The arrest of Jagan Mohan Reddy, MP from Kadapa in Andhra Pradesh, is another reminder of a lesson that Indians have failed to learn so far. And this is that the root cause of corruption lies in the excessive discretionary authority in the hands of politicians and officials. The reforms in 1991 took away some of that discretion but many sectors of the economy are still unreformed.  Thus, scams happen in the dark alleys of unreformed sectors such as land transactions, mining, and government purchases. So, the answer to corruption may well lie in actions of the 1991 variety.

Soon after his arrest, the counsel for the CBI said, “Jagan Reddy grew enormously rich in a short span of four years after influencing his father Rajashekhar Reddy (who was then chief minister of Andhra Pradesh) by getting ill-gotten money into his own firms from investors, who were doled out favours as part of quid pro quo." Reddy's declared wealth rose from Rs 1.7 crore in 2004 to Rs 77 crores in 2009 and to Rs 365 crores in 2012.Those “doled out favours” related to the same unreformed sectors.

The real crime of the UPA government lies in not initiating the second generation reforms. These would have significantly reduced the chances of scams in mining, 2G spectrum, Adarsh housing, and purchases for the Commonwealth Games. Anna Hazare’s team has rightly blamed “crony capitalism” but it has not explained that the nexus between business and politics exists because too much discretion still exists with public officials. Countries free of corruption do not allow discretion to officials but rely on the impersonal forces of the market to decide economic outcomes.

The 1991 reforms succeeded in wiping out crony capitalism in many parts of the economy and replaced it with rule based capitalism. There existed much greater corruption before 1991. The numbers were not as large because the economy was smaller. But the state intervened in almost every business decision. An official virtually decided a factory’s size, location, technology, the capital needed, and the machine to be imported. His power lay in a piece of paper, and he extracted a bribe each time he signed it. This continues in the unreformed sectors. A power plant even today needs 118 approvals, and a politician or official extracts a bribe for each piece of paper. Reforms in the power sector would remove 118 opportunities for corruption.

Evidence from around the world shows that a citizen’s ‘freedom to do business’ is negatively related to the ‘corruption index’. In 2011, seven of the world’s ten ‘least corrupt’ countries were ranked in the top ten for ‘business freedom’. Among these were New Zealand, Singapore, Denmark, Canada, Sweden, and Finland. The ten most corrupt countries had the lowest rank in business freedom. India ranked very poorly--167 in ‘business freedom’ and 95 on the corruption index. The Scandinavian countries, from which India has borrowed the concept of Lokpal, had the greatest ‘business freedom’ and were the least corrupt. There is irony here—Indians think they are free because of their proud democracy, but economically they are still unfree.

Our unprecedented corruption today is matched only by an economic crisis which has brought the nation to its knees. Inflation is unacceptably high, the rupee has weakened more than any currency in Asia, both fiscal and current account deficits are in a dangerous zone, and growth has plummeted from 9 per cent not so long ago to 5.3 per cent in the last quarter--the lowest in nine years. Many fear that we are at a tipping point similar to the one in 1991. We blame the eurozone debt crisis, but in our hearts we know that it is a crisis of our own making. The culprit is paralysis in decision making, especially the lack of approvals for land acquisition in the steel and power sectors, combined with the lack of reforms and high interest rates.

So, what is to be done? They say, ‘Never let a good crisis go to waste’, and this is the best advice for Manmohan Singh. A 1991 type crisis needs a 1991 type response. So, reform, more reform, and still more reform. Not only will this bring enormous prosperity but it will scare away the corrupt.