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September 2, 2011

Corruption Impacts India’s Business and Political Environment

MuslimWoman_sxc Corruption seriously affects India's business and political environment, posing a challenge to the country's economic growth. An increasing number of corruption scandals since the late 2000s have damaged the government's credibility, caused major loss in tax revenues, led to social unrest and widened income inequality. Corruption has become more endemic since the late 2000s along with the country's strong economic growth and a surge in investment.

  • India has been hit by a string of huge corruption scandals including a multi-billion dollar telecom licenses scam in 2008, alleged financial malpractices associated with the Commonwealth Games in 2010 and the illegal mining scandal in Karnataka state during 2006-2010;
  • India ranked 87th place out of 178 countries in Transparency International's Corruption Perceptions Index (CPI) in 2010, down from 84th place in 2009. The index refers to perceptions of the degree of corruption as seen by business people and country analysts. With this ranking, corruption in India is seen to be worse than in China and Brazil, but still less severe than in Russia and Indonesia.

Transparency International's Corruption Perceptions Index for Selected Countries: 2010

Transparency Internationals Corruption Perceptions Index for Selected Countries 2010

 

 

 

 

 

 

Source: Euromonitor International

 

Note: Score is based on a scale from 0 (perceived to be highly corrupt) to 10 (perceived to have low levels of corruption

Implications

Corruption significantly impacts India's business environment and poses a threat to sustained economic growth:

  • Pervasive corruption reduces competition and efficiency in the Indian economy. India ranked 134th out of 183 countries in the World Bank's Ease of Doing Business Index in 2011, a ranking lower than both China (79th) and Brazil (127th). Businesses face constraints in starting a business, dealing with construction permits and enforcing contracts;
  • Corruption raises the cost of doing business and adds to the problem of regulatory uncertainty, thus affecting foreign direct investment (FDI). Due to strict foreign investment regulations, FDI inflows to India remain low compared to its peer economies and stood at US$24.6 billion in 2010, compared to US$106 billion for China and US$41.2 billion for Russia;
  • Significant tax revenues have been lost due to corruption. The sale of the 2G spectrum telecom licences in 2008 alone caused an estimated US$40.0 billion revenue loss for the Indian government. India has faced a rising budget deficit which stood at Rs7.0 trillion (US$153 billion) in 2010 or 8.9% of total GDP;

India's General Government Budget Deficit 2005-2010

     

India’s General Government Budget Deficit 2005-2010 
Source: Euromonitor International

  • India's efforts to reduce poverty will be hampered as public funds are embezzled and diverted from social spending such as on healthcare and education. According to national statistics, more than one third of the Indian population still live below the national poverty line as of 2010. Income inequality has also worsened, with the Gini index rising from 37.8% in 2005 to 39.5% in 2010. The index measures the level of income equality where a zero value represents perfect income equality while 100% indicates absolute income inequality;
  • Rising corruption has led to social discontent amongst the middle-class and a volatile political environment. Since early 2011, a series of anti-corruption street protests and hunger strikes are putting the government under pressure to pass a revised anti-corruption bill that has been proposed by Anna Hazare, India's well-known anti-corruption activist.

Prospects

  • The Indian government has taken some action in fighting corruption. Since early 2011, some top government officials including the former Telecoms Minister have been arrested for alleged corruption. On August 4th, 2011, the government drafted a new bill to set up an anti-corruption watchdog. The bill was criticised however, for exempting the prime minister and senior judges from prosecution while they are in office;
  • On August 28th, the government accepted the first draft of the stronger anti-corruption bill proposed by Anna Hazare, and as a result he has ended the hunger strike he began in mid-August 2011 to force the government to pass it. There are further stages in passing the bill however, and it is possible that it could be weakened during them. If this happens, there could be socio-political uncertainty in the near future;
  • Economic growth in India will continue to be boosted by a rising middle-class and strong consumption. During 2005-2010, consumer expenditure in India grew at an average annual rate of 5.8% in real terms. In order to sustain growth, however, India needs to address corruption to improve investor confidence, consolidate government finance and reduce poverty. India's real GDP growth is forecast to slow down to 8.2% in 2011 from 10.4% in 2010, mainly due to high inflation and the government's austerity measures.

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