Corruption of India's Economic Miracle?
By Staff News & Analysis - September 05, 2011

India Says No to $80 Toilet Paper … An anticorruption campaign has given voice to a growing middle class tired of public indignities … A year ago, no one in India could have imagined that cabinet ministers, powerful politicians, senior officials and CEOs would be in jail now, awaiting trial for corruption. The credit for this dramatic shift belongs in no small part to the anticorruption movement of a 74-year-old activist, Anna Hazare, supported by determined justices of the Supreme Court, an exceptional auditor general, rival television channels in search of "breaking news" and, crucially, a newly assertive Indian middle class. The long-term impact of this movement is unclear. It could lead to something profoundly good, or it could destabilize the whole system. – Wall Street Journal

Dominant Social Theme: If India could only remove the corruption plaguing its government, prosperity might come to all …

Free-Market Analysis: More and more is being written about the anti-Indian corruption movement, which is led in part by Anna Hazare (see above article excerpt). We've commented on this movement in the past, which is gathering momentum in India and may in fact partake of the austerity meme sweeping Europe and America. You can see the original article here: Government Anti-Corruption Meme.

The original article focused on another austerity and anti-corruption campaigner, Swami Baba Ramdev. Baba Ramdev has insisted that India's large denomination bills – Rs.500 and Rs.1000 – should be withdrawn from the entire country in order to lessen financial fraud.

The anti-corruption meme is now complicated by skepticism about the bonds of so-called BRIC countries such as China and India – which has seen significant weakness in corporates of late. There are fears that both India and China will be affected by a further slowdown in Western economies. (We hadn't noticed they'd picked up.) Markets slumped around the world overnight.

China and India are both vulnerable to Western slowdowns. But the corruption issue, for India anyway, has taken center stage. The original article focused on another austerity and anti-corruption campaigner, Swami Baba Ramdev. Among other things, Baba Ramdev is seeking direct elections, the repatriation of all illegal funds, a methodology to ensure that all Indians declare and pay their share of taxes and, finally, the death sentence for any politician found to be corrupt. Anna Hazare is seeking stern measures to counteract corruption as well.

Hazare once served in the military and lives off his military pension. He has no family and stays in one room attached to a temple in the village of Ralegan Siddhi, which Hazare has transformed over the 30 years from poverty-stricken helplessness into a showplace of Indian modernity.

In doing so, Hazare has gained a somewhat authoritarian reputation. By virtue of his small military pension he was one of the wealthiest men in Ralegan Siddhi and over time he has been able to enforce his will on the community. He has banned smoking and drinking and has been known to flog citizens publicly for drunkenness.

No elections have been held in Ralegan Siddhi for at least 20 years, apparently on the instructions of Hazare. He has reportedly demanded that lower-caste families go on an all-vegetarian diet and has apparently flogged some who refused. His anti-corruption revolution, nonetheless, has resulted in great strides for Ralegan Siddhi as a model civic showplace. Poverty has been markedly reduced. Clean water and numerous other community advances have been lauded by the World Bank among other UN agencies.

The conclusion being reached by the UN and Western media alike seems to be that, generally speaking, the movement is a very good thing for India. If India, the logic seems to go, can reach a level of honesty and transparency of Western societies, then what has traditionally been seen as a third world country, can transform itself into a first-world estate similar to Europe, Britain or America.

Hazare, who dresses only in white, has styled himself as a modern Mahatma Ghandi, and this has no doubt helped his appeal at home and abroad. He has used hunger strikes like Ghandi and and marches against the government. A hunger strike last month in Delhi resulted in the government agreeing to consider a platform of Hazare reforms, which the Wall Street Journal calls a significant achievement as politicians of all parties have "stonewalled the creation of an anticorruption agency for 40 years."

Hazare's support, which seems to have deep resonance with the Indian middle class, is important, too. The Journal estimates that "the middle class is almost a third of India's population today, up from 8% in 1980. Since reforms in 1991, India has become the world's second-fastest-growing economy and the middle class is expected to become 50% by 2022." Here's some more from the Journal article:

"There are still vast areas of horrible deprivation, but a significant number of Indians have experienced a palpable betterment in their lives. As a result, the discourse of the nation, or what Alexis de Tocqueville called "habits of the mind," are changing. People have begun to believe that their future is open, not predetermined, and can be altered by their own actions.

"The same thing happened in the West after 1800. In her book "Bourgeois Dignity: Why Economics Can't Explain the Modern World," Deirdre McCloskey argues that the West rose not only because of economic factors but because the discourse about markets and innovation changed. People became encouraging of entrepreneurs. New perceptions and expectations emerged.

In the same way, the rise of India and China has brought dignity to their middle classes. Ordinary conversations over chai in India are now about markets and focus on the contrast between private success and public failure. While the private sector provides cutting-edge services and products to the world, the roads outside are potholed, electricity is patchy and water supply erratic. The difference between the two worlds is accountability: In private life, if you don't work, you don't eat; in public life, jobs are effectively for life."

The Journal has some cautions. Hazare's movement may contribute "to undermining India's finely crafted constitutional system, which has made its democracy the envy of the developing world." Hazare's hunger strikes have caused change, but legislation can only be realized by working within the system.

"India's churning reflects a deep middle-class anger with pervasive graft in the government, police and judiciary. Bourgeois dignity may well hold the key to this Indian puzzle, but it needs to find expression within the bounds of the country's constitutional system. Street theater seldom makes for lasting reform—and sometimes brings down the good with bad."

This is the conclusion to the article, and while it sounds reasonable, it seems to us that the assumptions on which the article is built are not necessarily accurate. For one thing, the article glosses over the fairly Draconian authoritarianism of the anti-corruption movement.

For another, the article assumes that the current Indian vitality is the result of inexorable cultural and entrepreneurial shift. We would argue this is entirely incorrect. India's resurgence is driven by central banking money printing and may not be seen as a natural expression of industry and society.

It is extremely important that the progress of the BRICS be placed in perspective. Brazil, China, India, even Russia, all have aggressive central banking policies. China and India, especially, have economies that are obviously being stimulated by excessive money printing. Both countries have a problem with price inflation as a result.

Progress built on printing money from nothing is ephemeral. In America and Europe, thanks to the debasement of money and the vast resources it grants (temporarily) to government, economies can seem quite healthy one moment and then ill the next.

Money printing hollows out economies. It distorts business and job growth. It makes people feel wealthier than they are in reality. In both China and India, economic implosions will eventually take place. It cannot be otherwise, because central bank money stimulation inevitably leads to an exaggerated business cycle and subsequent busts.

For this fundamental reason in particular, the Wall Street Journal article is flawed. India has not necessarily experienced a resurgence of business and market creativity. It is simply going through the same cycle of monetary stimulation that the European PIGS and America went through recently.

Such monetary stimulation inevitably leaves behind ruined and fractured societies. In the case of India, the anti-corruption movement will likely make things worse, as it is in no way an expression of ancient Indian culture, which was decentralized and extraordinarily tolerant.

The India of today, based on reports having to do with the anti-corruption movement, would seem to be inheriting the worst parts of Western socioeconomic systems. India's decentralized principalities have been merged into one bureaucratic morass.

Money printing, in fact, is fooling the Indians into believing their economy is far stronger than it is – and also increasing the corruption of the bureaucracy. The anti-corruption movement is providing the Indian middle class with a simplistic approach to dealing with such problems.

The real issue of the way the West has organized Indian society from the top down, starting with central banking stimulation, are not being addressed. The solution is seen as one of authoritarianism rather than a reconfiguration of India's basic institutions.

The waves of authoritarianism sweeping through the world today are the direct result of the failed economic systems that the great banking families of the West have worked assiduously to put into place. India is not immune to such "austerity" and to a kind of neo-fascism that is taking place as leaders attempt to offer solutions that have little to do with the actual problems caused by monetary inflation, taxation and over-regulation. India suffers from all these problems today.

After Thoughts

To a good degree, unfortunately, there is no Indian "economic miracle," only a false euphoria based on monetary stimulation. Within this context the Indian anti-corruption movement can be seen as further degradation of a powerful and ancient culture that once featured tolerance and forbearance rather than the bureaucratic prophylactics favored by the current crop of authoritarian "reformers."To a good degree, unfortunately, there is no Indian "economic miracle," only a false euphoria based on monetary stimulation. Within this context the Indian anti-corruption movement can be seen as further degradation of a powerful and ancient culture that once featured tolerance and forbearance rather than the bureaucratic prophylactics favored by the current crop of authoritarian "reformers."

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