Corruption and the Black Economy in India
- From: PakistanPal <pakistanpal@xxxxxxxxx>
- Date: Thu, 26 Jun 2008 02:57:31 -0700 (PDT)
TUESDAY, 24 JUNE 2008
http://champagne-socialite.blogspot.com/2008/06/corruption-and-black-economy-in-india.html
The Indian black economy is immense, lucrative, widespread, and has
grown significantly since independence. According to Kumar (2001, 2),
the black economy has grown from about 3% in the mid-50s to 20% by
1980, to 35% by 1990, and 40% by 1995. As a percentage of GDP and at
almost $1 trillion in absolute terms, the black economy is larger than
both the industrial and agricultural sectors. Corruption is pervasive
from the lowest to the highest levels of public administration, public
enterprise, bureaucracy, judiciary, law enforcement, and elected
officials. According to Transparency International’s Global Corruption
Barometer 2007 report, 25% of survey respondents had to pay a bribe to
obtain government services, over four-out-of-five believe that
political parties are corrupt, and more than 70% expect the level of
corruption to increase in the coming three years.
The history of corruption in India can be traced to late 18th century
British East India company rule. The first governor-general of India,
Warren Hastings was notably impeached on accounts of corruption in
1787. Though he was acquitted in 1795, his lengthy trial brought
various aspects of illegitimate company activity to light. Brian Smith
of Georgetown University (2008) writes, "too much ill-gotten wealth
had made its way home from India; too many of Hastings' compatriots
and defenders were in the House of Commons". The East India Company
laid the foundations of both a corrupt bureaucracy and a parallel
economy. During World War II, this black economy experienced a surge
(Financial Express, 2007). When large quantities of products and
resources were allocated to the war effort, the general public
experienced acute shortages of daily necessities. Scarcity, government
controls, and private hoarding stimulated the growth of the parallel
economy. Even though in both periods the black economy made up only a
small fraction of its present size, the institutional and social
practices that would facilitate its rise were developed then.
The most significant growth in the black economy occurred during and
after the 1960s. Until this time, Gandhian and Nehruvian politicians
who had been part of the independence struggle had largely
administered the government. As their careers ended, officials who
lacked their idealism, and were more likely to engage in corruption
and rent-seeking practices, entered the government. According to
Sondhi (2000), the keynote of this "great divide in the history of
public administration in India" was amorality.
Today, corruption pervades the political leadership, the bureaucracy,
law enforcement and the judiciary. Some of the most prominent causes
have been patron-client relationships and communalism in the
democracy, excessive bureaucratic administration and low wages at the
bottom rung of public sector employment, ineffective punitive and
combative measures, and a social environment conducive to corrupt
practices.
Since the sixties, a new brand of electoral politics has seen leaders
succeed who cater to specific regional, caste, religious, or
linguistic communities as well as distinct private lobbies. In order
to be reelected in a divisive environment, officials hand out benefits
to private supporters and client communities. Nepotism in the
allocation of government contracts and the siphoning-off of public
sector funds occur on a large scale. For example, public sector real
estate plots are taken over by individual politicians who then sell
them at preferential rates to family members, campaign contributors,
and other supporters in a process that is called "writing down".
Democratic corruption is further compounded by rampant electoral
malpractice, which undermines the legitimacy of the participatory
process. Vote buying and voter coercion, political thuggery and
warlordism are commonplace. Corruption pervades the political realm
from the local district level, to the state level, to the national
level, to the Prime minister's office - as Sondhi (2000) writes, "the
scams and scandals of the nineties revealed that among the persons
accused of corruption were former Prime Ministers, former Chief
ministers, and even former Governors."
During the sixties the development of a second factor also impacted
corruption. Private sector wages and relative social prestige,
particularly at the lower levels, grew faster than those of the public
sector, creating incentive for corruption. According to The Times of
India, the payscale for police constables in 2006, was between Rs.
3,050 and 4,590 in Maharashtra. In India, such wages are too low to
guarantee a dignified life, forcing constables to turn to bribes.
Therefore, it is common for well-off individuals to buy their way out
of arrest. Additionally, the colonial legacy of an extensive
administrative network facilitated the spread of corrupt activity in
the bureaucracy, judiciary, and law enforcement. According to Sondhi,
"the British had designed this legal system to strengthen a regulatory
colonial administration...It has built in provisions for delays,
prolonged litigation, and evasion. Its provisions are ideally suited
to the promotion of corruption at all levels."
Insufficiently low wages are generally characteristic of the lower
levels of bureaucracy, and therefore most simple government services
require bribing to be obtained. Many bureaucrats see their salaries as
pocket money, while their actual incomes are determined by
illegitimate means. Even in prestigious civil services like the Indian
Administrative Service (IAS) and Indian Revenue Service (IRS) that
require entrance examinations, salaries are significantly lower than
private sector alternatives. Corruption income is often taken into
account when bright individuals choose the civil services over the
private sector.
Looking at the problem from a broader perspective, pervasive
corruption has generated social attitudes that no longer view it as
morally wrong, but as normal. High degrees of corruption in the police
and judicial system coupled with widespread corruption among elected
officials have contributed a collective disregard for the rule of law
in society. "People often approach someone known to them for favors
which they know are not legally due to them. Jumping the traffic
lights or a queue or getting the benefits not due to one has become
part of social ethos" (Sondhi 2000). A vicious cycle has been created
where, because so many public officials are corrupt, corruption has
found social acceptance, and this results in an even greater number of
officials becoming corrupt. Therefore, increased corruption is a
consequence of corruption itself.
The economic impact of corruption is a powerful one. In theory,
countries where talented people are allocated to rent-seeking
activities tend to grow more slowly (Mauro 1995). Mauro finds that if
the integrity and efficiency of bureaucracy in developing countries
were to be improved, their investment and GDP growth rates would rise
significantly. Controlling for GDP per capita, he concludes that
corrupt governments spend less on education, and therefore achieve
lower levels of human capital formation. According to Mauro, if
corruption in India was reduced to Scandanavian levels, investment
would rise by 12% annually and GDP would grow at an additional 1.5%.
In India, the black economy has resulted in an immense loss of tax
revenue. If it accounted for 40% of GDP in 1998-99, the loss of direct
tax revenue at the prevailing rate would amount to at least Rs.
200,000 crore, or 47.5 billion U.S. Dollars (Kumar 1999, 5). According
to the BBC (2004), only 2 million of India's billion people pay taxes,
just 2% of the population. The government therefore suffers a
perennial shortage of funds and public services languish. To make
matters worse, public services and public enterprises are themselves
extremely corrupt - the Public Works Department and the State
Electricity Boards that are responsible for the provision,
maintenance, and distribution of infrastructure and energy
respectively, are among the most corrupt departments in India. "In the
capital city of Delhi itself the transmission and distribution losses
in the power sector are estimated to be over 50%, out which almost 30%
is attributed to theft which is done with the connivance of the
electricity board employees" (Sondhi 2000). Due to corruption, public
sector enterprises appear to be inefficient and making large losses.
In 1991, they lost over Rs. 30,000 crore, or $7.1 billion due to
corruption; if not for illegal activity, profit margins would have
been 30% as opposed to the reported 5% (Kumar 1999, 4)
Black incomes also form a major tax on investment. Rather than being
spent and injected into the economy, they tend to be mostly saved.
Furthermore, these savings tend to be concentrated in areas that do
not further investment. Black money tends to be laundered in
destabilizing speculative bubbles such as real estate and gold, or
deposited outside the country. Income from corruption constitutes a
significant leakage from the economy, amounting to a tax on investment
of almost 20 percentage points (Sondhi, 2000).
Given the magnitude of corruption and its consequences, it is
imperative that the problem is dealt with immediately. The government
has already developed a number of agencies to deal with the problem
such as the Prevention of Corruption Act (1947), Central Bureau of
Investigation (CBI), Administrative Vigilance Division (AVD), and
Central Vigilance Comission (CVC). However, a number of these agencies
are corrupt themselves, while others lack the expertise to function
effectively. I believe that a carrot and stick approach must be used
to combat corruption. That is, the monetary incentive for corruption
must be removed, while adequate punitive measures are simultaneously
implemented. Corruption has lead to a vicious cycle where it keeps tax
revenue low, thus keeps public sector wages low, and therefore
perpetuates itself. The government must bear the initial cost and
incur a deficit to raise public sector wages and make them more
comparable to the private sector, while strengthening anti-corruption
bodies. Theoretically, a higher salary should make an employee content
and the increased probability of prosecution should deter their
corrupt practices.
Electoral reform is also necessary to restore faith in a free
democratic process. Instituting stricter poll monitoring policies and
replacing the inkblot voting technique with newer technology would
better safeguard against malpractice. Allocating a fixed election
budget for each party a-la the European Union would set somewhat of a
barrier against rent seeking and patron-client politics.
The media and civil society are important entities that should also be
urged to expose corrupt practices. In the past, the media has exposed
numerous profile cases, such as the Tehelka scandal, however less
sensational corruption is left unreported. According to Kumar (1995),
media entrepreneurs have interests that require favorable policy
decisions and journalists have to be careful not to hurt these
interests. Independent organizations however, have been more vigilant
in their watch over corruption. Guhan and Paul (1997) state that the
Public Affairs Center in Bangalore has developed innovative
instruments, such as the report card methodology, to track down and
expose corruption in the public services.
The primary obstacle to implementing stricter controls over corruption
is the general social climate. If society continues to accept the
normality of corruption, politicians will not be pressed to implement
counter-measures. The costs of corruption can be fundamentally raised
through the democratic process. Voting against corrupt politicians
will ensure that those in power will reduce their own illegal
practices and take steps against corruption to garner votes. But until
social attitudes change, necessary legislation will not be implemented
to deal with the problem.
Works Cited
Aidt, T. S. "Economic Analysis of Corruption." The Economic Journal
113 (2003): f632-f652.
Biswas, Soutik. "Reforming India's Maddening Tax System." BBC News 5
July 2004. .
Guhan, S., and S. Paul. Corruption in India. New Delhi: Sage, 1997.
Guhan, S., and S. Paul. Corruption in India. New Delhi: Sage, 1997.
Khan, Mushtaq H., and Jomo K.S. Rents, Rent-Seeking and Economic
Development. Cambridge: Cambridge UP, 2000.
Kumar, Arun. The Black Economy in India. New Delhi: Penguin Books
Ltd., 1999.
Mauro, Paolo. "Corruption and Growth." The Quarterly Journal of
Economics 110 (1999): 681-712.
"Pay Hike for Maharashtra Police." The Times of India 17 Oct. 2006. .
Smith, Brian. "Edmund Burke, the Warren Hastings Trial, and the Moral
Dimension of Corruption." Polity 40 (2008): 70-94.
Sondhi, Sunil. Combatting Corruption in India. University of Delhi.
Prepared for the XVIII World Congress of International
PoliticalScience Association, August 1-5, 2000, Quebec City, Canada,
2000.
"The Parallel Economy in India." Financial Express 2 May 2007. .
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