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Tag Archives | corruption

Brazilian Economy in the Doldrums

By Anupam Manur

Brazil is staring at a lost decade of economic output, with political upheavals, domestic economic crisis of falling output, debt and inflation and a stagnant external sector due to falling commodity prices internationally.

While the world is gripped with stories of Chinese slowdown, another economy is staring down the barrel of deep economic and political crisis and faces the possibility of a lost decade for economic growth. Brazil has had another contraction in the previous quarter and according to The Economist, by the end of 2016, the Brazilian economy may be 8% smaller than it was in the first quarter of 2014. The Economist’s GDP forecast for 2016 is particularly dire for Brazil, the largest economy in the downside projections, with over 2% contraction in real GDP.

The last time that the Brazilian economy saw positive growth was in the first quarter of 2014. So, Brazil is officially in a recession in 2015, going by the NBER definition of recession as contraction of output for two consecutive quarters.

 

Brazil's GDP growth rate has been negative for the past 7 quarters and is expected to fall further in 2016.

Brazil’s GDP growth rate has been negative for the past 7 quarters and is expected to fall further in 2016.

Amidst the economic downturn, Brazil is also facing a political upheaval. Dilma Rousseff  and many of her party members, who are part of parliament, face very serious corruption charges against them and are presently being investigated. They are alleged to have accepted billions of dollars in bribes in exchange for bloated contracts with Petrobras, the State controlled oil and gas company. Also, Joaquim Levy, the Finance Minister who was known to bat for greater fiscal austerity and structural reforms resigned last week. When the need of the hour is urgent economic reforms and a plan to kickstart the economy, the Parliament Is obsessed with the impeachment of President Rousseff. This implies that Rousseff does not enjoy the political capital to initiate any reform agenda, assuming she has one, to get the economy back on track.

Falling commodity prices have a big part to play in Brazil’s misfortunes. Brazil’s commodity exports, and with it, its GDP, had a spectacular rise along with China’s growth story. However, with China slowing down, demand for commodities has fallen and so have its prices. Oil, iron ore and soy beans account for more than half of the Brazil’s export basket and their prices have been depressed for quite some time now. Brazilian commodities index has slumped 41% since 2011, according to Credit Suisse. The average price that Brazil used to receive for a ton of iron ore has slumped from about $125 in 2011 at its peak to about $40 currently. Among the big commodities exporters of the world, Brazil has been hit the hardest.

While it may be convenient for Brazilian administration to blame global conditions for their weak economic performance, a closer look will establish Brazil’s home grown problems as the chief culprit. Australia is a bigger commodity exported and relies heavily on Chinese manufacturing industry for its GDP growth. The share of exports in Brazil’s GDP is 11.5 per cent while Australia’s is much higher at 21 per cent. Despite this, Australia is slated to grow at a 2 percent this year. Other major commodity exporters in Latin America such as Chile and Peru are also affected by the declining prices, but are yet slated to grow at 2-3 percent this year.

The reason for this is Brazil’s structural problems. While Australia handled the global 2008 recession with caution, Brazil followed an excessively loose monetary policy and uninhibited fiscal expansion. Brazil has been spending indiscriminately: the estimate of budgetary deficit for 2015 was 10 percent of GDP. The debt to GDP ratio in July 2015 was already 65 percent and was set to touch 70 percent by end 2015. Further, the government is running a primary deficit of $13.9 billion or roughly equivalent to 2.5 percent of GDP. Primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments, and excludes interest payments. This implies that Brazil is adding to the total debt at a far greater rate than it can afford to do. Rating agencies such as S&P and Fitch have already downgraded Brazil’s debt instruments to junk bond status, which will translate into even higher costs of borrowing.

Corporate debt has been on the rise as well for the past decade. It is presently as much as 63 percent of GDP. It does not help the government that much of this is from either state owned companies such as Petrobras or other companies who have the implicit backing of the Brazilian government.

Quite unfortunately for Brazil, the usual routes for recovery from a recession are unavailable to them. As aforementioned, public debt is far too high to accommodate a fiscal push to the economy. The need of the hour is, in fact austerity, but that is bound to depress the economy further.

Monetary policy does not have too much wiggle room either and the central bank is in a real fix. The SELIC rate, Brazil’s policy interest rate is at 15%. With 150,000 jobs being shed in the formal sector every month, there is a real clamour for reducing the rates. However, this might fuel inflationary pressures, which are already quite high and high inflation will drive away the investors further. The consumer price inflation is hovering around 10 percent and the real has been steadily depreciating.

Raising taxes is also going to be extremely difficult, as Mr Levy  found out. Part of the reason for him quitting the cabinet as Finance Minister was the political opposition both from the opposition and within his own party to raising taxes, cutting federal spending and general fiscal adjustment.

The only way out is unlikely to be popular. Ms. Rousseff needs to come out with a credible new plan for restructuring the economy. This will involve painful cuts to pensions and other social security measures along with slight increases in the tax rates. Finally, Brazil also has to look at improving its business environment. It is currently placed at 120th out of 189 countries in the Ease of Doing Business Report by the World Bank. Though it is definitely going to be a tough period for Brazil in the next few years, it must aim to reduce the duration and severity of the problem by following sound economic policies.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

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Unaccounted income: To begin from the beginning

The current approach towards unaccounted income overlooks the sources of the unaccounted income.

By Surya Prakash B. S. (@SuryaPrakashBS) and Devika Kher (@DevikaKher)

The focus of the political debate about corruption in India is primarily confined to the unaccounted wealth stashed abroad. The solutions demanded focus on disclosure of assets located outside India and implementation of anti-money laundering laws. Amidst all this, the root cause for the generation of the unaccounted income is being overlooked.

The current approach towards unaccounted income overlooks the sources of unaccounted income. In addition, the various statutes in this area primarily link generation of unaccounted income to the proceeds from criminal activities.

Background

In May 2015, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 was passed with the objective of dealing with the undisclosed foreign income and assets. The Act also has a provision to impose tax on such income and assets.

Before the Black Money Act, 2015, the Prevention of Money Laundering Act, 2002 (PMLA) was in place to curb the problem of money laundering in India. As per the Act, possession of money, and assets generated from crimes like arms, narcotics, immoral trafficking was made punishable with the objective of reducing proceeds from crime. The Act refers to definitions under the Indian Penal Code to define the term ‘crime’. Therefore, reach of the Act is constrained continues to be so even after the new Black Money Act.

Dr. Nigam Nuggehalli, an associate professor at Azim Premji University has looked into the shortcomings of the Black Money Act regulating the unaccounted and undisclosed income. As per Nuggehalli, the Black Money Act provides a lot of discretionary power to the officers in charge and does not serve any purpose above and beyond, what is served in the Income Tax Act, 1961 and the PMLA, 2002. However, there are more generic problems attached to the legislature enacted to reduce the unaccounted income in India.

Shortcomings

The legislature in place currently restricts the scope of ‘black money’ to the income generated through illicit activities or the undisclosed foreign wealth or assets. They completely overlook the instances where illegitimate income is generated while carrying on legitimate businesses.

Based on the data collected from I Paid A Bribe, an online platform to report corrupt activities, some education institutions collect Rs. 20,000 to Rs. 1,00,000 as bribes for admissions. For services like ensuring passport verification or getting passport renewed, the market price estimated for the bribe is Rs. 200- Rs. 10,000. The closest that PMLA, 2002 gets to addressing such instances is by declaring ‘public servants taking gratification other than legal remuneration’ as a crime. Even then it does not looks at the root causes behind the rise of the undisclosed income like the transaction cost and the principal agent problem.

The scope for corruption primarily exists due to the cumbersome processes and the ambiguous regulations set by the administrative authorities. An increase in the time and the money spent on completing the process makes the illegitimate methods look economically rational in comparison. In certain situations the corrupt practices are also used due to the principal agent problem. The provisioners exploit the opportunity to extract benefits from the customers, as the service provided is in the interest of the customer and do not affect the provisioner. For instance, a process like ensuring passport renewal is only in the interest of the passport holder. Hence, the passport authorities use this chance to gain extra benefits.

To sum up, a close scrutiny of both the generation and the flow of unaccounted income are needed. Addressing the root cause behind unaccounted income generation requires an in-depth analysis of the sectors prone to malpractices. This analysis will help to better understand the environment that facilitates and necessitates such behaviour.

We hope to explore in further detail these aspects over the next few blogs.

Surya Prakash B. S. is a research scholar at The Takshashila Institution. His twitter handle is @SuryaPrakashBS

Devika Kher is a Research Associate at Takshashila Institution. Her twitter handle is @DevikaKher.

 

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Electoral Reforms – a Much Needed Shot in the Arm

By Sambit Dash

Parliament has been one of the cornerstones of Indian democracy. Through various trials and tribulations it has emerged as a wall which can be punched and spit at, but not be razed. The elections to the Lok Sabha – the house with more muscle, relevance and members – are affairs that have been, more often than not, immaculately managed by the Election Commission of India (ECI). This is no easy feat given that the Indian electorate is the largest in the world. The ECI has also implemented major reforms such as the lowering of the voting age in 1989, the implementation of electronic voting machines, the appointments of booth officers, and the digitization of electoral rolls. Though the pace of reforms has been slow, the ECI has proved to be above petty politics and has received backing from the Supreme Court of India. However many issues still plague the conduct of elections such as the criminalisation of politics, corruption, a lack of transparent funding, archaic laws, and the covert use of muscle and power.

One of the major issues is the criminalisation of politics; 34% of MPs in the 16th Lok Sabha face criminal charges, up from 30% in the 15th. The ECI, in their annual recommendations, have proposed that any person who is accused of an offence punishable with imprisonment for five years or more should be disqualified from contesting elections even during the pendency of the trial, provided that the charges have been framed against him by a competent court. This recommendation has been stonewalled, primarily by the contention that innocent representatives would be unjustly affected by politically motivated charges. However, some headway has been made by the Supreme Court in addressing the criminalisation of politics in Lily Thomas vs. Union of India where it held that a successful conviction would automatically disqualify a candidate or elected representative.

The funding of political parties is another critical area that needs attention, particularly the disclosure of the sources of campaign funds. Currently, India’s richest MP ( and a whopping 82% of MPs have assets worth more than one crore. Wealthy candidates are not a problem per se, but if their wealth can be illicitly used to gain advantages during elections it encourages the wrong kind of candidates. Unfortunately, this does indeed occur as the standards of disclosure during elections are poor. Political parties consequently tend to prefer candidates who can easily contribute towards unreported expenses during elections.

While the Representation of People Act, 1951 requires that candidates report all their individual expenses, political parties as a whole are only required to disclose to tax officials individual contributions above Rs. 20,000. Political parties however, cannot receive any contributions from government companies or any foreign source. The Act initially allowed corporate donations but they were banned in 1968 only to later be permitted by an amendment of the Companies Act in 1985. The amendment permitted corporate donations with riders like full disclosure and a cap of 5% of the average net profit over the last five years of the company. In 1979, new tax exemptions were created in order to increase the level of disclosure of political parties but they were ultimately unsuccessful in improving transparency.

In the last four decades, various committees have proposed tackling these issues through state funding. In 1972, a Joint Parliamentary Committee on Amendments to Election Laws had suggested that the state should bear the expense of funding candidates. In 1978, the Tarkunde Committee also suggested the same but in part. The Dinesh Goswami Committee (1990) suggested that the state should fund elections by providing campaign material, travel expenses, airtime in the media, etc. rather than money. The Law Commission Report of 1999 also proposed partial state funding. However, political parties have not reached any consensus on these proposals as smaller parties believe state funding will be advantageous to bigger parties.

An alternate route to achieving transparency is to bring political parties under the ambit of the Right to Information Act, 2005 (RTI Act). However, despite attempts to do so this has not been functionally achieved. In June, 2013, the Central Information Commission declared that six national parties qualified as ‘public authorities’ under the RTI Act and would thus have to comply with its provisions. None of the parties challenged the decision in any forum, yet they have still failed to reply to any queries, or appear before the CIC. This is not surprising given that major parties like the BJP and Congress ‘officially’ spent only Rs 714 Cr and Rs 516 Cr respectively in all elections in 2014.

Apart from removing criminals from politics and revising how election campaigns are funded, many other reforms are still needed. These include disallowing a person from contesting from two seats (as Prime Minister Modi did in the latest elections); increasing the security deposits of candidates; regulating advertisements (both surrogate as well as government-sponsored) and exit/opinion polls in the media; maintaining and auditing the accounts of political parties; and finally, revising the composition of the ECI.

Political parties will themselves not be the harbinger of these reforms as maintaining the status quo is in their interests. It is thus the duty of civil society and advocacy groups to mount pressure on the government of the day to implement these reforms. Electoral reforms are one of the few measures which can address multiple ills in India. Elections are the glacier from which the stream of democracy flows; reforming how they are conducted will be a shot in the arm for Indian democracy.

Sambit Dash is an alumnus of Takshashila’s public policy course, the Graduate Certificate in Public Policy.

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The Indian story- What went wrong?

Pratham Jahoorkar 

Alright, India’ GDP grew at an applauding rate for few years now. They talk of Bangalore– the Indian Silicon Valley, the telecom revolution, BPOs and Slumdog millionaires. We started acquiring western companies almost boding reverse colonisation. “India Shining” had become a cliché. And then, something started working against it all. We now talk about – nine year low GDP growth (5.3 percent in Q1-2012), corruption scandals, stagflation, rupee touching new all time lows, policy shocks that make foreign companies run for cover and of course blackouts! What can explain this turnaround? I pen down few thoughts in the capacity of an active observer at best.

The tightening of the monetary policy focused on the demand side and failed to curb the inflation that was largely because of the supply side shortcomings. Prolonged interest rate hikes (13 times between 2010 and 2011) targeting inflationary concerns have increased the borrowing rates across the board. Home owners, corporates and infrastructure projects are forced to deal with higher domestic debt costs affecting both the demand and the supply side economics adversely. And yet, inflation today continues to be a concern. From a vote-bank perspective inflation remains a higher priority than growth to the ruling parties. Thus, a monetary policy rescue to boost growth seems questionable in the near future.

It is no coincidence that lower growth rates reflect in lower investor confidence in the country. S&P rates India at BBB-. Any further downgrade means India will be the first of the BRICs to lose investment grade status. This is bad news for Indian foreign currency borrowers. Investor unfriendly policies are not only threatening returns that attracted foreign money but are also throttling the much needed investments to fuel our growth. Retrospective tax and FDI policy failure amongst other things, exacerbate a euro zone triggered bearish sentiment amongst the investment community.

The Twin deficits (current account and fiscal deficit) that were last seen in 1991 are back. Massive populist schemes like NREGA, food security bills and fuel/fertiliser subsidies contribute to a larger than expected fiscal deficit of 5.75 percent (as on March 2012). State Electricity Boards are severely buckling under subsidy burden curbing the power required to catch up with the industrial growth – partly causing the half-country blackout this late July. Oil and gold imports coupled with falling service sector exports widened our trade deficit. These deficits alongside grim foreign investment outlook percolate into the forex markets as severe downward pressure on the rupee. No surprise, it is the worst performing currency in Asia at the moment leaving us to deal with the costly imports.

The demographic political dynamics, coalition compulsions, rent seeking loopholes inherent to our democratic system forbid an expeditious counter to these quagmires. The majority poor vote-bank is bound to electorally prefer the populist schemes. While the power perpetuating efforts from the polity pander to such demand at the expense of long term growth. While the populist schemes fail repeatedly due to the implementation deficit, the announcing parties might get re-elected at the expense of massive splurge of tax payer money. It is this cost of imperfect democracy that squarely falls on the religious tax payer- “the middle class”. Other classes either earn too small to pay or are too wealthy to be bothered.

Coalition governments formed by identity politics and forged with disconnected agendas have become a recent reality. The resultant political instability means procrastinated policy making with myopic vision and regional focus. Lack of a clear national leader is now felt more than ever. Further, the license raj hangover still persists in several areas and most prominently in the allocation of resources. The massive scale corruption scandals unearthed in 2G scam and coal resource allocation bear testimonial for it. This is now being coined as the “Resource Raj” by the economists.

The world outlook does not help either. Economists like Nouriel Roubini have long been warning about an economic ‘storm’ in 2013. The shift in trajectory of Indian growth rate from 5.7 percent in the 1990s to 8.6 percent during 2005-2010 was largely due to the service sector growth shift from 7.5 percent to 10.3 percent in the same time period. Global economic doom puts India’s service led export growth story in jeopardy.

There is a glimmer of hope that reassures there is light at the end of the tunnel. That’s an impending 1991 like ‘Crisis’ (“twin-deficits”?) that will shake the governments out of their stupor to reform. Second generation reforms are long overdue that will set to finish the job we have started in the 1990s. These should eliminate all rent seeking avenues, increase investor confidence, facilitate infrastructure build-up, make resource allocation transparent, make subsidies work, revive labor laws and much more. Further, our middle class awakening witnessed during Anna Hazare’s protests is encouraging as well. Will this convert into active political participation by this class is arguable, albeit, is strongly desired.

Amidst this deafening noise of narratives and rhetoric it takes a deliberate effort to do wishful thinking. Hope is not collective action but it will surely lead to one someday when enough people talk and write about it. I try to do my part.

Pratham Jahoorkar is an entrepreneur in financial services industry and is based out of Mumbai.

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Do we need the Lokpal or is economic liberalisation enough?

Karthik Dinne

Any debate about the Lokpal generally ends up being an argument over either the function and structure of the Lokpal or about its need. People, who question the need for the Lokpal, term “economic liberalisation” as the solution for corruption and also more often as a panacea. Some of them truly believe that economic liberalisation is the only solution for the problem of corruption. But most others take up this argument just to damage the credibility of Team Anna which is bearing the brunt of the movement.

Corruption in India is a complex problem and there is no single point magic solution, be it a Lokpal or be it economic liberalisation. Lokpal has its own limitations. And so does economic liberalisation- mainly for two reasons. Firstly, economic liberalisation is essentially reducing the role of the government in the business or economy of the country, withdrawal of the government from certain sectors and removing the barriers for the market forces to operate freely. No matter how hard we try to limit the role of the government, it certainly has its role to play in certain vital sectors and areas where markets don’t offer solutions- law and order, universal primary health care and public infrastructure to name a few. If the presence of the government is the cause of corruption and since the government can’t get out of all sectors, there is always a possibility of corruption in those key sectors where government has a certain role to play.

Secondly, designing public policies in those sectors which ensure zero percent possibility for corruption during its implementation is an impossible task. Keeping in view the vastness and diversity of India, one cannot make a rigid set of implementation procedures or rules at the micro level and paint the whole country with the same brush. Some amount of discretion has to be left at the lower levels to ensure flexibility so that the policy can be adapted to the local conditions. But there is always a danger of this discretion leading to graft and other such problems. Maintaining this balance of discretion vs. the rules is one of the most challenging tasks in designing a public policy.

It is in some sense similar to controlling a crime. Some crimes can be prevented by delving deep into their root cause and for some there is no other way than punishing, thereby creating deterrence. Lokpal is one such deterrence mechanism. The absence of such a strong deterrence mechanism only creates incentives for people to be more corrupt. If people believe that even if they get arrested, they can conveniently get out of it by exerting their political influence or owing to the delays in the court judgements, if they think that can comfortably live on by using this convenient argument of “corrupt not until found guilty by court”- it is even more dangerous. The need of the hour is to have such an investigation agency free from political agency and a speedy delivery of the judgement. Lokpal ensures both of these and hence is very much essential.

There might be other possible solutions for corruption, each effective in its own sphere. Some may be “necessary but not sufficient” but that cannot be the argument to downplay that solution. Each step may only advance us a little, but we have to start somewhere and proceed towards having holistic solutions. This excessive obsession with both Lokpal and economic liberalisation is equally dangerous. As Swami Vivekananda once said “We take the highest point of ours and compare it with the least point of others and then downplay them”. Hope we don’t let this happen, because this nation simply can’t afford it.

The Author is a student at the Indian Institute of Technology, Kharagpur. 

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