Thursday, 2 August 2012

3 Reasons Why an Entrepreneurs should bother about Anna's Anti-Corruption movement?

3 Reasons why Entrepreneurs should bother about Anna's Anti-Corruption movement!

Business is the source of corruption
Lets assume a perfect system, a perfect country and perfect governance.
We have stiff competition in business as well as politics.
Consider 'X' political party is a ruling party and is threatened by new entrants or it wants to expand itself aggressively and win with a majority votes in next elections so that it can develop the country without any worry of keeping it's allies happy.
For this to become a reality 'X' political party needs huge sum of money to communicate it's presence and intentions to people.
Now consider 'Y' Ltd. company applied for a tender for building a 100km  road network, so it goes to 'X' political party and offers them to build a quality road at the cost of 1 lac per kilometer with a profit margin of 10% i.e 'Y' Ltd. promises to build 100 km road network at the total cost of Rs.1 crore and total profit of Rs.10 lac. Now 'Y' Ltd. offers 'X' party Rs.5 Lac donation in exchange of tender order from government, with a view that 'Y' ltd. is just sharing it's benefits 'X' party accepts the offer as it also require money to promote it's party to develop the country.
Now 'Y' Ltd wants to recover it's money that it spent for winning the contract, so he finds a contractor and sub-contracts the road network project of worth Rs.1 crore at the cost of Rs.85 lac, thus saving his Rs.10 lac as profit margin and recovering Rs.5 lac that he spent.
Now neither politicians nor business consider this as corruption, they just helped each other, hence this practice in all sectors of business becomes casual and acceptable, same with politicians.

Now slowly this corruption starts moving down the ladder towards root infecting everyone. At each level business have to interact with different representatives of governing body and they share benefit, at times business offer this benefit or at times benefit are demanded by bureaucrats, but ultimately the benefit is shared. Thus the word bribe is naked form of the word benefit, which is generated out of business. To ensure these benefits business started sharing it with politicians. Now these politicians became most priced assets to be owned by any business, so businesses got into spending spree to buy them out, like the above example businesses cover such expenditure using various methods like sub-contracting, low quality output, etc, and bureaucrats too have to go out of their way to return the favor of the benefits received from such businesses.

Buisness is the Resource of Corruption
Corruption rides on the money of Businesses.
Lets take few examples

1) Common Wealth Games 2010, it alone illustrates the series of corruption cases.
This time bureaucrats and firms came together to achieve this feat, if a project was worth Rs.1 crore bureaucrats asked for the benefit of Rs.2 crore and allowed firms to escalate the cost of project exponentially.

2) 2G Spectrum Scam case, 2G spectrum frequencies where awarded at a throw away prices to companies which offered to throw away a part of their benefit.

List of such scams is endless but above two is enough to establish the fact that the kind of money businesses and bureaucrats can together generate is huge and this huge potential is what fuels corruption.

Corruption doesn't occur on it's own, it needs a motive and some money, both criteria are fulfilled by businesses. Thus Business is the Resource of Corruption.

Business faces the Repercussions of Corruption

This the reason justifying this blog, why Entrepreneurs should bother about Anna's Anti-Corruption movement.
Corruption often backfires on Business!

Let me explain this part in terms of Economics

As I have explained above how business give birth to corruption and how it fuels corruption but now the question is how politicians and bureaucrats utilize these benefits and its affect on businesses.

When a politician earns a benefit of Rs.1 crore, what happens exactly is companies handover this Rs.1 crore in the form of cash to the beneficiary, it means Rs.1 crore disappears from the radar of monetary system of our country, it is termed as black money. Now the beneficiary can't risk to stack this black money at his home so he hires financial experts to route this money to safe havens. This so called financial expert has too many ways of routing this black money and one of the way is described as follows:
1. Open number of fictitious account with Indian banks.
2. Deposit this black money in small fragments in the above mentioned fictitious accounts.
3. Then transfer gradually all the black money to safe havens.
(The process is more complex but I tried to explain in a simple manner.)

Now, what happened when black money was gradually transferred to safe haven, Indian banks actually exchanged rupees with RBI for Dollars and Dollars were sent to safe haven. It means RBI's Dollar Reserve decreased by some quantity.
When the same process keeps on running again and again involving huge sums of money, it affects the Dollar Reserve of RBI more harshly thus weakening Rupee against Dollar.
When Rupee is weakened, importing oil becomes more costly thus fueling inflation. Costly import of oil fuels food inflation too. It bleeds Indian common man to such an extent that he is stripped off of his purchasing power.
If common man doesn't have money to spend, he will not demand thus decreasing overall demand thus inviting recession and hence companies will be affected.

Also, if Rupee becomes weak and inflation within the country is high then domestic companies become incompetent in global market.

Another consequence of corruption is, neither the government nor companies entrusted to develop infrastructure accomplish the task thus making operations for businesses costly and again making them incompetent.

Thus its in the interest of companies to support Anna's Anti-Corruption movement.
Entrepreneurs are missing the bigger picture.


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