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India: corruption affecting investment and economic growth December 13, 2012

Posted by southasiamasala in : Future Directions International, Guest authors, India , trackback

Gustavo Mendiolaza

Transparency International released the results of its annual Corruption Perceptions Index on 5 December 2012. India was ranked 94 out of 174 countries in corruption, a claim highlighted by the scandals that have hit the Indian National Congress-led government this year.


India, and the Congress-led United Progressive Alliance government in particular, have felt increasing pressure over the levels of corruption. This year’s Corruption Perceptions Index (CPI) illustrates that although the situation has improved since last year, an underlying culture of corruption still exists in India. Such endemic corruption may cause a decline in India’s attractiveness for foreign direct investment (FDI).


The poor rating from Transparency International highlights the incidence of corruption in India. The three largest corruption scandals uncovered in 2012 cost India over US$100 billion. The scale of such fraud was the rationale behind a statement by British Prime Minister David Cameron in 2011, in which he warned the Indian Government that persistent corruption could be damaging to FDI inflows. The UK is among the four largest investors of foreign capital into India, which is still a popular country for foreign investment. China, by comparison, is the most popular destination for FDI and was ranked at 80 on the CPI.

Major corruption cases uncovered in2012 include: the Karnatake Wakf Board Land case, at US$36.4 billion; the 2G Spectrum telecommunications case, involving the alleged misappropriation of US$32.15 billion; the Indian Coal Allocation case, a major issue as India faces energy scarcity, involving US$33.78 billion. With a total value of over US$100 billion, the corruption cases represent 5.5 per cent of India’s gross domestic product for 2011.

India’s position as a favoured destination for foreign investment may change if corruption is not controlled. The Financial Times has said that high levels of corruption and bureaucracy are unsustainable if India is to maintain its economic growth. Economic reform including the elimination of the corruption culture is needed, if India is to increase its GDP, improve fiscal sustainability and promote a more equitable distribution of wealth.

One of the key contributors to corruption, as seen by Transparency International, is an overabundance of regulation. India falls within this definition because of shared and conflicting responsibilities between the State and Union governments. One of the states that allegedly has the least corruption is the economic powerhouse of Gujarat.

The Economist listed Gujarat as one of the fastest-growing regions in India. Over the past decade, Gujarat has consistently grown at a higher rate than that of India as a whole. The state achieved an average growth rate of 9.76 per cent per annum over the period 2005-11.

For Australia, India’s bureaucracy can place limitations on investment opportunities. One of the main issues facing Australian businesses wishing to operate in India, is the complexity of the bureaucracy – the so-called ‘licence raj’ – which can add significantly to the cost of doing business.

This year’s Corruption Index is a reminder that, although India is a rising power, there are significant challenges and issues ahead. For the Indian Government, the result of this year’s Index should be an impetus for further improvement. India possesses a robust legal framework to deal with corruption, based on the British anti-corruption model. Among other challenges, Prime Minister Manmohan Singh will need to change the attitudes of politicians and businesspeople towards corruption, to better fulfil the potential of the Indian economy.

Gustavo Mendiolaza is an Assistant Analyst in the Indian Ocean Programme at Future Directions International. This post first appeared on Future Directions International website on 12 December 2012.





1. Mark Jones - December 19, 2012

Gustavo Mendiolaza highlights what could be called the “big ticket” items of corruption in India. In an environment where ‘informal payments’ below 40% of total don’t really get classified at corruption and are just considered ‘normal’ their negative impacts cannot be denied.

But in India corruption exists on every scale and in every transaction. You want reasonable service from your local Foreigner Registration Office and not to get raided occasionally? Well INR3-5,000 per month please. You want an electricity bill that doesn’t include most of the neighbour’s usage? Well INR1,000 a month please. You want a health certificate for your restaurant and maybe a fire safety certificate? Well INR5,000 a year please.

These ‘special’ services are not always unwelcome by business people. Do you have any idea how many office and how much time you need to spend in each of them to actually get the certificate you need legitimately? Not to mention that most government officers, the people who actually have to sign or stamp your certificate, appear to be ‘out of station’ at least 90% of the time and even when they are in they seem to spend most of their time taking chai.

The real tragedy is not corruptions impact on business though. It’s the impact on the poor. It cost INR6.50 to give a poor person INR1 worth of rice under the BPL Card scheme and even then the rice will be stale and full of rice moth . This suggests that more than 80% of all government spending in India disappears in corruption. A rate that no nation or people can sustain.