India Journal: Corruption – A Misunderstood Problem?

As public demonstrations and street protests subside, India’s anti-corruption movement is not losing momentum.

The movement’s unofficial leader, Anna Hazare, who now enjoys a cult-like following, recently secured a victory of sorts following a 13-day hunger strike after which the Indian government announced it would form a committee to consider legislation to tackle corruption in officialdom.

As public demonstrations and street protests subside, India’s
anti-corruption movement is not losing momentum, argue Hemal Shah
and Nathan Gamester.

However, there is a danger that, in focussing on this issue exclusively, India will fail to address some more fundamental economic problems such as lengthy permit application procedures and convoluted tax payments – which are arguably the cause of corruption. Corruption, therefore, should be considered as just one of a number of problems that are inhibiting economic growth in India.

Narayana Murthy, founder of Infosys, recently said  of India’s corruption problem: “the double-digit growth that has eluded India could have been ours if we had combated corruption.”
Certainly, this is the underlying message of the protestors on the streets and it is the message of Mr. Hazare. But what if it is not the problem? What if corruption is just one of a number of problems holding back India’s growth?

This is one of the questions that emerges from our new survey of Indian entrepreneurs    in which the data reveal that, while corruption is viewed as a very serious problem (that is getting worse), the majority of Indian entrepreneurs believe that the Indian economy will be successful anyway.

The data reveal that a staggering 91% of Indian entrepreneurs think corruption is a problem that hurts business in India and, perhaps most worryingly of all, 80% believe that corruption is getting worse. However, the same report finds that 85% of Indian entrepreneurs believe India’s economy will be stronger in five years time and, perhaps most strikingly, over 50% believe that their country will be the most important global economic power in 20 years time (just one-quarter said China, only 8% stated the U.S.) So what’s behind these seemingly contradictory findings?

The rise in corruption perception has no doubt been fuelled by a series of high-profile scams such as the Commonwealth Games building scandals and the 2G “sell-off” scam that deprived the public purse of up to $40 billion, according to a government auditing agency. This not only demonstrated that corrupt practices had reached the highest echelons of power but also sent out a damaging message to India’s competitive telecoms industry and its many industrious, middle-class workers.

However, there is reason to be encouraged about the direction in which India is headed. The fact that Indians at every level of society are becoming increasingly less tolerant of corruption is evidence to suggest that the tide is turning on this issue. Further, the government’s willingness to consider the draft Jan Lokpal Bill (or the citizens’ ombudsman bill), provides hope that the problem of corruption is finally being taken seriously after almost four decades of waiting.

But there are other problems beyond corruption affecting India’s economic progress. The economic reforms of 1991 were only half-baked and the abolition of the License Raj has never been complete. World Bank data reveal that the unusually high costs and lengthy procedures to process construction permits; convoluted tax payments; and trouble with enforcing contracts are major impediments to doing business in India. Corruption could therefore be argued as the effect, and not the cause of India’s economic problems – as a by-product of the flawed institutional environment.

Costs associated with over-regulation and frustrating bureaucratic procedures would naturally incentivise budding entrepreneurs to accelerate business processes by bribing (without negatively affecting levels of optimism about future success, hence the seemingly contradictory survey results). To pull out of the practices that preserve this bribing culture, a higher level of economic freedom through completion of second-generation reforms is needed. This would greatly encourage the entrepreneurial class – the lifeblood of any thriving economy – to take risks, invest in ideas, and develop the goods and services upon which India’s future success depends.

Indian historian, Ramachandra Guha recently argued  that India is too corrupt to become a superpower. Whether this statement is true remains to be seen but what emerges from this new survey data is that Mr. Guha’s belief is not shared by the men and women of India who are creating, running, and sustaining new businesses. Perhaps it is time to look beyond corruption and focus on the other economic issues facing Indian businesses.