Lessons to learn from the US economic crisis

Indian-born former Goldman Sachs director Rajat Gupta charged in a New York court for passing on information to convicted Sri Lankan Tamilian and hedge fund player Raj Rajaratnam amounting to insider trading has made many middle-class Indians uncomfortable.

They have been of the view for a long time that it is governments and public sector undertakings that are corrupt because of the noxious politician-bureaucrat nexus.

Do not blame the Indian middle-class from drawing on their personal experience because public sector and governmental venality is all they knew.

They had also blamed the government’s unreasonable rules when private sector players broke the law.

Former disinvestment minister and noted journalist Arun Shourie, speaking on the first death anniversary of Dhirubhai Ambani, famously claimed that by breaking laws in the 1980s, the elder Ambani showed all that was wrong with the laws at that time. This was only partly true. The private sector was using loopholes in the laws to make unjustifiable profits and was choking the country’s genuine demand for quality goods and efficient services. That attitude has not changed much. The consumer has to battle the private sector manufacturers and businesses — including the service sector — to get a fair deal in any transaction. 

While they were right in hating corruption in government, the middle class’s belief that nothing much can go wrong in the private sector, and that entrepreneurs would never think of shortchanging people was born of intellectual retardation of some kind. The people who lost money in the stock market scandals generated by Harshad Mehta in 1993 and by Ketan Parekh in 2000 were middle-class folk. Yet, they would not, or could not, see the need for oversight of market operations. Even when they feel the need for it, they have no idea as to how it is to be done. People who are eloquent and even hysterical about a Lokpal bill that will nail and hang corrupt politicians are clueless about how to deal with private sector wrongdoing.

The old ideological positions — of either supporting the public or the private sector — are not sufficient to deal with the new economic situation in India and in the world. The private sector cannot be shunned as evil nor the public sector damned for its socialist underpinnings. As a matter of fact, the economic crisis in the United States and in the European Union clearly shows the two sides of the coin. If in the US, the cause of economic woes was unbridled private greed, in the EU the problem arises from the recklessness of governments. Greece is only one conspicuous example and not the only one.

In the 1990s, free market ideologues both at home and abroad made the public sector the whipping boy for all that was wrong with the Indian economy. They would not pause to make a more nuanced assessment. To be fair, some in the private sector knew the truth. For example, Anil Ambani had acknowledged at the India-World Economic Forum Summit in 2000 that the private sector’s best managers were recruited from public sector undertakings, and those people who were heading loss-making PSUs were responsible for growth and profitability in private sector companies.

Prime Minister Manmohan Singh’s statement on October 20 that private sector bribery will be made a criminal offence at the conference of the biennial Central Bureau of Investigation and anti-corruption bureaux from the states is rather a mild and ineffective announcement. What Singh had in mind was the private sector bribing politicians and bureaucrats. What he should have spoken out about is corruption in intra-private sector deals as was the case with Raj Rajaratnam and Rajat Gupta.

What was needed was the further strengthening of the Securities and Exchange Board of India, and the need for criminal prosecution of those in the private sector who break laws. Of course, there are enough provisions in the statutes to punish wrongdoers in the private sector. Satyam founder Ramalinga Raju, who defrauded the company and its shareholders, is facing charges under extant legal provisions.

What the Indian middle-class will have to learn now is to be critical of the private as much of the public sector, and to accept the fact that we need sensible laws to deal with crooks in the public and private spheres of the economy.

This will greatly help those who want to play the economic game according to rules. That will be the true sign of a mature free market democracy.