Beyond demonetization

The task before Modi is not merely to clean up corruption at high levels but to set in place systemic changes that continue to provide good governance to the people even under changed circumstances.

moneyPrime Minister Narendra Modi must be congratulated for demonetizing notes of Rs 500 and Rs 1000 in order to curb black money.

However, it is equally important to take steps to curb the generation of black money. The present stock of black money in the country consists of bank notes that are genuine.

Just as these “white” notes have become “black,” so also the new high-security notes of Rs 500 and Rs 2000 will also become “black.”

Therefore, the present bold measure of demonetization must be accompanied with steps to curb the generation of black money.

Black money is generated by the complicity of businessmen and lower bureaucracy.

It is profitable for the businessman to bribe the excise- and sales tax inspector and sell the goods without paying taxes.

The inspectors, in turn, invest this money in jewelry and property. This is the source of the huge prevalence of lack money in these sectors.

It is necessary to introduce systemic changes in governance such that it becomes difficult for lower bureaucracy to indulge in corruption.

It will not be sufficient to curb corruption at high levels. Remember that the entire government system had become highly efficient for a period of two years during the emergency.

However, it fell on its old inefficient ways soon after emergency was lifted. Similarly, the improvement in governance at high levels may soon revert to the old corrupt ways after some time.

Contrast this with the enactment of the Right to Information Act. It has put reins around the bureaucrats permanently.

The impact of the Act is not dependent on which Minister is in power.

The task before Modi is not merely to clean up corruption at high levels but to set in place systemic changes that continue to provide good governance to the people even under changed circumstances.

Thomas B. Smith of the National University of Singapore points out that there are two mechanisms of ensuring accountability of the bureaucracy—internal and external.

Our system of bureaucratic accountability is heavily loaded in favour of internal mechanisms.

These include annual performance review written by superiors, vigilance, and audits.

Difficulty is that these accountabilities are managed by other government employees who are part of the same corrupt machinery. Thus, the rot smolders within.

There is a need to strengthen external accountability mechanisms. The first external mechanism for bureaucratic accountability is legislative review.

A committee of the United States’ Congress approves the appointments to senior positions of bureaucrats and judges of the Supreme Court in the United States after giving a patient hearing to the candidate.

We could similarly create a system wherein appointments to the post of secretaries to the government and promotions to selection grade in the IAS cadre are placed before a Committee of the Parliament or the State Legislatures.

Presently,certain appointments such as those of Central Vigilance Commissioner are made by a collegium that includes the Leader of the Opposition. This is inadequate.

Need is to extend this system to all senior appointments. Also, independent persons who are not politicians or bureaucrats must be made members of these Committees.

There are large numbers of statutory bodies like the Bar Council of India, Wakf Board, etc. The heads of such organizations could form art of the collegiums.

The second external mechanism is that of a spy system. The present anti-corruption organizations such as the Central Vigilance Organization are reactive in nature.

They act only when a complaint is made. Need is to establish a parallel vigilance system that is manned by independent persons such as envisaged in the Lokayukta.

This vigilance system should be proactive. It must assume that every government employee is corrupt and lay traps on random basis.

The third mechanism is to establish a system of external evaluations of the senior bureaucrats. I was undertaking a review of a five star NGO.

I sent letters to all the 1000-odd members of the society seeking heir inputs about the performance of the CEO.

Many irregularities came to be known in the process. Such a system of external evaluation can be set up.

These can include independent evaluation by an external consultant, a public hearing on the performance of the concerned official, and sending questionnaires to the customers of the department seeking their anonymous evaluation.

The Fifth Pay Commission had made such a recommendation that has been put in the cold storage. This must be revived.

The fourth mechanism is to dismiss form service those government employees who are ranked in the lowest 10 percent every year; and appoint fresh persons in their stead.

The United States-based company CISCO Systems routinely lays off about five percent of its employees every year and appoints new persons to fill the posts. This removes the inefficient flab and brings in fresh blood.

The fifth mechanism is to create a system of external impact audit. Our present audit system looks mainly at financial processes.

Say, an engineer has honestly installed an electricity feeder without providing for the transformer.

The audit will give him a clean chit. Need is to make an audit of the result of the government programs. It needs to be assessed whether the people of the village have started using the electricity provided by the new electricity feeder.

The sixth mechanism is to amend the law to fix responsibility of an irregularity discovered subsequently. Recently, certain houses were demolished in Delhi because they were built on a water body.

The house owners had all the required approvals from the civic authorities. These approvals had been given in violation of the rules. Action must also be taken against officials who violated the rules.

It can be made mandatory that the concerned official shall be held accountable if she has made any irregularity.

The seventh mechanism is to enact a Right to Reply Act. The Right to Information Act has brought a fundamental change in the working of the government.

I was able to track down the illegal increase in capacity of a hydropower project by getting copies of entire files related to the project from the Ministry of Environment under the Act.

However, the RTI Act only enables an applicant to get copies of documents that are present in the files of the government department.

The applicant cannot ask a question such as why was cement work allowed under MNREGA in one village and not in the other. The necessity to reply will encourage the officials to act transparently.

It is clear that Narendra Modi will leave a legacy. Notes of Rs 500 and 1000 denominations have been demonetized. The challenge is to introduce systemic changes that endure.

Author was formerly Professor of Economics at IIM Bengaluru Author's phone: 85278-29777

Author was formerly Professor of Economics at IIM Bengaluru.
Phone: 85278-29777


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