The arrest in London, the rejection of bail owing to fears of flight risk, and subsequent incarceration of Nirav Modi last week is undoubtedly a shot in the arm for India’s investigating agencies. In fact, it is much more.

That the fugitive, who is the key accused in the 14,356 crore fraud that nearly brought down Punjab National Bank (PNB), is now closer to being extradited for trial in India is also a big endorsement that the rule of law is finally beginning to take root in India. This is an important prerequisite in rebuilding the trust quotient in the country; in the aftermath of a raft of big-ticket corruption scandals caused by a few black sheep, the public perception of big business and the polity in general is plumbing unprecedented lows.

For too long India has been an exceptions-based regime; something which has fuelled the rapid spread of corruption. The elite’s capture of key institutions in the country ensured status quo; this in turn created the culture of IOUs among middlemen to facilitate the exceptions from the application of rules in return for pecuniary payoffs. This is exactly how corruption spread its tentacles rapidly, manifesting at the wholesale level as crony capitalism and at the retail levels as petty corruption.

At the macro level, many may recall the era of Licence Raj, wherein the government created a command-control regime by capping production across industries. As a result, an entrepreneur needed a licence to manufacture a product. This created the perfect circumstance for crony capitalism as an entrepreneur could leverage this process to also pre-emptively pitch for production capacity—which was capped for each sector—and thereby prevent a competitor from emerging. It is another story, of course, as to how this created an extremely wasteful and unproductive production structure.

When this regime was finally dispensed with in 1991, this unholy nexus survived in a different avatar—the race now was to grab natural resources and claim rentier incomes. This was because the new regime was not pro-market as it espoused. Instead, it was pro-business—what Arvind Subramanian, former chief economic adviser, argues has created stigmatized capitalism.

In a co-authored paper published by the National Bureau of Economic Research, Subramanian said: “We make a distinction here between a pro-market and a pro-business orientation. The former focuses on removing impediments to markets, and aims to achieve this through economic liberalization. It favours entrants and consumers. A pro-business orientation, on the other hand, is one that focuses on raising the profitability of the established industrial and commercial establishments. It tends to favour incumbents and producers."

What this has done is to foster an ecosystem that has given short shrift to the rule of law. Take the PNB fraud, allegedly perpetuated by Nirav Modi. From all available evidence it was a systemic failure created by repeatedly flouting the rule of law by exploiting the lack of transparency in the rules and regulations; worse the bank management, auditors and, of course, the Reserve Bank of India erred in failing to provide the desired oversight. It was, in short, a perfect storm.

To be sure, India has over the last decade taken baby steps towards creating a rules-based regime. One example, is the idea of triangulating a beneficiary of government subsidies using their Aadhaar and bank account to target the benefits and also eliminate illegal claims; similarly, the decision to auction resources, such as licences for coal mining and spectrum, are good instances of implementing transparent mechanisms.

But, there is a still long way to go before India can realise the ideal social order based on the rule of law—without which its potential will elude it. So, every step in that direction should be a moment to cherish.

Anil Padmanabhan is managing editor of Mint and writes every week on the intersection of politics and economics. He tweets at @capitalcalculus

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