In his 2015 Independence Day speech, Indian Prime Minister Narendra Modi warned that corruption was eating away at India “like a termite,” while reiterating his commitment to eradicating graft and poverty.
Here is the reality check for the business-friendly premier, who’s facing re-election next year.
One of India’s largest banks last month accused a celebrity jeweller of being the mastermind of a financial scam, a seven-year heist in which fake guarantees worth $2bn were purportedly used to get loans.
Then the owner of a pen manufacturer was arrested along with his son after accusations they defrauded banks of about $570mn.
Also, don’t forget the case of Vijay Mallya, the liquor tycoon who’s battling extradition in a British court amid $1.5bn fraud charges.
The bad publicity couldn’t have come at a worse time. Capital-starved India is desperate for foreign investment to resuscitate employment and growth. The country needs to consistently grow above 8%-9% to provide enough jobs for what will be the world’s biggest workforce, according to Raghuram Rajan, the former governor of the Reserve Bank of India.
The spotlight is on an opaque business culture dominated by powerful families - known in India as ‘promoters’ - and the absence of controls to rein them in. A Credit Suisse Research Institute report last year showed that India ranks third globally - after China and the US - on the number of family-run businesses.
Modi won a landslide victory in May 2014 riding on his promise of clean governance, after the previous Congress-led government was mired in a string of corruption scandals.
Shortly after the $2bn fraud was uncovered at state-run Punjab National Bank, a picture emerged of Modi with billionaire jeweller Nirav Modi - who is at the centre of the unfolding scandal - at the World Economic Forum in Davos in January.
Government officials said the jeweller was just part of a separate, non-official business delegation, and that the prime minister had only stopped by for a photo. The scandal, however, may already be having an impact: On March 14, Modi’s ruling Bharatiya Janata Party lost three by-elections in the populous and politically crucial states of Uttar Pradesh and Bihar.
Systemic corruption in India weighs heavily on economic growth. India’s ranking has averaged 75.32 from 1995 until 2016 - showing little improvement – according to Transparency International’s Corruption Perceptions Index.
Modi’s reform agenda has stalled of late due to a host of issues typical of the Indian polity. But India’s nearly $2.3tn economy offers great prospects for investors. The economy will expand 7.3% in fiscal year 2018, 7.7% in 2019 and 7.7% in 2020, according to a Bloomberg survey.
To be sure, for the people doing the investing, the recent scandals are a reminder to do it carefully. Goldman Sachs Group yesterday cut its estimate for India’s economic growth, saying the $2bn bank fraud will render the government’s record recapitalisation plan less effective.
If Modi wants to leave the legacy of a modern leader of having put India irreversibly on a firm growth trajectory, he has to take on India’s systemic corruption in an all-inclusive campaign; no exceptions.
