Gurcharan Das's Blog, page 16

With time we come to realize that the only reliable pleasures in life are the smaller ones. The big sources of happiness--success, fame, marriage and religion—often fail us. Among the smaller enjoyments are things like friendship and humour. What is true for individuals can also apply to nations. Instead of nationalism and military grandeur, a modest delight in trade is more dependable, and this was underscored by a happy piece of news on February 29th.

Prime Minister Yousuf Raza Gilani told Pakistani reporters, "People have not understood MFN. It means 'most favoured nation', not 'most favourite friend'. Pakistan will now merely treat India as it treats a hundred other countries." Gilani was defending his cabinet's historic decision to open up trade with India. Having thrown its doors open to 6850 products, it will remove all restrictions to trade by year end, and pave the way for granting India Most Favoured Nation status. Although there was no risk of India becoming most favourite friend, 'sabse pasand mulk' as the Urdu press put it, there were 6850 reasons to be happy in both countries.

This beleaguered civilian government in Pakistan continues to amaze us. Not only is it battling on all fronts--war in Afghanistan, hounded by its Supreme Court, hostility of its own army, grave problems with the United States—it has gone and asserted a fine civilian conception of its national interest. By not insisting on Kashmir as a pre-condition of trade liberalization, it has proved gutsy, reminiscent of Narasimha Rao's bold liberalization in 1991 when he was pushed against the wall.

It is better not to be euphoric when it comes to Pakistan. Still, the announcement was a healing balm for an India which has suffered unending bad economic news—much of it self-inflicted—over the past twelve months. The strategic significance of this opening is huge—it will energize free trade area in South Asia via SAFTA, which has suffered so far through Pakistan's intransigence. If the experience of North American Free Trade Area (NAFTA) is any guide, SAFTA could transform millions of lives on the sub-continent.

Presently India-Pakistan trade is a paltry $2.6 billion, less than one per cent of their respective global trade. It should quickly climb to $ 10 billion by 2015, still modest compared to $ 60 billion trade between China and India. To make the deal a success, India will have to buy more from Pakistan; presently the trade is heavily skewed in our favour--Indian exports are $ 2.3 billion to Pakistan's $ 0.3 billion. India has 80 per cent of South Asia's GDP, which makes our neighbors suspicious. Dominance brings responsibility and India will have to be more generous— as Germany is in Europe today; large-heartedness should replace our traditional policy of reciprocity if we want a peaceful South Asia.

In this case India has played its cards well. It gave Pakistan MFN status way back in 1996, without insisting on reciprocity. Unilateral liberalisation works because lower trade barriers help one's own people. Besides, a government's first duty is to its consumers; afterwards, to its producers. As one of the world's more productive economies, India like Germany has only to gain from free trade. The major threats to trade liberalization are Pakistani extremists, who are dead set against this deal; the other is bureaucracy and red tape, which could easily stall this reform by keeping a tight lid on visas, for example.

Much credit goes to Prime Minister Manmohan Singh, who has persisted in engaging patiently with Pakistan's weak civilian government. He took a lot of flak for his moderate stand at Sharm-al-Sheikh. By assuming that Pakistan's civilian government was as much surprised by 26/11, he reposed faith in Gilani, whom he saw as a moderate, modern Pakistani and strengthened his hand against the army and the extremists. There is a clear lesson here: do not see a nation as a monolith and look for opportunities in unlikely places.

For the moment, India and Pakistan do not have to be favourite friends. They should be content to be good neighbours and trade with mutual respect. They will be rewarded in the end for trade multiplies connections between human beings and brings prosperity, stability, and peace.

In a shock ruling ten days ago, the Supreme Court cancelled 122 mobile phone licences that had been deceitfully awarded in 2008. The ruling sent the telecom industry into chaos, confirmed dreadful corruption in the government's decision-making process, and damaged the reputation of our nation in the eyes of the world—especially foreign investors. There was much euphoria inside the country, however, for justice had seemingly been served.

The Supreme Court also instructed the telecom regulator (TRAI) to auction the illegally gained 2G spectrum, as it was done in the case of 3G spectrum. "While transferring or alienating natural resources, the state is duty bound to adopt the method of auction by giving wide publicity so that all eligible persons can participate," said the Court judgment. Auctions are certainly a better way to allocate a scare resource than first come first served, but what Mr Raja did was, of course, preposterous — he subverted the "first come first serve" policy by changing rules mid-way; he allocated spectrum out-of-turn in a non-transparent manner, and that too at 2001 prices, thus creating the biggest corruption scandal in India's history.

But is auctioning the best way to allocate radio spectrum? Although it is scarce, should it used as a money making device by government? Since water is scarce, should it be auctioned? No. The risk in an auction is that "animal spirits" of entrepreneurs forces them to bid very high, which is then reflected in high tariffs, and this forces the poor out of the market. Thirty one countries have used spectrum auctions and many have regretted it for this reason. India is, perhaps, the world's most successful telecom market with the lowest tariffs in the world. Hence, it has the highest number of subscribers who are poor. The credit for this goes to the previous government which had the courage to change policy from high license fees to revenue sharing between the telephone company and the government. If the state had been "duty bound to hold an auction", cell phones would not have reached the poor.

In the ideal world, radio spectrum would be like sunshine which is not owned by anyone or any government but everyone enjoys it without any cost. But unlike sunshine, spectrum is finite and hence it has been historically controlled by governments. It is widely accepted that government allocation is inefficient and leads to corruption. Ronald Coase, the Nobel Prize winner, exploded the myth long ago that governments should control spectrum to prevent airwave chaos. Today many experts think of spectrum as a common grazing ground around a village, which is open to everyone to use freely. They claim that new spectrum sharing technologies allow a virtually unlimited number of persons to use it without causing each other interference--this eliminates the need for either property rights or government control. This is why the United States has gone ahead and designated a 50 MHz block of spectrum in the 3650 MHz band as a "commons".

If the spectrum were a "commons" nobody would own it nor need to auction it. A telecom company would merely register with an authority, which would assign it a spectrum frequency for its use. When the company reached the limit of its spectrum, the authority would release it some more. Just as a villager pays a nominal tax for maintaining the commons, depending on how many cattle he grazes, each cell phone subscriber would pay a nominal fee, say a paisa per minute, towards upkeep of the spectrum. It would be form a part of the monthly bill, and transferred by the phone company to the authority. Just as a village needs rules to prevent over-grazing, there would be rules in maintaining spectrum to avoid a "tragedy of the commons". The rules would be transparent, monitored in real time, and no one would be able to corner the spectrum.

Unfortunately, the Supreme Court judgment has come out so heavily prescriptive in favour of auctions that future governments in India will be shy to adopt a better alternative. Technology is developing very rapidly and soon the world will be ready for an "open spectrum" regime, but the Court's inflexible judgement will inhibit the Indian government in doing the right thing. A pity!

The mistake is to think that the current paralysis in decision making in Delhi is limited to politicians. Gutless bureaucrats, risk averse at the best of times, have done as much damage. India's economy has sound fundamentals and is today one of the world's strongest, but its confidence has been badly shaken by a weak state that cannot enforce its own laws, let alone enact its legislative agenda. Partly to blame is the Anna Hazare movement which has led to contempt for state institutions. Around the world, the Left wants a large state and the Right wants a small one, but what India needs is a liberal but strong state that will, at least, implement its own laws.

The other mistake is to believe that the Indian state has weakened in the past two decades as a result of coalition politics. Truth is that India has always had a weak state and its history is a story of political disunity and warring kingdoms. Even our strongest empires were far weaker than say, the Qin Dynasty in China which built the Great Wall to keep out invaders. (That those invaders ended up in India in a chain reaction is another story.) The historian, Chris Bayly, describes how early European travellers to India were struck by the energy, colour and sophistication of the bazaar compared to the decadence of its rulers.Although historically weak, at Independence India inherited strong, robust institutions of the state—a professional police, bureaucracy, and judiciary. These are now in decay and the gap between ideals and reality has grown. It should not take seven years to build a road that takes two elsewhere; neither should it take 19 years to get justice; nor 23 years to build a dam. Poor governance and its cousin, corruption, are symptoms of a weak and soft state.

However, India has historically had a strong society, which prevented tyranny by the state. An Indian was defined by his village, caste and family, not by the state (as in China). The law—dharma--also emerged from society, not the state, and was later codified in Dharmashastras. But that old society is now changing. As Adam Smith predicted in The Wealth of Nations, the growth of markets would lead to a division of labour and new social groups would emerge. Open access to markets and job mobility would undermine traditional social authority, replacing it with more flexible, voluntary groups. Two decades of high growth is doing that and Anna's movement reflects how it. The country is evolving from a traditional to a modern civil society. This is a positive thing for a modern democracy needs a vigorous civil society to keep it honest.

The past twenty years of capitalist growth have made India one of the world's fastest growing economies. The contrast between a successful private economy and a weak, public order has led to the impression that India might be able to manage without a strong state. But markets do not work in a vacuum. They need a network of regulations and regulators to enforce them. In the past two decades good regulators have definitely contributed to India's economic success. The telecom revolution was partly ushered by its first regulator (TRAI) under Justice S. S. Sodhi and B.K. Zutshi, who were strong enough to withstand pressures from the Telecom Department, which wanted to weaken private mobile companies. Stock exchanges have been strengthened by SEBI, the capital market regulator. The Reserve Bank's oversight of banking has improved and matured. The insurance and pension regulators have also earned their spurs. On the other hand, power regulators in the centre and the states are mostly spineless, self-serving, retired babus, who have failed to implement Electricity Act 2003, and prevented a power revolution in India.

A 'strong state' usually carries a bad odour, conjuring up authoritarian images of Nazi Germany or Soviet Russia. A 'liberal, strong state' is, however, not oppressive. It is efficient, enabling and tough against law-breakers. It punishes the corrupt swiftly. But it also protects liberties and dissent and enjoys legitimacy among the governed. A strong civil society is needed to hold such a state accountable. More than ever, Indians today need to make a liberal case for such a strong state.

The past two weeks witnessed a remarkable spectacle in which India's democracy won but India's people lost. On November 24, the government announced a bold reform to allow 51% foreign stake in retail. It triggered off a storm of protest across the political spectrum, and eventually forced the government to back down and suspend the reform. During the entire debate no one asked why China and dozens of countries welcome foreign investment in retail. The defeat of the government means that Indian consumers have lost a chance for lower prices, India's farmers have lost the prospect of higher returns, a third to half of India's food will continue to rot, and millions of unemployed rural youth have been denied jobs and careers in the modern economy. It is also a severe blow to the future of reforms in India.

It does seem odd that democracy should win and people lose. But democracy's great flaw is that it is easily captured by vested interests. In the 1980s, labour unions captured it to ban computers in government offices, banks and insurance companies. Today the powerful kirana trade has succeeded by funding opposition to a policy that was patently in the nation's interest. The kirana lobby created an atmosphere of fear. The same fears were expressed during the 1991 reforms. If the government had given in then, India would not have lifted 200 million people out of poverty; not raised 300 million into the middle class and not made India the second fastest growing major economy.

Indians today are victims of the primitive "mandi system" which escalates food prices by 1:2:3:4, resulting in the world's highest gap between the price a housewife pays and what the farmer receives. What a farmer sells for 1 is sold at the mandi for 2, which becomes 3 at the kirana store and 4 to the consumer. When you pay Rs 20 per kilo for tomatoes, the farmer gets only Rs 5. As tomatoes travel from the farm to the mandi to the bania, each middleman gets his cut. The price spread varies by commodity and season, but studies show that the gap is less in countries with modern retail. This is because large foreign retailers usually buy directly from farmers without middlemen. Thus, they can pay Rs 8-10 to farmers for the same tomatoes and sell them for Rs 15-17 to consumers, and still make a profit. Some middlemen will lose out but P Chengal Reddy, secretary-general of Consortium of Indian Farmers Associations says, "India has 60 crore farmers, 120 crore consumers and half a crore traders. Obviously, government should support farmers and consumers. FDI in retail will bring down inflation."

It will also save food from rotting. Global retailers have perfected a cold distribution system. By investing in thousands of cold storages and air-conditioned trucks, they will reduce farm wastage, and bring a revolution in transport, warehousing, and logistics, as they have done in major countries like Argentina, Brazil, Chile, China, Indonesia, Malaysia, Russia, and Thailand, which have allowed 100 per cent FDI in multi-brand retail since the 1990s.

In none of these countries have small stores been wiped out; nor are there complaints of predatory pricing by supermarkets—the two fears expressed in the past two weeks. According to a recent study, small outlets have grown by 600,000 in China since 2004. "In Indonesia, after ten years of opening FDI in multi-brand retail, 90 per cent of the business remains with small traders, while employment in the retail and wholesale sectors grew from 28 million to 54 million from 1992 to 2001". Kirana stores continue to succeed because they offer personalized service, give credit and deliver to the house.

This issue goes beyond shops and supply chains to whether India's democracy can throw up the sort of leaders who can reach out and persuade opponents about much needed reforms. This was a test for the Prime Minister. He made a bold decision to usher in a retail revolution. He gave a choice to the states to opt out of the reform. He may have failed this time but if he is courageous he will persist and win the next time because he is doing the right thing for the nation.

On a sweltering afternoon on September 29th principal district judge S. Kumarguru began to hand out sentences. There was a hushed silence in the packed courtroom in Dharmapuri, Tamil Nadu. He began at 3.30 but could not finish until 4.40 because he had to read aloud the names of 215 government officials. Among those convicted were 126 forest officials, 84 policemen and 5 revenue officials. Seventeen were convicted of rape and they were sentenced from seven to 17 years; others received from one to three years on counts of torture, unlawful restraint, looting and misuse of office. Had 54 of the accused not died in meantime, the sentencing would have taken longer.

Early on June 20, 1992 four teams of government officials descended on the adivasi hamlet of Vachathi, near Sathyamangalam forest, also home to the dreaded brigand Veerappan. They assembled the villagers beneath a neem tree and let loose a reign of terror as they searched for smuggled sandalwood. They picked up 18 teenage girls and dragged them into the forest, where they raped them repeatedly. They only brought them back at 9 pm. Claiming a haul of sandalwood from the riverbed, the officials then put 133 villagers in jail.

How does the human mind begin to cope with this soul-numbing news? My first reaction was horror at the rape of teenage girls by men in uniform. Second, was a feeling of relief and catharsis when punishment was meted out to powerful men. The third emotion was outrage at those who allowed the case to drag for 19 years. Then questions arose in my mind. How could this happen in the first place? And was this not as serious an act of corruption as the 2G scam? And why was the nation quiet?

The last time I had felt similar emotions of revulsion was in reading about Ashvatthama's night time massacre of the sleeping Pandava armies, which had turned the mood of the Mahabharata from heroic triumph to dark, stoic resignation. Ashvatthama was a fine young man but he was totally transformed by his father's brutal murder. Many of the officials in the Vachathi raid were also fine young men, but their personalities changed during the losing battle against the infamous outlaw Veerappan and they got caught in a Mahabharata-like escalating cycle of revenge. How else do you explain it?

The 65 year old Angammal, whose daughter had been raped, also spoke of vengeance. "It is sweet revenge for us", she said, "to see those who raped our daughters being sent to jail." Only the state is allowed to take revenge in civilized societies and we call it punishment. Some think that revenge is neurotic but I believe that the "thirst for revenge" fulfils a legitimate human need. If a good person suffers, then the bad person should suffer even more--this idea is embedded in the human psyche. Wanting to punish a villain is ubiquitous in literature and movies because it brings profound moral equilibrium to the human mind.

The statement of the senior-most official convicted, Mr. M. Harikrishnan was striking. The retired Conservator of Forests claimed that the officials "had merely been doing their duty". The judge obviously disagreed and awarded him three years in jail "for causing evidence to disappear". The Nazis who were tried at Nuremberg for killing Jews also had claimed in their defence that they had been doing their duty.

The Vachathi case is "one of the worst examples of the abuse of power in Independent India" said P. Shanmugam, who is one of the heroes of this story. As president of Tamil Tribal People's Association, he worked tirelessly to bring justice for 19 years. But the real issue is this: how does one prevent such abuse of power in the future? I believe this will only come about if those charged with enforcing the law do not see themselves as above the law. To perceive oneself below the law needs a cultural change, especially in the police. The best feature of this court judgement is that senior officers have been punished for crimes committed by their juniors. Cultural change begins at the top. This is why we need Anna Hazare to continue his fight against corruption.

The dust has settled and a degree of calm prevails. Anna Hazare has returned to his village after conquering Delhi. He ought to consolidate his gains now before letting loose another storm. He would do well to sit down with his advisors in this lull and draw up a result oriented, longer term agenda to fight corruption. To this end, I offer Team Anna a primer on what we know about corruption--what works and what doesn't--a sort of corruption fighter's manual.

A strong Lokpal is a good idea but it should be lean and effective. Less is always more and the Lokpal will succeed if it does few things. Let it focus on the big fish and leave the smaller ones to Lok Ayuktas, Vigilance Commissions, and other agencies. The Lokpal should have the power to initiate a case without the government's permission and its decisions should be binding. Chief Vigilance Commission (CVC) has failed for these two reasons, and it too should be reformed by removing these two handicaps. The CVC should be answerable to the Lokpal but not be under it. Similarly, Central Bureau of Investigation (CBI) should be answerable to the Lokpal, but not under it. All three—Lokpal, CVC, CBI—should be autonomous bodies. However, in CBI's case, the "single directive" (which requires prior government permission before prosecuting senior officers) should not scrapped as suggested by the Supreme Court for it was paralyze decision making.

A lot depends on luck when it comes to who is the Lokpal. The Election Commission was a mediocre institution until the determined T.N. Seshan came along, and he was followed by another outstanding CEC, J.M. Lyngdoh. Karnataka's Lok Ayukta has recently brought the state's chief minister to his knees. One can help 'luck' by insisting on probity, toughness, will power, and courage when selecting a Lokpal.

While the Lokpal is needed medicine, it is administered long after the sickness appears. Hence, prevention is better than cure. To prevent corruption, we must reform our institutions of governance—the administration, police, judiciary, and elections. Since Indians confront the bureaucracy daily, it is the first priority. Corruption will be cut if decision making is transparent, discretion is reduced, rent seeking opportunities shrink, officers are punished for deliberate delay--the favoured tactic of a corrupt babu-- and punishment is guaranteed to the guilty.

But none of these administrative reforms will work unless the incentive system within the bureaucracy is changed from the present one based on seniority--where everyone gets promoted based on years of service--to rewarding good performance and punishing poor outcomes. The present assessment system is ineffective—you cannot have eight out of ten officers being rated as 'very good' or 'outstanding', especially when India's bureaucracy is rated the worst among 13 countries in a survey by an independent firm in Hong Kong.

There are two types of corruption—harassment and collusive. In collusive corruption the bribe taker and giver collude—such as in the 2G scam—to steal money that belongs to the state, and both should be harshly punished. In harassment corruption, an official gives a citizen what his rightful due—a ration card or a birth certificate--only after he earns a bribe. The bribe giver is a victim here and should be encouraged to complain. This is why Kaushik Basu has suggested that a bribe-giver be given immunity to encourage him blow the whistle. The virtue of the Jan Lokpal draft is the strong protection advocated for victims of corruption. The government's bill is superior in stipulating strong punishment for false complaints.

The Internet is our best friend in preventing harassment corruption because it brings transparency in transactions. We got our first taste when buying railway tickets and corrupt booking clerks have practically gone out of business. Placing land records on-line in Karnataka and Andhra has reduced the corrupt power of revenue officials. Those states which are using e-governance in giving birth and death certificates, ration cards, pension payments, driver license renewals have cut down on speed money. It should be mandatory for every government department to place its rules, procedures, and forms on its website. Cash transfers based on the Aadhaar smart cards will do much more to reduce the massive corruption that exists in delivering jobs, subsidised food and fuel, and other services to the poor.

Citizens Charters have been a flop so far but post-Anna some state governments, like Delhi, have decided to implement these and from September 15 officials will be fined Rs 10 to Rs 200 per day when they fail to deliver services to citizens on time. Five states have announced that they plan to follow suit.

Land is the biggest source of corruption because government decision making is deliberately opaque. Change of land use, municipal permissions, completion certificates, plus dozens of permissions result in massive collusive corruption. The amounts are even larger in awarding contracts for natural monopolies--mining, oil and gas, telecom spectrum—and the answer is open, transparent bidding (like an auction) under a firm regulator. Because most industrial and large real estate projects require environment clearance, the 'licence raj' had shifted to this ministry.

Ever since Indira Gandhi disallowed corporate donations, elections are now only fought with black money. Cleaning up electoral funding has to be a priority along with other electoral reforms such intra-party democracy and banning criminals from politics. Judicial and police reforms are crucial. The police cannot be a lackey of state chief ministers and has to be given autonomy as reform commissions have suggested. Given the growing cases of the misconduct of judges, the judicial appointments must come under a judicial commission comprising of non-judicial persons.

Finally, the most important lesson--keep the government small. A lean government tends to be more competent and less corrupt. Sensible governments no longer run industries, airlines, and hotels. Fewer controls and fewer licenses mean less corruption, as we have seen since 1991. Reforms are the best medicine against corruption.

An anticorruption campaign has given voice to a growing middle class tired of public indignitiesA year ago, no one in India could have imagined that cabinet ministers, powerful politicians, senior officials and CEOs would be in jail now, awaiting trial for corruption. The credit for this dramatic shift belongs in no small part to the anticorruption movement of a 74-year-old activist, Anna Hazare, supported by determined justices of the Supreme Court, an exceptional auditor general, rival television channels in search of "breaking news" and, crucially, a newly assertive Indian middle class. The long-term impact of this movement is unclear. It could lead to something profoundly good, or it could destabilize the whole system.

A series of corruption scandals has swept India over the past year. These include graft-ridden purchases for the 2010 Commonwealth Games in Delhi, for which rolls of toilet paper were purchased for $80 each; the government's sale to favored companies of licenses for the mobile-phone spectrum, at prices so low that they are estimated to have lost taxpayers somewhere between $10 billion and $40 billion; and the grabbing of expensive apartments in Mumbai by politicians, officials and generals on prime property that was meant for war widows.

Fighting this pervasive corruption has been Mr. Hazare, a villager in a white rural cap who evokes the figure of Mahatma Gandhi and has successfully emulated Gandhi's protest tactics of hunger strikes and peaceful marches. Mr. Hazare launched his first hunger strike, a five-day fast, in April. As a result, the government agreed to draft a bill creating an anticorruption agency that would investigate complaints against officials, but the bill was weak, and Mr. Hazare rejected it.

His second hunger strike, which he staged last month in Delhi, drew tens of thousands of supporters and spurred the government to agree to discuss his own version of the bill—a considerable victory, since politicians of all parties have stonewalled the creation of an anticorruption agency for 40 years.

Many officials were taken by surprise by Mr. Hazare's support from the middle class, which is almost a third of India's population today, up from 8% in 1980. Since reforms in 1991, India has become the world's second-fastest-growing economy, and the middle class is expected to become 50% by 2022.

There are still vast areas of horrible deprivation, but a significant number of Indians have experienced a palpable betterment in their lives. As a result, the discourse of the nation, or what Alexis de Tocqueville called "habits of the mind," are changing. People have begun to believe that their future is open, not predetermined, and can be altered by their own actions.

The same thing happened in the West after 1800. In her book "Bourgeois Dignity: Why Economics Can't Explain the Modern World," Deirdre McCloskey argues that the West rose not only because of economic factors but because the discourse about markets and innovation changed. People became encouraging of entrepreneurs. New perceptions and expectations emerged.

In the same way, the rise of India and China has brought dignity to their middle classes. Ordinary conversations over chai in India are now about markets and focus on the contrast between private success and public failure. While the private sector provides cutting-edge services and products to the world, the roads outside are potholed, electricity is patchy and water supply erratic. The difference between the two worlds is accountability: In private life, if you don't work, you don't eat; in public life, jobs are effectively for life. Indians believe that they are rising despite the state and are often heard to say that "India grows at night, when the government sleeps."

India's electoral politics do not cater to this aspiring middle class. Every party treats the voter like a victim, focusing on welfare programs or historical wrongs. Politicians have not realized that with high growth, mobility and a demographic revolution, aspiring Indians will soon overtake those who see themselves as victims. The person who got India's 851,695,668th cellphone in June was a village migrant, and no one in the country's political life captures his hopes. An op-ed about Mr. Hazare's protest movement in the Times of India had just the right title: "It's the middle class, stupid."

For too long Indians have been denied dignity by public officials who ride in cars topped with flashing lights and make citizens wait endlessly in gloomy offices, placing miles of red tape in their way to get even basic documents. The newly assertive middle class will no longer put up with this. As the social anthropologist Shiv Vishwanathan says, "The consumer revolution that we have experienced in the past two decades has told the citizen that he can expect a higher quality of governance."

It would be a shame if Mr. Hazare's movement contributed to undermining India's finely crafted constitutional system, which has made its democracy the envy of the developing world. Street protests and hunger strikes can gain attention, but legislation requires working within the system, in the messy details of parliamentary negotiation.

Mr. Hazare's bill is needed medicine, but it is being administered long after the sickness appeared. Clearing swamps is a better way to tackle malaria than administering quinine.

To prevent day-to-day corruption, Mr. Hazare and others like him need to work on reforming the rules of India's bureaucracy—creating transparent decision making, reducing discretion, shrinking opportunities to manipulate public rules for private gain and penalizing delays (the favored tactic of a corrupt bureaucrat). Indian bureaucracy needs to be transformed from a system based on the benefits of seniority to one that rewards good performance and punishes poor outcomes.

India's churning reflects a deep middle-class anger with pervasive graft in the government, police and judiciary. Bourgeois dignity may well hold the key to this Indian puzzle, but it needs to find expression within the bounds of the country's constitutional system. Street theater seldom makes for lasting reform—and sometimes brings down the good with bad.

—Mr. Das is the author of "The Difficulty of Being Good" and "India Unbound."

A year ago no one could have imagined that cabinet ministers, powerful politicians, senior officials and CEOs would be in Tihar jail awaiting trial. Corruption is no longer the news about India; it is our unexpected and puzzling response to it. What explains the unending movement against bribery is an increasingly self-assured and impatient new middle class, which has finally attained self respect and dignity and is being taken seriously by the media. The middle class will become 50% of India's population by 2020, and when that happens our politics will also change. What we are seeing today could either destabilize the system or lead to something profoundly good.

The big story of our own times is not Islamic terrorism or even the global financial crisis but how China and India have embraced liberal economic ideas and have risen. In both countries the middle class has attained a sense of dignity which was denied to it for so long. Deirdre McCloskey's new book, Bourgeois Dignity: Why economics can't explain the modern world, reveals that the West rose after 1800 not only because of economic factors but also because the discourse about markets, enterprise, and innovation changed. People became enthusiastic and encouraging of entrepreneurs. The development of the West is explained not as much by colonialism and imperialism; not by Marx's theory of classes; not by Max Weber and his Protestant ethic; not even by Douglass North and the central role of institutions. It has much more to do with how people's perceptions and expectations changed.

Robert Lucas, the Nobel Prize winner, says that 'for income growth to occur in a society, a large fraction of people must experience changes in the possible lives they imagine for themselves and their children…economic development requires a million mutinies'. There are still vast areas of horrible poverty and deprivation in India but there is also a critical mass of people who can see that their lot is palpably better than their parents; their future is open, not pre-determined, and can be changed by their own actions. They feel that dignity is being bestowed on their middle class dreams as their children are getting MBAs and aspire to become CEOs. Ordinary conversations over chai and chaat are about markets and innovation. Even leftist theorists at JNU and in the Congress Party have been forced to rethink their old prejudices. What has changed is 'habits of the mind' as India has become a 'business respecting civilization' in Schumpeter's words.

Indians won political liberty in 1947 but they gained economic liberty only in 1991, and gradually they have attained dignity. Dignity is a state of mind engendered by social, political, and economic liberty. For too long Indians have been denied dignity by public officials who ride around with lights flashing on top of their cars and announce their dignity either by making citizens wait while they pass or by placing endless red tape in issuing a birth certificate, a ration card, a passport or whatever a citizen is owed as a matter of right. Liberty without dignity is self-despising; dignity without liberty makes for status without hope; but liberty with dignity is hugely empowering.

If our new found prosperity and dignity is founded on the reforms, how does one explain the lack of reform in the past seven years of the UPA government—especially when the father of the1991 reforms is our Prime Minister? And why is sullen BJP not supporting the Goods and Services tax (GST), which is possibly the biggest future reform in the country's financial life? Sonia Gandhi, in particular, needs to comprehend that no country became successful by trying to spend its way to prosperity through populist welfare programs. Food inflation would not be hurting as much today if we had reformed agriculture. Black money would be far less if we had reformed the real estate sector. People would be less angry if the UPA government had fulfilled its promise to make the bureaucracy more accountable through administrative reforms.

What politicians of all parties need to understand is that the newly emerged middle class, having attained hard fought dignity, will no longer allow itself to be humiliated by public officials as in the pre-reform decades of the Licence Raj. It sees today a dramatic contrast between its own private life of accountability—if you don't perform, you lose your job--and the public life where you are rewarded even if you don't perform or are corrupt. It just won't put up with it. Since its voice is not heard in Parliament, it expresses itself in the only way it can, through rage on television night after night. Rising expectations are creating pressures on leaders and these could either undermine the political system or be a transformative force for the good. Bourgeois dignity is the key to an Indian puzzle.

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Human beings are flawed animals with plenty of good and bad in them. They are also addicted to judging each other. During the past month there has been plenty of high moralizing about the world's most powerful leaders. But in most cases the judgements have often been flawed as I will show in the cases of Dominique Strauss Kahn, Osama bin Laden, Rajat Gupta and Baba Ram Dev

Throughout human history when a servant or someone of low status accused a powerful person of rape, she was ignored. This is why the arrest in New York of Dominique Strauss Kahn (DSK), the former head of the International Monetary Fund and a contender for the presidency of France, has exhilarated the world. The trial will soon decide if DSK is guilty of sexual assault. In the meantime, there is victory in the fact that the maid was given the respect she deserved when New York's police took her accusations seriously and arrested a very powerful and wealthy man.

The mistake people made in judging DSK was to confuse his womanizing with sexual assault. It was as wrong as the idea still prevailing in India that a loose women cannot be raped. There is huge difference between consensual and forced sex, and a woman's right to say "no" is not diminished by the number of times she may have said "yes" in the past. In fact, DSK's ability to find willing partners makes him an unlikely rapist. Only one historical allegation matters--Tristane Banon's claim that he sexually assaulted her and tried to rape her during an interview in 2002. In the eyes of the law there is no difference between raping a prostitute or a virgin. A husband who forces his wife to have sex also commits a crime; a married woman who has an affair does not.

A second example: Osama Bin Laden's death hopefully has buried the demons of 9/11 in the American mind, bringing to a close what Americans have mistakenly called 'the bin Laden decade'. A hundred years from now historians will remember the first decade of the 21st century for the rise of China and India, not bin Laden. Islamic terror is a doomed ideology. Human beings prefer peace to war. Parents want children to go to school, get a job, and look after them in their old age. True, there is a desire for recognition— to be somebody, not a nobody. Greeks called this thymos, and this desire was satisfied in the past by becoming a 'war hero'. But today's young prefer to become CEOs, cricket heroes, or film stars. Islamist warriors, I reckon, will eventually succumb to the consumerist middle class life.

Americans can learn something from India which has also suffered from Islamist terror. George W. Bush proclaimed he had 'moral clarity' after 9/11, and so he invaded Iraq. India's political leadership, on the other hand, was accused of being cowardly after 26/11. The truth is that India behaved sensibly and maturely. It did not become paranoid over terror like the Americans. After each attack, India shrugged its shoulders, quietly improved its security systems, and remained focused on its economic destiny.

My third example: people across India admire Baba Ram Dev, who has brought yoga and healthy living to millions. But his solid achievements do not give him permission to blackmail the government via a fast unto death (FUD). Everyone sympathises with his ends but not his means. Peaceful protest is acceptable in a democracy but FUDs are dangerous and authoritarian. With his resources and his acumen, Baba Ram Dev could achieve tremendous results by working within the rule of law.

A final example: Rajat Gupta was the toast of the world's corporate elite. He had been head of McKinsey, and was director American Airlines, Procter & Gamble, and Goldman Sachs--a rare executive whose integrity was beyond reproach. But a tape of his voice, divulging secret details of a Goldman board meeting to a convicted hedge fund manager brought about his fall. Why does a man, who had everything, do something so dreadful? I can only speculate: he was well off but not wealthy like his friends. In coveting wealth, he forgot that he was a professional executive (a guardian of wealth, a kshatriya) not an owner of wealth (a vaishya).

What these examples illustrate is that the moral life is anything but clear. DSK's womanizing life-style is irrelevant to his crime. George W. Bush's 'moral clarity' brought great suffering to the Iraqi people and diminished America's prestige; India's 'cowardly' response to terrorism turned out to be wiser. Baba Ram Dev's admirers confuse means and ends. Rajat Gupta confused his role in life. The Mahabharata had the right idea— "dharma is sukshma, 'ambiguous'", says Bhishma. Hence, we ought to be cautious and humble before judging others.

On April 8, the day before Anna Hazare broke his fast, I was in Cairo to present the 'Indian model' for Egypt's future. After the conference, a few of us wandered off to Tahrir Square, where a massive demonstration had broken out. Through a twist of fate, I found myself suddenly on the podium, offering good wishes to the 37,000 protesters from the people of Al Hind. In the next three minutes I tried to convey a lesson from India's democracy: it is not elections, not liberty, not equality that finally matters; it is the rule of law. Corruption persists in India because the rule of law is weak.

That night at three am I woke up to the sound of gunfire. I thought they were bursting crackers. There was a knock, and my host whispered that the army had moved into Tahrir Square and I should be prepared to flee as my 'three minutes of fame' was posted on YouTube. Filled with fear, I quickly changed, picked up my laptop and passport, and waited. I must have fallen asleep because the next moment it was 7 o'clock and I was still alive. I saw a cloud of smoke above Tahrir Square and switched on the TV to learn that the army had left as quickly as it had come, leaving two dead.

I returned home much relieved. My Egyptian adventure made me view our own politics differently. Although I share Anna Hazare's rage against corruption, I feel ambivalent. However, the arrogant grandees of the political class, who from their private jets and black SUVs, are trying to smear his anti-corruption movement have not understood the limited nature of political power in India.

India has always had a weak state and a strong society. Because political authority was either too distant or irrelevant to its daily life, we never allowed state power to be so concentrated, as in China, that it could reach deeply and change its basic social institutions. The type of despotic governments that emerged in China or Russia, which were able to divest the whole society of property and personal rights, have never existed in South Asia. Hence, India's history is of relative political disunity while China's is one of strong empires. Not surprisingly, India became a chaotic democracy after Independence. In the 1960s Gunnar Myrdal called it a 'soft state'. Today, India seems to be rising from below, marching towards a modern, democratic and market-based future without too much help from the state. It is quite unlike China, whose success has been scripted from above by an amazing state that has built incredible infrastructure.

What is this society that has held India together for centuries? Jawaharlal Nehru defined it in three words: village, caste, and family. It consists of the over half a million autonomous, self sufficient villages; more than two thousand, hierarchical jatis or sub-castes; and the joint family. What is significant is not hierarchy, as most think, but the idea that the group is more important than the individual. India's society is changing today with power shifting from traditional to the civil society, including media.

The Indian state evolved from a tribal society, and the tribal raja's authority was limited by his kinsmen. The land did not belong to the king but to the clan families. Even when sovereign states emerged in the 6th c BC, like Magadha, the king's power was limited by dharma or the law, and by the Brahmin who interpreted the law. The law did not spring from the king as it did in China, but was above the monarch who was meant to protect it. The Raja who violated dharma is called a mad dog in the Mahabharata, and it calls for a revolt against him.

A successful nation must have an effective state and society. A weak state tolerates corruption, creates uncertainty in peoples' minds, and weakens the rule of law. People generally obey the law because they think that it is fair and applies to everyone equally. But if policemen, ministers, and judges can be bought, then people lose confidence in the rule of law.

The belated arrest of Suresh Kalmadi, the charging of Kanimozhi, and A. Raja already in jail—these are good omens for the future of the rule of law in India. It is now important to try and sentence the guilty speedily. The political class has stone-walled a Lok Pal bill for 40 years. Anna Hazare's original version was hugely flawed but with persistence we will soon have an effective law. A Lok Pal bill is not a panacea but it is a big step in the right direction. Meanwhile, I feel grateful that India has come a long way. Unlike Egypt, I do not have to fear the army, nor Islamists high jacking our secular democracy.
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