How corruption corrodes growth

November 30, 2010

An employee arranges rupee notes at a cash counter inside a bank in Agartala, June 3, 2010. REUTERS/Jayanta Dey/Files
(The views expressed in this column are the author’s own and do not represent those of Reuters)

The scams that have surfaced in the last two months have created revulsion among the people about the way the government functions.

The feeling is that money that should have gone to promote national development is pocketed by politicians, bureaucrats and businessmen.

Corruption impacts in different ways. First, it can deprive the exchequer of its legitimate income. The 2G scam is the most glaring example. Second, it can increase the expenditures of government as was visibly seen in Commonwealth Games construction projects and materials purchases.

Third, as in the Satyam scam, companies and individuals defraud shareholders, creditors or consumers.

The 2G spectrum scam is about telecom licences that could have fetched a good price but were sold for a song, depriving the exchequer of 175,000 crore rupees. Had that money come into the budget, the government would have used it for putting up power plants, building roads, expanding irrigation facilities for agriculture and on.

Instances like the 2G scam make headlines. But on a smaller scale, every day and every hour individuals and businesses deprive the exchequer of its legitimate income by evading taxes.

Goods are produced but escape excise duties, VAT is added to bills without goods actually moving, income is earned but not declared for income tax, and so on, mostly in collusion with the officials.

Look at the second variety that inflates government expenditures. The principal consideration is the kickbacks, not the quality, time of completion or cost of construction.

Naturally, contracts go to those who cannot do the job well but pay underhand the most. The Commonwealth Games inflated budgets by more than 15,000 crore rupees.

Satyam-type frauds are rare. But on the smaller scale again considerable money changes hands illegally. The LIC housing loan scam is not the first of its kind. It is prevalent in many other areas.

The popular impression is that corruption drives money out of circulation into the pockets of the corrupt. But that money does not remain locked up. It does get out of the pockets to be used for consumption and investment. To that extent, corruption does not dilute growth though it does vitiate the climate for growth particularly for foreign investment.

It is really the part of corruption money which gets out of circulation that hits growth. With the vigilant authorities like the CVC, super computers with the tax departments, SEBI, etc. it has become difficult to stack up money within the country.

Most money from corruption finds its way abroad.

Global Financial Integrity has estimated that between 1948 and 2008, $462 billion of corruption money travelled overseas. The outflow was particularly high in the years after liberalisation. By a broad reckoning, the annual generation of corruption money would be 2.5-3 percent of GDP.

About a fourth of it which is used domestically gets back into circulation. As such it hardly affects growth. The balance three-fourths which is remitted abroad through devious channels is lost for good and cuts GDP growth by 0.5 percent.


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Thats really true….

Posted by Boga | Report as abusive

The author fails to score a note on the nounces of corruption. The biggest fallout of corruption is poor quality development that leads to reinvestment for the same cause. For example, city roads (Delhi) & housing construction by DDA is of very poor quality where the end user spent millions on maintenance of vehicles / houses due to poor quality. This is a multiple loss. You have to build roads again and again. The corruption money changes hands for growth in Areas which are undesirable. Most of such money is used in businesses where underhand dealing or black money is 80 % more than the cost shown to state agencies or channeled abroad to come back invested in some growth projects. Mostly the owners of black money have invested in properties, gold, shares and banks.
Corruption reduces revenues, transfer legality to unqualified possessors, changes course of right progress, retains bad authorities and systems, drive wrong policies. On paper India’s growth of 8 to 9 % seem impressive but where is the supposed to be investment? If 50 % of intended investment falls into wrong hands than the growth is only on paper. That’s happened in CWG games recently, but the GDP will show growth. An auditor can actually assess the investment in the government project to say if 100 % is invested? The numbers are misnomer unless they are not physically verified by an independent agency. Similarly where government should get the royalty, or share of profit as per PSC agreement the numbers favors heavily the other joint venture partners and so on.

Posted by Fresh | Report as abusive