India: Why Graft Matters in Spite of a Growing Economy

Corporate fraud 2 Comments

With a current growth rate of 8.9% (The Economist), it is safe to say that India is reaping the benefits of its educated workforce and its entrepreneurial culture.

But this impressive strength masks a serious problem: graft. In spite of efforts to clean up the countries image, two recent scandals illustrate the extent of the challenge the country still faces in this area.

One of the scandals centers around the sale of telecommunications licenses in 2008. A report from the state auditor in November was damming to say the least. It claimed that the licenses were sold at far less than fair value, that the sale ‘lacked transparency and was undertaken in an arbitrary and unfair manner’, and that as many as 122 licenses were given to ineligible applicants - some of whom used falsified application information. Losses to the treasury resulting from this debacle are estimated at $39 billion. Unsurprisingly, Andimuthu Raja, the telecoms minister, was forced to resign (Aljazeera).

The other involves allegations of bribes being paid in order to make loans available from state-run banks; eight people, including five officials from state-run institutions, were arrested in late November (Sky News).

These are not isolated events.  In global rankings, the country ranks 11th worst out of 109 countries in the Graft Index (Encyclopedia of the Nations), which measures the proportion of occasions where gifts or bribes are requested or expected when using public services. Its ranking in Transparency International’s World Corruption Index 2010 (87th out of 178 countries) is average to say the least. And life for the entrepreneurial minded is not exactly easy - India ranks an appalling 165th out of 183 countries in the World Bank’s measure of difficulty in starting a business (The Hindu).

That’s not all. A recent report from Washington-based watchdog Global Financial Integrity says that tax evasion is rife, stashing of illicit cash abroad is common, and the underground economy is almost half as large as the legal one (The Economist).


Yes, it does matter
In spite of all this, the country’s prosperity continues to rise, with the economy growing by 8.9% in the third quarter.

Far from being deterred, foreign investors still clamor for a piece of the action. Overall, the country ranked third out of all countries for foreign direct investment in 2009, according to a United Nations Conference on Trade and Development. In Japan, a 2009 survey of Japanese investors conducted by the Japan Bank of International Cooperation ranked India second after China as a promising country for overseas business operations. And in Canada, the number of Canadian firms interested in investing in India has risen from 8% in 2005 to 13.4% in 2010, says an Asian Investment Intentions Survey issued by the Asia Pacific Foundation in Canada (Indian Brand Equity Foundation).

With this in mind, it would be tempting to fall into the misconception that graft is not really hurting.

Tempting, but wrong. Dirty practices do matter. The impact of graft on India’s economy may be hidden, but it’s there.

For a start, the $40 billion odd in government revenue lost through the telecoms scandal is money which could have been spent in health, education and infrastructure. So too, all that illicit cash which is being hidden overseas is being invested elsewhere – not in job creating expansion within India.

The black economy is problematic as well:  businesses which operate under the radar need to stay small in order to avoid attracting attention and cannot grow into prosperous, job creating enterprises.

Third, any capital from state-owned financial institutions which goes toward the highest bidder, as happened in the bribes-for-loans scandal, is capital which is not necessarily going to worthy borrowers – those with viable enterprises, good business plans and a demonstrated ability to deliver products and services of real value in a cost effective manner.

Finally, whilst it may be true that foreign investment is running hot at the moment, who’s to say that India would not attract even more if the country cleaned up its act?

Graft is hurting India’s economy. Its impact may be masked by a smart workforce and an entrepreneurial culture, but the effect is real nonetheless.

And India would be better off without it.

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2 Responses to “India: Why Graft Matters in Spite of a Growing Economy”

  1. Brad Shorr Says:
    December 13th, 2010 at 10:10 pm

    Andrew, Interesting topic – again, one which does not get much coverage in the U.S. media. Pervasive graft puts a damper on foreign investment in India’s economy, and certainly won’t help them be competitive in the world economy. If India wants to be a long term economic power, it needs to develop a private and public sector infrastructure that supports a free market. This is no easy task but must be undertaken with great energy.
    Brad Shorr recently posted..What Happens When You Change Your Twitter UsernameMy ComLuv Profile

  2. Andrew Heaton Says:
    December 14th, 2010 at 1:12 pm

    Brad,

    To be fair on the U.S. media, it is understandable that this topic has not received a great deal of coverage. Although this topic affects American companies which do business in India, it does not directly affect the lives of most U.S. citizens. Your country’s media would be more than justified in devoting primary attention to issues which are more immediately relevant to Americans. (This issue hasn’t received a great deal of attention in Australia, either.)

    Moreover, I generally find that when I am researching topics for this blog that some American newspapers do seem to give pretty good coverage, even if the topics concerned are not headline topics.

    India, with its ambitious workforce and abundance of entrepreneurs, does have what would seem to be the nucleus to develop into an economic power. But they do need to lift their game in some key areas if the country is to reach its full potential.
    Andrew Heaton recently posted..India- Why Graft Matters in Spite of a Growing EconomyMy ComLuv Profile

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