International Policy Digest

World News /03 Mar 2018

How Corruption Ruined India’s Economy

Transparency International released its global corruption perception index for 2017, and India has dropped down two places to 81 (out of 180 countries). TI went on to point out that India is amongst the worst offenders in terms of press freedom and political graft (which describes the extent to which politicians use their power for personal gain). The news is a blow to the rhetoric of the BJP government, as one of their main platforms was to weed out corruption.

Corruption is so rampant in India that it has more or less become a way of life, an accepted evil. Many of us conform to the norm due to personal convenience. However, at some point we must stop and consider the effects of corruption on long-term growth: up to three times lower income, relative to countries with little corruption), higher infant mortality rates, up to 25% lower literacy rates.

Inevitably, this leads to the formation of oligopolies and monopolies. This can be observed in various sectors in India, namely the railways; aeronautics, where HAL (Hindustan Aeronautics Limited) is the dominant player; coal, where Coal India is responsible for more than 80% of the coal production in India; and in oil, where state owned corporations form an oligopoly.

This crony capitalism leads to a slowdown in technological advancement, a lack of competition which could even border on collusion, and higher prices for consumers. This in turn dramatically reduces the consumer surplus (the difference between the amount that consumers are willing to pay and how much the consumers actually end up paying). In turn, this creates mma black market, which leads to violent crime and tax evasion.

While we must give the present government some credit for its implementation of the GST, we cannot ignore the fact that shadow economies lead to an unorganized workforce, wherein workers face problems regarding salaries, job security, contract agreements, working conditions, etc.

An informal workforce hampers the growth of manufacturing firms through lower degrees of productivity. It should not be surprising that India is a country which largely consists of an informal workforce, and the continuation of such which will have an effect on both the quantitative and qualitative aspects of growth in the long run. Labour reform is definitely needed, but it is unlikely to happen until the government can ensure that businesses around the country follow fair practices. As long as organisations can get away with bribing officials for their own personal gain, little progress can be made.

Some studies argue that the prevalence of corruption can have some benefits as well, especially in countries that fail to adequately provide public services. What’s more is that the paying of bribes tend to help firms in the short run in terms of productivity. This is due to the preferential treatment they receive from the public officials that they bribe.

Nevertheless, the overall impact is what we must consider, and the literature is quite clear on the negative impacts that corruption will have on an economy in both the short and long terms. To achieve a sustained period of economic growth, countries must be able to achieve satisfactory redistribution of wealth. Corruption has also been shown to be very expensive for the conduction of business in various parts of the world, where the added costs to doing business can add up to 10%.

The present government was clear with its agenda when it came into power four years ago, and to some extent the intention to rid society of corruption could be seen, namely through the two main economic reforms that the government introduced (demonetisation and GST). The reality of the situation however reflects the plain and simple fact that either nothing has changed or it has merely gotten worse. The PNB scam is a clear indication of this, and of course the situation has been reflected in the Transparency International’s global corruption index. A lower ranking for India compared to previous years is certainly a black mark on the BJP government’s report card.