Economic Challenger - - CONTENTS - − Mithilesh Ku­mar Sinha


In­dia has been fac­ing a paradoxical phase since re­forms pe­riod. Ris­ing In­dia, ris­ing cor­rup­tion; shin­ing In­dia, cry­ing Bharat; in­clu­sive Government, ex­clu­sive sys­tem; in­clu­sive growth, au­to­cratic mar­ket; peo­ple eat­ing medicines for di­ges­tion of food, starv­ing peo­ple un­der−nour­ish­ing chil­dren and moth­ers − th­ese sce­nar­ios present a paradoxical sit­u­a­tion. The pa­per aims at show­ing a para­dox be­tween the growth of In­dia and ris­ing cor­rup­tion.


Cor­rup­tion is a world wide phe­nom­e­non. It, in one form or the other, has ex­isted for ages. The an­cient and me­dieval lit­er­a­ture is full of ex­ten­sive com­men­tary on cor­rup­tion in pri­vate and pub­lic life and its gi­gan­tic ef­fect on so­ci­ety. Back to the fourth cen­tury B.C. in In­dia, Kau­tilya writes in ’Arthasas­tra: "Just as it is im­pos­si­ble not to taste the honey that finds it­self at the tip of the tongue, so it is im­pos­si­ble for government as­sis­tant not to eat up, at least a bit of king’s rev­enue" (Kan­gle: 1972). In an­cient Egypt, prob­lems of bribery and nepo­tism were clearly rec­og­nized. The sec­tion of peo­ple on the apex of so­cio−po­lit­i­cal hi­er­ar­chy with power and author­ity, uses their in­flu­ence in di­ver­si­fied ways in or­der to make vast for­tunes for them­selves and for their near rel­a­tives and friends. Re­cently cor­rup­tion has taken a global di­men­sion in devel­oped and de­vel­op­ing coun­tries. It is of­ten said that de­vel­op­ing coun­tries are more cor­rupt than devel­oped coun­tries. It may be more cor­rect to say that devel­oped coun­tries have forms of cor­rup­tion that are le­gal, while de­vel­op­ing coun­tries have forms of cor­rup­tion that are il­le­gal, though law it­self is sub­ject to change and is not cast in stone (Bibek De­broy: 2011). Small− ticket cor­rup­tion is what we of­ten con­front in our day−to−day in­ter­face with the government, ei­ther as a cit­i­zen, or as an en­ter­prise. For such kind of cor­rup­tion, there is an oft−cited for­mula that has a lot of va­lid­ity. Cor­rup­tion= (Mo­nop­oly + Dis­cre­tion) − (Accountability + In­tegrity + Trans­parency). The lit­er­a­ture on cor­rup­tion shows that (a) it is nei­ther a new phe­nom­e­non nor found only in de­vel­op­ing coun­tries, and (b) its lev­els and ef­fects in­flu­ence and get in­flu­enced by the ex­ist­ing so­cio−eco­nomic and po­lit­i­cal con­di­tions of the coun­try in ques­tion (Pil­lai: 2000). Cor­rup­tion knows no ’ ism’. It en­joys a free visa to visit any na­tion, whether devel­oped or not, at any stage. There is a close re­la­tion­ship be­tween tax eva­sion, black money and cor­rup­tion and all feed on each other. In 2008, UNDP pro­duced a primer on cor­rup­tion. This has some­thing like tax­on­omy of cor­rup­tion and cov­ers sev­eral types: bribery, fraud, money laun­der­ing, ex­tor­tion, kick­back, ped­dling in­flu­ence, crony­ism, nepo­tism, pa­tron­age, in­sider trad­ing, speed money, em­bez­zle­ment and abuse of pub­lic prop­erty. No such tax­on­omy can ever be per­fect and one form of cor­rup­tion spills over into an­other. But there are clearly two kinds of cor­rup­tion one has in mind. There is the big ticket kind of cor­rup­tion, as­so­ci­ated with the elec­toral and po­lit­i­cal sys­tem and abuse of dis­cre­tion in al­lo­ca­tion of nat­u­ral re­sources.

Like most things in eco­nom­ics, cor­rup­tion has also two sides− de­mand and sup­ply. It re­quires two will­ing and able par­ties− the giver and taker. The ’de­mand’ for nepo­tism, favours and un­der−priced re­sources (cor­rup­tion) comes from us, the ci­ti­zens, on the re­tail side and cor­po­ra­tions seek­ing con­trol over some vi­tal as­sets or li­cences, or some ad­van­tage over com­pe­ti­tion etc on the other.


There is a clear cor­re­la­tion be­tween cor­rup­tion and level of eco­nomic devel­op­ment, how­ever de­fined. We have sta­tis­ti­cal cor­re­la­tion be­tween lev­els of cor­rup­tion and lev­els of eco­nomic devel­op­ment. But the di­rec­tion of cau­sa­tion is by no means clear.

Cor­rup­tion has been ob­served in lit­er­a­ture hav­ing two as­pects in eco­nomic devel­op­ment− as can­cer, re­tard­ing eco­nomic devel­op­ment and grease, speed­ing up the wheels of com­merce. The re­la­tion­ship be­tween cor­rup­tion and devel­op­ment is murkier than econ­o­mists would ad­mit. There are sev­eral chan­nels through which cor­rup­tion hin­ders eco­nomic devel­op­ment in­clud­ing re­duced domestic in­vest­ment, re­duced for­eign di­rect in­vest­ment, overblown government ex­pen­di­ture and dis­torted ex­pen­di­ture on ed­u­ca­tion, health and in­fra­struc­ture. Cor­rup­tion acts as a source of macroe­co­nomic vul­ner­a­bil­ity and lower eco­nomic growth.

On the ba­sis of cor­rup­tion rank­ing data as­sem­bled from the Busi­ness In­ter­na­tional Cor­re­spon­dents in 70 coun­tries in the early 1980s, Mauro (1995) finds a sig­nif­i­cant neg­a­tive as­so­ci­a­tion be­tween the cor­rup­tion in­dex and the in­vest­ment rate or growth. When in­ef­fi­cient projects due to cor­rup­tion are ac­cepted, the rate of re­turn and hence the growth rate would be lower.

The study done by a panel of 69 coun­tries over a seven−year pe­riod from 1995−2001 men­tioned that: Cor­rup­tion works as a re­gres­sive tax− the poor pay a dis­pro­por­tion­ate share of their in­come in the form of bribes to se­cure ac­cess to pub­lic ser­vices. Bribes and of­fi­cial ex­tor­tion act as an ex­tra tax and there­fore de­ter po­ten­tial for­eign di­rect in­vest­ment into de­vel­op­ing coun­tries.

Cor­rup­tion may be help­ful as a grease for squeak­ing wheels of a rigid ad­min­is­tra­tion. Oil­ing the wheels of the ad­min­is­tra­tion can re­sult in con­sid­er­able sav­ings of time, ef­fort and money. In the US, dur­ing the "gilded age" of 1960s and 1970s wide­spread cor­rup­tion of state leg­is­la­tures and city gov­ern­ments by busi­ness in­ter­est and those seek­ing for fran­chises for pub­lic util­i­ties is re­ported to have helped rather than hin­dered eco­nomic growth. If cor­rup­tion is just a law and fixed cost of do­ing busi­ness, it might be less harm­ful than vari­able cor­rup­tion that cre­ates un­cer­tainty for busi­ness de­ci­sions. In­done­sia flour­ished for a long time un­der Suharto though cor­rup­tion there was per­ceived to be much worse than in In­dia in the early 1980s but this cor­rup­tion was much more cen­tral­ized and hence more pre­dictable. Bangladesh has grown quite rapidly for a long pe­riod of time (as Shanta De­vara­jan of the World Bank pointed out) de­spite scor­ing very low on mea­sures of gov­er­nance. And Tamil Nadu has grown rapidly un­der Jayalalithaa and Karunanidhi´s wizard in equal stature in the dark art of malfea­sance.



The econ­omy was show­ing growth in­di­cat­ing a balanced and sus­tained growth. The year 2000−01 reg­is­tered the growth rate of 4.4 per cent since then the growth rate has been show­ing up­trend till 2007−08 ex­cept 2002−03. In­dian econ­omy has grown at an av­er­age rate of about 8.5 per cent per an­num dur­ing 2004− 08. The coun­try’s GDP growth rate in 2007−08 was placed at 9.3 per cent. The fi­nan­cial mar­kets around the globe had wit­nessed tur­bu­lence due to sub−prime cri­sis in the US, ris­ing oil prices with re­sul­tant up­ward drive on com­mod­ity prices as well as in­fla­tion­ary pres­sures wit­nessed in the domestic mar­ket. This melt­down ap­plied a sud­den brake to the growth story of the coun­try. Af­ter clock­ing an an­nual growth of 8.9 per cent dur­ing 2003−08, the coun­try reg­is­tered a GDP growth of only 6.8 per cent in 2008−09. Af­ter that a GDP growth rate gained mo­men­tum and the year 2009−10 was marked by re­cov­ery and re­vival. In In­dia, the econ­omy has ex­ceeded ex­pec­ta­tions to record an im­pres­sive 8.0 per cent GDP growth rate. In 2010−11, the over­all growth in GDP clocked 8.5 per cent. (Ta­ble: 4).

# Forecast is based on Citi re­ports



At the in­cep­tion of our Repub­lic, there was the jeep scan­dal, be­sides se­ri­ous al­le­ga­tions against sev­eral state chief min­is­ters; ir­reg­u­lar­i­ties com­mit­ted by the Life In­surance Cor­po­ra­tion (LIC) in 1957 were only the prover­bial tip of the ice­berg. Then we have had the Bo­fors scam, the se­cu­ri­ties scan­dal, the sugar and vanas­pati im­port con­tro­versy, the fod­der scam, and myr­iad other sin­is­ter in­frac­tions.

The year 1969 was a wa­ter­shed in a way. Since the then Prime Min­is­ter Indira Gandhi com­menced a des­per­ate bat­tle for po­lit­i­cal supremacy, per­sonal cor­rup­tion by politi­cians took new di­men­sions. Soon a new ver­sion of po­lit­i­cal ma­noeu­vring came into be­ing. John El­liot put it suc­cinctly: "Be­fore it was canal­ized, cen­tral­ized and co­or­di­nated. Now it’s de­con­trolled, lib­er­al­ized; three times as big and out in the open." The ever−de­te­ri­o­rat­ing mo­ral stan­dards in an en­vi­ron­ment of splin­tered pol­i­tics have taken the in­ci­dence of cor­rup­tion to in­tol­er­a­ble lev­els.

Eco­nomic re­forms dis­man­tled the li­cense− per­mit raj. The phi­los­o­phy be­hind this pol­icy was to abol­ish op­por­tu­ni­ties for cor­rup­tion. Preven­tion of cor­rup­tion through sys­temic change was crit­i­cal to th­ese changes. Huge trans­ac­tion costs in­volved in the process dis­ap­peared at one go. The re­duc­tion of rates of both in­come tax and cus­toms de­mol­ished an­other wall of cor­rup­tion.

It was hoped that re­forms will de­mol­ish the wall of cor­rup­tion but this hope col­lapsed when peo­ple felt dis­tressed to see the quantum jump of cor­rup­tion with ris­ing In­dia. We live en­wrapped in a state of ethics deficit and a gov­er­nance deficit, cul­mi­nat­ing in a trust deficit vis−à−vis the government. Amidst gloom and de­spair at the ubiq­ui­tous graft, the two moth­ers of scams, CWG and 2G spec­trum, epit­o­mized the government’s in­ac­tion and in­ap­ti­tude, bor­der­ing on col­lu­sion and con­nivance. Not only did th­ese mega scan­dals typ­ify day­light rob­bery but showed the coun­try in a very poor light

The last Cor­rup­tion Per­cep­tions In­dex was for De­cem­ber 2011 which ranked 178 coun­tries, In­dia was 95th. In­dia, the big­gest democ­racy of the world has been placed in the bot­tom four among the 22 lead­ing economies in a sta­tis­ti­cal in­dex drawn up by Trans­parency In­ter­na­tional in the Bribe Pay­ers Sur­vey.

Change in Cor­rup­tion over the last three years in In­dia In­creased: 74% Stayed the same: 16% De­creased: 10%


In­dian Ex­pe­ri­ence: Paradoxical Sit­u­a­tion

From the ob­ser­va­tions we can say that in re­gards of cor­rup­tion and devel­op­ment In­dia has its own ex­pe­ri­ence of paradoxical sit­u­a­tion be­tween cor­rup­tion and devel­op­ment. . A para­dox about In­dia is that ca­sual ob­servers of the In­dian scene be­lieve the prob­lem of cor­rup­tion has, in fact, be­come a big­ger one de­spite the fact that the In­dian econ­omy is per­form­ing bet­ter and its democ­racy thriv­ing more than ever. There is enough ev­i­dence in In­dia to­day to sug­gest that Mar­cos−type "10 per

cent" cor­rup­tion has not harmed devel­op­ment. We can con­sider a state like Tamil Nadu, where suc­ces­sive gov­ern­ments be­long­ing to dif­fer­ent po­lit­i­cal par­ties have been charged with Mar­cos− type cor­rup­tion for over three decades now. Yet, Tamil Nadu re­mains one of In­dia’s bet­ter ad­min­is­tered and more devel­oped states. But even the Mar­cos−type cor­rup­tion can harm devel­op­ment, as one has seen in a state like Ma­ha­rash­tra which has fallen be­hind Gu­jarat in re­cent years be­cause in­vestors find the government in Gu­jarat to be less cor­rupt.

In­dia has much bet­ter roads to­day but the min­is­ters who have built them and their par­ties have also pros­pered. Ris­ing In­dia has led to big­ger rev­enues and new or ex­panded ar­eas of eco­nomic ac­tiv­ity. Mo­bile tele­phony, Pub­lic− Pri­vate Par­tic­i­pa­tion (PPP) in in­fra­struc­ture sec­tor, coal and iron ore min­ing are some such ar­eas. It has led to the rapid ex­pan­sion of government bud­gets. Th­ese changes have pro­vided new ar­eas for cor­rup­tion. The growth process has thus, thrown up new chal­lenges.

The above anal­y­sis re­veals that the cor­rup­tion has been ris­ing as In­dia is ris­ing. It does not mean that In­dia’s growth is not af­fected ad­versely with cor­rup­tion. Cor­rup­tion cloud dark­ens In­dia’s ro­bust growth story.

Cor­rup­tion has blocked the in­vest­ment. If there is ad­e­quate in­vest­ment in both phys­i­cal and hu­man cap­i­tal (such as ed­u­ca­tion and health care), there is no rea­son why In­dia should not close the gap on China just as the Mid­dle King­dom is catch­ing up with Amer­ica.

EPI­LOGUE: The ev­i­dences show that with the ris­ing of In­dia cor­rup­tion has also been ris­ing. We have to fight both the de­mand and sup­ply sides of cor­rup­tion to ac­cel­er­ate the pace of eco­nomic growth. Con­trol­ling cor­rup­tion is re­lated to the qual­ity of pub­lic in­sti­tu­tions, in­clud­ing demo­cratic accountability, the bu­reau­cracy, the po­lice and ju­di­ciary. If the de­mand dis­ap­pears, the mar­ket for cor­rup­tion will col­lapse. So we as con­sumers should take a pledge not to try to buy a rail­way ticket out of turn by brib­ing, how­ever ur­gent our need be, not to bribe the traf­fic cop when chal­laned, nor to seek and use in­flu­ence to favour our­selves. Like­wise if cor­po­ra­tions pledge not to pay bribes, for what­ever rea­sons and we work on ways to con­trol government pur­chases, the de­mand for cor­rup­tion will surely di­min­ish.


1. De­broy, Bibek (2011): "The Cor­rup­tion Trade−Off", the Eco­nomic Times, Novem­ber 7. 2. Kan­gle, R. P ( 1972): (" The Kau­tilya Arth­sas­tra Part II" Univer­sity of Bom­bay, Bom­bay, p−91. 3. Mauro, Paolo (1995): "Cor­rup­tion and Growth", Quar­terly Jour­nal of Eco­nom­ics, Au­gust, pp. 681−712. 4. Pil­lai, S. Iyyam (2000): "So­cio−Eco­nomic and Po­lit­i­cal Di­men­sions of Cor­rup­tion", the 83rd Con­fer­ence Vol­ume, In­dian Eco­nomic As­so­ci­a­tion, pp 673−680

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