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Corruption Threatens India's Growth

Author: Jayshree Bajoria
March 1, 2011

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A spate of high-profile corruption scandals has rocked the Indian government in the last few months and is threatening foreign investor confidence. The scams include allegations of graft against officials responsible for last year's Commonwealth games (BBC) hosted by New Delhi, a telecom case involving the government underselling mobile-phone licenses (Guardian) for kickbacks that may have cost the exchequer nearly $40 billion, and a housing scam (Reuters) in which politicians, bureaucrats, and military officials are accused of taking over a plush Mumbai apartment block intended for war widows.

Prime Minister Manmohan Singh, whose government has come under fire from opposition parties and the media, has vowed to crack down on corruption (NYT). But as the BBC's Soutik Biswas notes, India has a poor record of prosecuting corruption and an even grimmer record on actual convictions.

India ranks 87 out of 178 countries on Transparency International's 2010 Corruption Perceptions Index. A 2010 report from Washington-based think tank Global Financial Integrity blames India's poor governance for the tax evasion and corruption, which result in illicit financial flows from the country of at least $462 billion. "It is an issue which needs to be tackled, because corruption not only reduces the social acceptability of whatever growth we achieve, but actually reduces growth” (Agencies), India's Planning Commission Deputy Chairman Montek Singh Ahluwalia told the World Economic Forum.

Some investment analysts say corruption is already a factor in declining foreign investment (CSMonitor)--which has been a key to India's growth over the last two decades--and is worrying domestic investors, too. Foreign institutional investors (FIIs) became net sellers for the first time in January since May 2010, shedding some $1.4 billion in holdings, according to industry data. "We're not claiming FII flows are driven simply by corruption concerns," said analysts from Espirito Santo Securities in Mumbai, but "corruption and ensuing political risk has without question become a major concern" (FT). India's surging growth rate of nearly 8.5 percent is also under threat from high inflation (BBC), which may further scare off foreign investors.

A report from international organizations, including the UN Global Compact, estimates that corruption adds as much as 10 percent (PDF) to the total cost of doing business globally, and as much as 25 percent to the cost of procuring contracts in developing countries. When it comes to ease of doing business, the World Bank ranks India 134 out of 183 countries in 2011.

Corruption also harms poverty-alleviation efforts in India. The World Bank has found corruption the single greatest obstacle to economic and social development.

India has a right-to-information law that promises to make government accountable, but whistleblowers have often had a fight on their hands (Tehelka), in several instances paying with their lives. The government has a draft anti-corruption bill (ET) scorned by many activists who have coalesced under the banner "India Against Corruption." Indian businessmen, too, are calling for effective legislation to counter corruption (Tehelka). The most promising drive for change, say some commentators, comes from India's civil society (ET), with initiatives such as I Paid a Bribe, an online tool where citizens report instances where they have paid or resisted the demand for a bribe.

Additional Analysis:

Radha Vinod Raju, former director general of India's federal National Investigation Agency, explores India's efforts to fight corruption (PDF) and lays down recommendations.

Background:

Read India's national anti-corruption strategy here (PDF).

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