Saturday, November 5, 2011

The changing dynamics of public rent-seeking in India

Ashutosh Varshney recently wrote about the dynamics of rent-seeking in India,

It is worth noting that the countryside, where 68 per cent of India currently lives, is not where most of national income is generated. At this time, not more than 25-30% of India’s GDP comes from villages, with agriculture accounting for a mere 15% of GDP. More simply stated, over two thirds, perhaps as much as three fourths, of the nation’s GDP is generated in cities where less than a third of the country lives, whereas less than a third, perhaps as little as a fourth, of the country’s GDP is produced in the countryside where over two thirds of the national population resides.

As a consequence, for politicians, the city has primarily become a site of extraction, and the countryside is predominantly a site of legitimacy and power. The countryside is where the vote is; the city is where the money is. Villages do have corruption, but the scale of corruption is vastly greater in cities.

In fact, this analysis, while broadly accurate, can be made more nuanced. The top tier of the political and bureaucratic establishment is increasingly getting its dominant share of rents from the high rent yielding infrastructure sector. These sectors are predominantly urban in nature and their rent interfaces (say, decision makers and corporate offices) are located in urban areas. As opportunities in these sectors have grown, the politicians and officials in the upper tier have vacated their traditional rent space for those at the lower rung.

Consider this illustration. Since independence, until a few years back, the major sources of rent-seeking for everyone was in the local sources of patronage - dealership of fair price shop, control over anganwadi center and school, local officials postings, small local engineering works (of the panchayats and other departments) etc. The large construction works and private industrial establishments, except in industrial belts, were generally absent or marginal. The rents available too were minimal. Everyone from local government politicians to the state and central legislators sourced their rents from this small pie.

Over the last decade or so this landscape has been undergoing a transformation. There have been steep increases in infrastructure investments even in rural areas, which in turn have spawned off property booms in their catchment areas. Big infrastructure contracts involve large private contractors, who provide great opportunities for the local political establishment. Private investments too have flowed into many areas. Since the pie has expanded dramatically, the upper levels of the political establishment can now feast on these larger opportunities and leave their local minions to corner the older set of opportunities.

Obviously, the degree of evolution of this pattern varies from state to state. In certain states, this pattern has advanced considerably. In any case, this transformation only shifts the agents of corruption without altering any of the existing incentives to seek rents.


KP said...

Dear Gulzar,

On a brief reading of varshney's article heres what I feel.

The article is trying to nuance corruption based on scale of output / or as a form of behaviour that shoud be mitigated by the electoral process (the relative weights in the electoral process that is.)

Preface a quote from Latha Jishnu in Down to Earth on occupy Wall street
"India is following a similar trajectory. Its budgets have turned increasing pro-business with six successive budgets since 2005-06, writing off corporate income tax amounting to Rs 3,74,937crore. In the current budget it was Rs 88,263 crore. So far there has been no focus on this aspect in a country where a million mutinies over daily injustices have left little time for such analysis. The outrage of the 99 per cent is spreading though'

1.Most corruption is not output based. It is transaction based siphoning even before any output of goods or services can be realized. In other words - fraud.

2. The huge subsidies that have thrived for decades in Indian politics - under the guise of land for industry / education / welfare - will not even qualify as corruption.

The deeper issue is the way corruption is through a direct subsidy - but cannot be identified as such.

I am not even including the rent collected in the disbursement of subsidy here.

2. How will the 2G scam be classified using this logic - the locus could be city based - akin to people rob banks because thats where the money is.

3. The transactional rent seeking in the RTO is not related to any output - it is simply a due process of interaction with the RTO bureaucracy - how is this classified?

This may be small - but adds up to a significantly large number that creates wealthy RTO employees - again with no productive output.

The subsidy offered to rural areas through fertilizers etc., is again pocketed by industries.

Rich farmers and industrialists (wherever they are located) draw huge subsidies ostensibly directed at improving rural areas.

I think the urban vs rural is a poor way to evaluate corruption - particularly in a country where corruption is ubiquitous.

The abstract theorizing from a political scientist obfuscates the simple reality - people followed the protest because there was somebody with credibility to lead.

The establishments continuous attack on the credibility of the inividuals involved - is clearly the counter strategy.

Indians are easily carried away by self - righteous moral equivalence and the oft repeated self flagellation -"we are the corruption that we see in others" -( I have never understood that though).

The question of why now - accords too much historical value - to a haphazard outcome of circumstance -as though some inflection point was the necessary trigger.

One thing can clearly be said - the bang for the buck - in corruption proceeds through privatization was faster in turn around time and larger in scale - the bigger fish moved out of shallower waters into larger (wholesale) corruption- but nothing changed in the retail part of our corruption story.


KP said...

Dear Gulzar,

This line completely rings true ... from your note "Since the pie has expanded dramatically, the upper levels of the political establishment can now feast on these larger opportunities and leave their local minions to corner the older set of opportunities." .. perfectly said.