Track every rupee

In the bad old days, promoters of private sector firms in India systematically looted the public companies that they were in charge of. They collected kickbacks on imported equipment and transferred the funds to Swiss accounts. They would not account for a substantial portion of the production of factories, especially if the goods involved high excise duties and would sell these goods in ‘black’ lining their personal accounts. They would sell company real estate — vacant lands, office buildings or apartments at a fraction of the market price on the official books and pocket the difference in cash from the buyer in ‘black’. They would drive companies to bankruptcy and powerless banks were saddled with ever-growing non-performing assets.

Today the same promoters book legitimate revenues and report high quarterly earnings. What has made the difference? Simple. The incentives have changed. When you paid wealth tax on your shareholdings and 97 per cent income tax on your dividends, it made no sense to pay dividends or improve your share price. It was better to earn untaxed money and stash it in Switzerland. When your heirs had to pay huge amounts of estate duty, why leave them a legitimate inheritance? Hoarded cash and money outside the country beyond the grasp of the taxman were the best bequests. Making profits and paying dividends today is good for the financial health of the promoters. Presto, that is what they want to do! As promoters realise that quality accounting, more transparency, independent directors all help increase their share price, they go for it. Of course, not everyone does. But many who realise that wealth creation on a large scale is best done by good governance opt for it. It is not that people have become more moral; the system rewards you for being moral.

While our private sector goes from strength to strength (primarily because of sensible incentives, not because the players are inherently honest), our state sector suffers. Most private offices you walk into are world-class facilities, comparable to the best in the world. Every government-managed road you drive on is worse than the roads of sub-Saharan Africa. Clearly this is because we have the wrong incentives in place. Can the situation change such that the concerned actors get rewarded for building good quality roads, water works, sewage plants and parks and for building them in months, not in decades? How can we align the interests of contractors, civil servants and elected officials such that they escape from their equivalent albatrosses of high taxes and estate duties? How can we make it ‘profitable’ for them to deliver quality public goods in a timely manner? If we crack this, we reduce corruption and improve their performance as we have done with our erstwhile immoral promoters.

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