance

Dr. C. Rangarajan

          1.   It is great privilege to deliver the seventh D.P. Kohli Memorial Lecture. Economists talk of infrastructure development as the key to economic progress. Infrastructure is broadly conceived as comprising social infrastructure which includes facilities in health and education and physical infrastructure which includes investment in, for example, power, transport and communications. However, an important part of the infrastructure is the existence of a good legal system without which a modern society cannot function. A good legal system requires in turn an impartial investigating agency to facilitate the dispensation of criminal justice. It is this important role that the CBI is playing in India’s democratic polity. Over the years, the CBI has established a reputation for professionalism and competence. There is a growing demand on the Agency to take up investigations of various types. The CBI in its present form owes very much to the vision of its founder-director, the late Shri D.P. Kohli. Among the attributes required of a good police officer are leadership, integrity and professionalism – three attributes that best describe the Late Shri D.P. Kohli in whose honour and memory we are assembled here today.

          2.   A review of the economy in the recent period throws up several interesting insights. Economic growth has averaged 8 per cent per annum over the last three years. Our external payments situation is comfortable, foreign exchange reserves are robust, inflation is benign, the investment climate is promising and our comparative advantage in the knowledge economy is fueling the boom in the service sector. Social indicators have improved too. Life expectancy has gone up as have indicators in health and education. A child born today can expect to live 25 years longer, hope to be more educated, and lead a healthier and more productive life than a child born at the time of independence. Indeed, if we can sustain an average annual growth rate of 8 per cent, the child of today will see the per capita income of the country multiply more than four fold by the time she grows up to be 21.

Challenges Ahead

          3.   Yet there are many challenges on the way forward. We need to sustain the present rate of growth, if not accelerate it to higher levels. We need to translate growth into poverty reduction. In other words, we need to generate poverty reducing growth – i.e. growth to which the poor contribute and from which the poor benefit. We need to expand employment opportunities and improve productivity across all sectors of the economy. We need to narrow economic disparities across and within states without compromising on efficiency. We need to improve on social indicators too; India still ranks a low 127th in the UNDP’s Human Development Index in the bottom third of the league of nations. The agenda for achieving growth and poverty reduction is formidable requiring as it does focus not only on identifying priority areas for action but also on effective and efficient implementation of the policy agenda. In other words, we need to focus simultaneously on economic growth and on governance. I want to use the opportunity that you have so kindly provided me to reflect on the broad contours of this theme – Economic Growth and Good Governance.

1991 Reforms – Genesis

          4.   In the post-independence economic history of our country, 1991 is a watershed year. This was the year in which the economy was faced with a severe balance of payments meltdown. In response, we launched a broad ranging economic programme not just to restore the balance of payments but to reform, restructure and modernize the economy. This was entirely appropriate for the external payment crisis was just the proximate manifestation of a policy regime that has, over the years, tended to give precedence to command and control over productivity, efficiency and entrepreneurship. In the event, the 1991 reforms signaled a shift away from the earlier paradigm.

Economic Reforms – Break with the Past

          5.   This break with the past came in three important directions. The first was to dismantle the complex regime of licences, permits and controls that dictated almost every facet of production and distribution – what to produce, where to produce, how to produce and how much to produce. The entrepreneur has now greater freedom to decide on all these choices. The second change in direction was to reverse the strong bias towards state ownership of means of production and proliferation of public sector enterprises in almost every sphere of economic activity. Areas once reserved exclusively for the state have been thrown open to private enterprise. The third change in direction was to abandon our inward looking trade policy. This elusive, and in hindsight ill-advised, quest for self-sufficiency was driven by a belief that there was a value to minimizing the economy’s external dependence and producing what we need ourselves even if it meant high costs and low efficiency. By embracing international trade, India signaled that it was abandoning its export pessimism and was accepting the challenge and opportunity of integrating into the world economy.

Rationale Underlying Reforms

          6.   Although the various elements of the reform agenda may look disparate, there is an underlying rationale running across the broad swathe of economic reforms. This was to give a greater market orientation to the economy and to let the competitive forces and growth impulses that are the bedrock of a modern, dynamic economy to come into fuller play. Liberalization removed the barriers to entry and relaxed the plethora of restrictions on production and distribution. Deregulation brought about a more competitive domestic environment while the liberalized trade and foreign investment policy sought to improve international competitiveness. By reducing its entrepreneurial role, the government was yielding economic space to the private sector while also redefining the role of the state.

Stabilization and Structural Adjustment

          7.   Conceptually, the economic reform agenda can be divided into two strands – stabilization, aimed at redressing the internal and external imbalances in the economy, and structural adjustment aimed at removing the rigidities and inefficiencies in the system and improving its competitiveness. Thus, stabilization can be attempted and completed quickly while structural adjustment is a medium to long-term process. Stabilization is macro-economic in content while structural adjustment encompasses both macro and micro-economic aspects. While stabilization could be managed by the government acting on its own, structural adjustment is much broader and deeper in scope requiring the proactive involvement of the government at various levels and the people at large.

Uniqueness of India’s Reforms

          8.   India’s economic reforms are unique in two important respects – not because of the content of the reforms but because of the context in which we are pursuing them. First, we are implementing reforms in a democratic context, no matter that it has many flaws. Second, we are pursuing reforms in a decentralizing context. This democracy-federalism context oftentimes has meant restraint, even compromise, deliberate decision- making and slow progress. While there are many respects in which we can make our approach to reforms more efficient and purposeful, in an overall perspective, it must be acknowledged that making haste slowly – ‘crossing the river by feeling the stones’, as the Chinese say – has a lot of merit. The participatory and consultative processes inherent in our institutions of meditation and restraint have added to the credibility and robustness of our reforms.

Post-reform Growth Performance

          9.   That the content and process of our economic reforms are on the right track is vindicated by the performance of the economy since the launch of the reforms. Between 1981-82 and 1990-91, i.e. the decade before the reforms, the economy grew at 5.6% on a compound average basis. The year 1991-92 was on outlier because of the balance of payments crisis, and should therefore be omitted for the purpose of discerning trends. In fact, there is very justification for including it in the pre-reform period because it was also a culmination of the policies pursued previously. The effect of the reforms should be judged starting with the economy’s performance in 1992-93. Between 1992-93 and 2004-05, the economy grew at 6.2% on a compound average annual basis, a significant improvement over the pre-reform record. The growth rate was 8.5% in 2003-04, 7.5% in 2004-05 and is expected to cross the 8% mark 2005-06. It clear that India has shifted to a higher growth trajectory.

Six Challenges on the Way Forward

        10.   At the same time if we are to sustain this rate of growth, and in fact accelerate the growth rate to higher levels and translate that growth to broad-based poverty reduction, we must address some important challenges. I want to reflect on what I think are six of the most important challenges warranting priority attention.

1st Challenge – Stepping up Agricultural

        11.   First, we need to step up the growth rate of the agriculture sector. We have come a long way from the chronic food shortages and occasional famines that marked our pre-independence and immediate post-independence history. That we have achieved near self-sufficiency in food is a remarkable achievement. Yet it must also be admitted that our agriculture is characterized by low productivity both of land and labour. The most critical problems are low yields and the inability of the farmers to exploit the advantages of the market because of lack of infrastructure to transport the produce from the farm to the market. Clearly we need to modernize and diversify our agriculture sector by improving both the forward and backward linkages. These will include better credit delivery, investment in irrigation and rural infrastructure, improved cropping pattern and farming techniques and development of food processing industry and cold chains across the entire distribution system. Agricultural growth is critical for expanding employment, generating broad-based growth and sustained poverty reduction.

2nd Challenge – Infrastructure Development

        12.   The second critical constraint to growth is the infrastructure deficit, more particularly, in power. The infrastructure needs of the economy are large because of the demand generated by economic growth, rise in population, rapid urbanization as well as the need for making up the accumulated backlog. Provision of infrastructure was once considered to be an exclusive responsibility of the government. Advances in technology which have made unbundling possible, as well as innovative financial products have changed the characteristics of infrastructure provision making both private sector participation as well as competition possible. In order to mobilize the necessary resources and build quality infrastructure, we need to put in place appropriate legal regulatory and administrative frameworks to attract domestic and foreign investment. We also need to address issues of pricing and cost recovery, with subsidies where required, being made transparent and explicit. This in turn will require the establishment of credible regulation for ensuring fair competition across public and private operators, and for protecting consumer interest, public safety and environmental integrity.

3rd Challenge – Fiscal Consolidation

        13.   The third critical challenge on the way forward is fiscal consolidation, which is a necessary prerequisite for sustained growth. Excessive fiscal deficits can disempower the government in important ways. The finances of the state governments are particularly under greater pressure. The appropriate level of fiscal deficit has a relationship to the level of household savings in financial assets. Even as of now, very nearly the whole of the household savings in financial assets is appropriated by the public sector. The argument that government expenditures should shift in favour of capital expenditure is valid. Unfortunately, the trend has been in the reverse. Containing the growth of current expenditures – what we commonly call revenue expenditures – is critical. Admittedly, in a developing economy like ours where a significant proportion of the people are poor, subsidies provide a safety-net and are essential component of public expenditure. However, subsidies need to be targeted appropriately so that they accrue only to the deserving. We must avoid the temptation to extend subsidies indiscriminately. We must make an effort to evolve a consensus on rationalizing subsidies and user charges and reducing revenue expenditures.

4th Challenge – Building Social Infrastructure

        14.   The fourth important challenge to growth is investment in social infrastructure – particularly in the twin merit goods of primary education and basic health. There are any number of studies that establish a positive correlation between low levels of poverty and improved indicators of health and education. We need to spend more on education and health. But we also need to spend more efficiently because better education and health are a function not just of the quantum of expenditure but also of the quality of that expenditure.

5th Challenge – Managing Globalization

        15.   Next on my list is the challenge of globalization. Globalization has been a contentious issue, and a topic of often-acrimonious debate as also high profile protests. The scope of this lecture does not permit me to address in detail all the issues surrounding the debate on globalization. What I do want to emphasize though is that our economies are no longer defined by political boundaries. Globalization, defined as the free movement of goods, services, ideas and people across borders, is here to stay. No revolution in human history has been totally benign. So it is the case with the globalization which comes with costs and benefits. We cannot wish away globalization, nor can we shut our doors and remain indifferent. The only option is to manage globalization in such a way as to maximize the benefits and minimize the coasts. Consider for example our head start in the knowledge economy. We got off the block here ahead of other countries because of our superior technical manpower. But other countries are fast catching up and our comparative advantage will be threatened unless we are continuously ahead of the curve in terms of technical sophistication and competence levels. More than many other developing countries, India is in a position to wrest significant gains from globalisation. Even as we make efforts to modify the international trading arrangements to take care of the special needs of developing countries, we must identify and strengthen our dynamic comparative advantages.

6th Challenge – Good Governance

        16.   Just to recap, the five challenges on the way forward to accelerating growth and poverty reduction that I have addressed so far are: stepping up agriculture growth, infrastructure development, fiscal consolidation, enhancing the quality and reach of primary education and basic health, and managing globalization. Identifying these challenges and drawing up plans to address them is the relatively easy part. What is infinitely more difficult is the translation of those policies into action. That brings me to the sixth and final Challenge that we need to confront – the issue of governance.

Evolution of Thinking on Economic Development

        17.   That good governance is at the very heart of economic growth and poverty reduction, and even political legitimacy, is now part of conventional wisdom. However, we did not zero in on this intuitively. The realization that good governance is critical came as a result of some profound changes in development thinking over the past 50 years. In the 50s and 60s, when many countries of Asia and Africa were emerging out of colonialism, the path to development, it was widely believed, lay in capital formation. In the 1970s, awareness grew that physical capital was not enough, and at least as important was fulfilling basic human needs. When this too did not produce results, the missing link, it was thought, was improving social capital through education and health. Yet again there was no breakthrough. The disappointing experience with the debt crisis in Latin America and chronic poverty in Sub-Saharan Africa and South Asia during the ‘lost decade’ of the 80s threw up the idea that the path to development lay in improving economic management and giving greater play to market forces. Again the results were mixed. Some countries such as those in Latin America posted disappointing results in spite of making the transition to the market fully; on the other hand countries in East Asia performed well despite deviating in important ways from the market model. What made the difference was institutions of governance. The received wisdom is that, for growth and poverty reduction, we need physical and social capital, we need to focus on basic needs, and we need to yield to the market forces in a calibrated manner. These are all necessary, but not sufficient. They will not yield results unless they are accompanied by good governance.

What is Good Governance?

        18.   What is good governance? As per textbook definition, good governance is the manner in which the authority of the state is exercised in the management of a country’s economic and social resources for maximizing welfare. In the ultimate analysis, it is the quality of governance that separates success and failure in economic development. Across countries, application of the same policies in roughly similar contexts has produced dramatically different results. In our own country, we have seen vast differences across states in development outcomes from out of the same mix of development policies. These differences across countries as well as across regions within countries, even as they adopt similar policy packages, arise because of differences in governance. Indeed research shows that per capita incomes and the quality of governance are strongly correlated indicating a virtuous circle in which good governance results in economic development.

Nexus Between Good Governance and Economic Development

        19.   How does good governance impinge on economic development? Anti-poverty programmes may be totally undermined by weak accountability, ‘capture’ of the programmes by vested interests. An unsympathetic and oftentimes hostile government-citizen interface may alienate people from the ruling class and erode the government’s credibility. Legislation promoting social development (e. g., bonded labour, minimum wages) may come to naught if the laws are not implemented without fear or favour. Efforts to promote private investment may not succeed unless the rules of the game are clear and potential investors see governmental action to be credible, rational, transparent and predictable. Public investment priorities may be distorted by narrow parochial concerns or corrupt motives. Expenditure management systems may flounder because of weak accounting or monitoring systems. Failure to involve people in the development process may erode its benefits and compromise its sustainability.

State and Market

        20.   While talking of good governance, it is contextual to refer to the debate thrown up by economic reforms on the role of the government. Liberalisation implies the state yielding economic space to the market. This has given rise to the stereotype view that in the post-reform scenario, the government has a smaller role because the market now takes over much of what the government has been doing. This is a misperception. In the reform context, the government has, not a smaller role, but a different role, and arguably a more critical one. As has been remarked somewhat paradoxically, more market does not mean less government but different government.

Role of the Government

        21.   Conceptually, the role of the government in the reform context can be divided into two broad strands. The first strand of the role of the government arises from performing those functions that the government alone can perform. In the transition to a market system, government needs to move out of areas where markets can perform; conversely, government needs to concentrate its efforts and resources in areas where markets do not exist or cannot perform. For example, tasks such as maintaining macro economic stability, promoting equity, securing the right to property are all quintessentially government functions which, to use today’s terminology, cannot be outsourced to the market. Then there are government functions which arise as a result of market failure. Market failure represents a set of conditions under which markets fail to allocate resources efficiently because of the myopic nature of the market participants. This happens typically in the provision of public goods, in the case of natural monopolies or in situations where there are externalities or information asymmetries. For example, markets cannot be relied upon to provide external defence or internal security which are public goods. Markets cannot also be relied upon to provide a positive bias in favour of girls’ education which has a positive externality, or to prevent pollution which has a negative externality.

        22.   The second strand of the role of the government in the reform context is to ‘govern’ the market to maximize collective welfare. Market economies are not self-regulating. They cannot simply be left on an autopilot with a government watching from the sidelines. The government has a central role in regulating the market. For example, the government has to set in place and enforce a competition law, regulate those utilities which are natural monopolies, has to set standards for quality and safety and has to take initiatives towards consumer awareness and consumer protection. As David Osborne said in his landmark book, ‘Reinventing Government’, the role of the government is to “steer, but not row”.

        23.   As succinctly observed in the Discussion Note for the conference of chief secretaries on Effective and Responsive Administration in 1996:

“The unfinished course of economic reforms and the new model of participative governance will require the government to become more caring and responsive both to the needs of a growing economy and to the concerns of the relatively unserved sections. The popular references to a non-interventionist and smaller government, cannot be taken to imply the abandonment by the central and state governments of the fundamental obligation of a democratic government to provide an administration which is efficient, effective, clean, corruption-free, freely accessible to the people, and based on simple and transparent procedures.”

Good Governance – Characteristics

        24.   What does the above statement on governance mean in practical terms? Obviously it covers a wide canvas. Here I will only attempt to reflect on some essential characteristics of good governance, and for the sake of clarity, will group them under three heads: (i) rule of law; (ii) accountability for actions and results; and (iii) combating corruption.

Rule of Law

        25.   I need hardly emphasize the importance of rule of law to maintaining an orderly civil society. What is not appreciated though is the link between the rule of law and economic development. Private enterprise cannot thrive if there is no rule of law. Indeed there are surveys to show that at the top of the wish list of private entrepreneurs is not tax sops or purchase and price preferences but a clean law and order situation free of bribery, extortion, and violence so that they can pursue their economic activity.

        26.   Rule of law has five distinct characteristics, viz: first, there is a set of laws/rules known in advance; second, the laws/rules are effectively enforced, in other words nobody should be able to get away by breaking the laws/rules; third, the laws/rules are enforced in a transparent and non-discriminatory manner; fourth, there are established institutional mechanisms for making new laws and for amending modifying existing laws to reflect the changing situation; and finally, the processes for making laws are participatory and consultative.

        27.   Where do we stand on the rule of law when judged by the above five criteria? While our laws and the law making processes stand the test, it is in the enforcement of the laws that there are serious shortcomings. In particular, there are two widely held perceptions. First, the rich and the powerful can get away by breaking the law because they can ‘manipulate’ the system. Second, the poor and vulnerable get caught in the spokes of law enforcement even when they are innocent. As a premiere police organization of the country, you are in better position to appreciate these perceptions, evaluate to what extent they are valid, and throw up ideas for restoring the faith of the common man in the law enforcement system. The usual and by far the dominant refrain is that the system is compromised because of political interference. Admittedly, that is an issue and a problem. But is that the only issue? Or are there other vested interests? Can it be claimed that if the officers are guaranteed freedom to act free of political interference, they will be able to show better results without being hostage to any other interest? I am aware these are sensitive issues, but it is important for each and every one of us to introspect on whether we are compromising our professionalism, integrity and sense of duty at the altar of personal gain.

        28.   A related issue in the context of the rule of law is our procedures for investigation and prosecution. I must confess that my knowledge of the issue is limited, as I have not had the opportunity or the occasion to study this issue in detail. I know that some police officers feel that our procedures are hostage to the culture of a ‘soft state’ and that the police cannot get the better of crime unless they are allowed to resort to more coercive methods. This is an important issue if also a sensitive one. But in a democracy means are as important as ends and procedures adopted cannot violate the basic principles of rule of law. Order without law can be dangerous.

Accountability for Results and Actions

        29.   The government is the trustee of public resources and is responsible for using them for maximizing collective welfare. This requires that there are institutional mechanisms not only for determining how the resources are allocated but also for demanding accountability for results. Modern democracies are beginning to embrace a wider and more direct concept of accountability that goes beyond the traditionally established channel of the accountability of the executive to the legislature in a parliamentary democracy. Increasingly, the trend is towards accountability in of terms standards of performance and service delivery of public agencies to citizen groups that the agencies are required to serve.

        30.   We have seen several positive movements in the direction of increasing the accountability of the government. First, there has been the deepening of decentralization through the 73rd and 74th amendments to the constitution. Although not commonly perceived as such, decentralization is an essential component of economic reforms. The rising demand for decentralization around the world has come as part of the broader process of liberalization of the economic system. The underlying rationale for liberalization is similar to that for decentralization: that power over the production and delivery of goods and services should be rendered to the lowest unit capable of capturing the associated costs and benefits. Decentralization, if effectively enforced can aid good governance by giving ‘voice’ to people not only to determine how their common pool resources should be spent but also to demand accountability for those expenditures. It is equally important that delegation must go hand in hand with capacity building.

        31.   The second recent initiative towards enforcing accountability for result is the output/outcome budgeting. This is an important reform as it links outlays of expenditure to actual results on the ground. For example, we spend enormous amounts of money on primary schools and teachers, but what use is all this expenditure if there is no improvement in enrollment (which is an output) and in literacy levels (which is an outcome). By explicitly indicating results to be achieved through public outlays, the government is not only imposing a discipline on itself but is also providing a reference frame for rendering accountability.

        32.   The third initiative towards enhancing accountability is the right to information. We may have any number of institutions and mechanisms for “supply” of accountability, but that will not be effective unless there is “demand” for accountability. The right to information fills this important gap by providing public access to information relating to the functioning of the public agencies. Although it is not yet clear how the right to information will unfold, early experience is promising. We have several examples from around the country where the right to information has checked malpractices, prevented waste and leakage of resources and enforced accountability for results.

        33.   Even as initiatives such as output/outcome budgeting decentralization and right to information are all positive steps, they do not, in and of themselves, cover the whole gamut of issues in enforcing accountability for results. In fact, to comprehensively address the issue, three things are important. First, there should be systems to define results to be achieved both at the macro level and at the individual level; second, there should be objective, transparent and value free methods for measuring performance; and third there should be widely endorsed methods of rewarding performance and penalizing failure. Take for example primary education. We have three objectives here: enrolment, retention and minimum levels of achievements. The relevant questions will be the following. Are there systems to define results to be achieved in respect of the three performance indicators? Are the present hierarchical systems appropriate for evaluating the performance of teachers individually, and, collectively, at the school level? How effective are the parents committees, the user watchdog groups, tried out in some states? Have these been empowered appropriately? Do they inspire trust and credibility? Are there incentives for teachers to deliver on the results? Are there penalties for performance deficits and are they deterrent enough? These are the types of issues we need to work on to promote accountability for results. In the final analysis, the system should encourage initiative and innovation. The system as it prevails now promotes, as some one remarked, to do things rightly than to do the right things. This has led to the quip that the file work of the most corrupt bureaucrats is always perfect.

Combating Corruption

        34.   Concern about corruption is as old as the history of government. In 350 BCE, Aristotle said in The Politics that “….to protect the treasury from being defrauded, let all money be issued openly in front of the whole city, and let copies of the accounts be deposited in various wards.” There are similar references in Koutilya’s Arthasastra. Corruption, broadly defined, is the abuse of public office for private gain. Accordingly, this definition covers all the pernicious maladies that most of us confront in every day lives – bribery, nepotism, extortion, black-market. The negative consequences of corruption are well known but, as someone put it, not well realized. Corruption is anti-national, anti-development and anti-poor. There are documented studies to show that corruption impedes growth, inhibits potential investment, increases inefficiency and breeds vested interests. Most importantly, corruption, like inflation is a regressive tax and hurts the poor the most. There is a widespread view that corruption is a global phenomenon, that it is part of human nature and not much can be done about it. This is both cynical and defeatist. Admittedly corruption is pervasive across all countries, all cultures and all settings. But it various in degree, in kind and most importantly on its damaging impact. The costs of corruption in a country such as ours with over 250 million people living in poverty are decidedly much heavier and more tragic than the costs in rich societies where everyone enjoys basic security and livelihood. It is also an important fact that in poorer countries with all round scarcities, corruption is more pervasive.

        35.   Although economists are increasingly engaged in the task of estimating the impact of corruption on growth and development, there are no definitive answers. Several studies do show a negative correlation between corruption index and the investment rate or the rate of growth. However, there are three problems associated with such studies: first, there is no standard definition of corruption; second there are as yet no standard ways of quantifying the extent of corruption; most studies base their measures of corruption on surveys of corruption perception; and third, it is difficult to estimate the counterfactual – what would growth have been in the absence of corruption?

        36.   Notwithstanding these conceptual and empirical problems, there is wide acknowledgement that, corruption imposes heavy costs on society. In particular, there are five types of costs: (i) loss of public resources through leakages in taxes, duties, fees and other levies; (ii) misallocation of public resources as investment choices are often driven by opportunities for corruption; (iii) low investment because of lower trust and confidence in public institutions; (iv) high costs and low quality of public service; and (v) increased insecurity and vulnerability of the poor, erosion of confidence in public institutions, breakdown of the rule of law, and ultimately threat to the legitimacy of the state itself.

        37.   We now know that corruption is not culture specific but is a function of the environment. As Malcolm Gladwell explains on the basis of evidence in his bestseller, ‘The Tipping Point’, the impetus to engage in a certain kind of behaviour does not come from a certain kind of person but from the context and the environment. If there are opportunities for corruption, some people will succumb to it. And if the chances of getting caught and punished are slim, more people will succumb to it. The incidence of corruption is large and pervasive in our system. Some of you might remember that in the pre-reform regime we used to draw up the production plan on the basis of complex input-output models. The late Prof. Raj Krishna, who was involved at one time with the models, suggested that the input-output matrix cannot be realistic unless it includes “leakage and corruption” as one of the sectors of the economy.

        38.   Demand for corruption, i.e. opportunity for corruption, as is well known, is higher in regulated and controlled environments which allow politicians and bureaucrats to dispense patronage. For example, the pre-reform licence-control regime provided opportunities for corruption because of the rents available in dispensing licences, permits and quotas. Similarly, citizen-government interface provides opportunities for corruption. In tax administration, for example, corruption depends on five factors: complexity of tax laws, monopoly power of revenue officials, the degree of discretion available to tax officials, the degree of transparency in the system, and finally the role of the political leadership. Quite evidently, demand for corruption goes down if the opportunities for rent seeking and dispensing patronage are minimized.

        39.   The implementation of economic reforms has reduced opportunities for rent seeking. The introduction of e-governance systems has increased transparency. Even as these have been positive developments, the incidence of corruption, especially at the cutting edge level, continues to be high. Transparency International, an international watchdog body, ranks India low down in the 88th position in the corruption perception index at par with African economies like Mali, Benin, Gabon and Tanzania. People ask, how come India is growing so fast in spite of so much corruption. That is a wrong question. The right question will be to turn this one on its head and ask, how much faster would India be growing if corruption were controlled.

        40.   In fact, corruption has become so entrenched in our system that we have totally acquiesced in it. We accept it as an unavoidable part of our democracy and governance structures. While we denounce corruption in principle, we do not attach any social stigma or enforce any social sanctions against people perceived to be corrupt. The issue of ‘tainted ministers’ continues to haunt us without a satisfactory solution. We no longer blow the whistle against corruption because we are not confident that the corrupt will be booked and punished. We no longer get agitated against bribes we have to pay because we have already provided for them in our calculations. We are no longer surprised at the high cost of public works or the poor quality of public services because we have internalized corruption in our collective psyche.

        41.   As the premier police agency in the country charged with the responsibility of preventing and controlling corruption, you should be asking yourself a number of questions. How come there are so few people caught for corruption when there are many more who are perceived to be corrupt? How come it takes so long to complete prosecution in spite of so many specialized agencies for enforcement and delivery of justice? How come the conviction rate is so poor?

        42.   The usual explanations again are the familiar ones: political interference, loose laws, inadequate and poorly trained staff etc. These may all be true, but collectively they still do not offer a satisfactory explanation.

        43.   Combating corruption is critical to improve the quality of life of the people. A two-fold strategy is needed to contain corruption. First opportunities for corruption must be reduced. This can happen as we carry forward our economic reforms and reduce all forms of controls which result in rent-seeking opportunities. As scarcity of supply of goods and services is replaced by greater abundance, the pervasive nature of corruption that we see in our country can be restricted. Reforms and growth can go hand in hand in reducing opportunities for corruption. Second, the government agencies charged with combating corruption must show an increased determination in identifying corrupt officials and politicians and getting them convicted. Unless the conviction rate goes up, indulging in corruption will be treated as a low risk violation. Above all, the public have a major responsibility. They must show in decisive way their disapproval of people who are corrupt. This is particularly relevant at the time of casting the vote.

Conclusion

        44.   To summarize, good governance is a combination of transparent and accountable institutions, strong skills and competence, pecuniary and professional integrity, and a fundamental willingness to do the right thing. The test of good governance is ultimately the quality of service at the cutting edge level. I can hardly overemphasize that good policies are necessary, but not sufficient. They need to be accompanied by good governance. Each and every public functionary, be they part of the executive, judiciary or the legislature has the responsibility of making his or her contribution to good governance. Only then will we be able to achieve our goals of growth and poverty reduction. The art of progress, as the philosopher Whitehead put it, is to preserve order amid change and to promote change amid order. I wish the officers and men of the CBI all the very best in fulfilling their critical obligations in delivering good governance.