Corruption is an issue that adversely affects India's economy of central, state and local government agencies. Not only has it held the economy back from reaching new heights, but rampant corruption has stunted the country's development. A study conducted by Transparency International in 2005 recorded that more than 92% of Indians had at some point or another paid a bribe to a public official to get a job done. In a study conducted in 2008, Transparency International reported that about 50% of Indians had first hand experience of paying bribes or using contacts to get services performed by public offices.
Transparency International's 2017 Corruption Perception Index ranks the country 81st place out of 180 countries.
The largest contributors to corruption are entitlement programs and social spending schemes enacted by the Indian government. Examples include the Mahatma Gandhi National Rural Employment Guarantee Act and the National Rural Health Mission. Other areas of corruption include India's trucking industry which is forced to pay billions of rupees in bribes annually to numerous regulatory and police stops on interstate highways.
The media has widely published allegations of corrupt Indian citizens stashing millions of rupees in Swiss banks. Swiss authorities denied these allegations, which were later proven in 2015–2016. The Indian media is largely controlled by extremely corrupt politicians and industrialists who play a major role by misleading the public with incorrect information and use the media for mud-slinging at political and business opponents.
The causes of corruption in India include excessive regulations, complicated tax and licensing systems, numerous government departments with opaque bureaucracy and discretionary powers, monopoly of government controlled institutions on certain goods and services delivery, and the lack of transparent laws and processes. There are significant variations in the level of corruption and in the government's efforts to reduce corruption across different areas of India.
See also: Booth capturing
Corruption in India is a problem that has serious implications for protecting the rule of law and ensuring access to justice. As of December 2009, 120 of India's 524 parliament members were accused of various crimes, under India's First Information Report procedure wherein anyone can allege another to have committed a crime. Many of the biggest scandals since 2010 have involved high level government officials, including Cabinet Ministers and Chief Ministers, such as the 2010 Commonwealth Games scam (₹70,000 crore (US$11 billion)), the Adarsh Housing Society scam, the Coal Mining Scam (₹1.86 lakh crore (US$28 billion)), the Mining Scandal in Karnataka and the Cash for Vote scams.
Sole philosophy pages on all norms and guidelines to clear mess, but now placed below plates.
A 2005 study done by the Transparency International in India found that more than 92% of the people had firsthand experience of paying bribes or peddling influence to get services performed in a public office. Taxes and bribes are common between state borders; Transparency International estimates that truckers annually pay ₹222 crore (US$34 million) in bribes.
Both government regulators and police share in bribe money, to the tune of 43% and 45% each, respectively. The en route stoppages at checkpoints and entry-points can take up to 11 hours per day. About 60% of these (forced) stoppages on roads by concerned authorities such as government regulators, police, forest, sales and excise, octroi, and weighing and measuring departments are for extorting money. The loss in productivity due to these stoppages is an important national concern; the number of truck trips could increase by 40%, if forced delays are avoided. According to a 2007 World Bank published report, the travel time for a Delhi-Mumbai trip could be reduced by about 2 days per trip if the corruption and associated regulatory stoppages to extract bribes were eliminated.
A 2009 survey of the leading economies of Asia, revealed Indian bureaucracy to be not only the least efficient out of Singapore, Hong Kong, Thailand, South Korea, Japan, Malaysia, Taiwan, Vietnam, China, Philippines and Indonesia, but that working with India's civil servants was a "slow and painful" process.
Land and property
See also: Illegal housing in India
Officials are alleged to steal state property. In cities and villages throughout India, groups of municipal and other government officials, elected politicians, judicial officers, real estate developers and law enforcement officials, acquire, develop and sell land in illegal ways. Such officials and politicians are very well protected by the immense power and influence they possess. Apart from this, slum-dwellers who are allotted houses under several housing schemes such as Pradhan Mantri Gramin Awaas Yojana, Rajiv Awas Yojna, Pradhan Mantri Awas Yojna etc., rent out these houses to others, to earn money due to severe unemployment and lack of a steady source of income.
Tendering processes and awarding contracts
A 2006 report claimed state-funded construction activities in Uttar Pradesh, such as road building were dominated by construction mafias, consisting of cabals of corrupt public works officials, materials suppliers, politicians and construction contractors.
Problems caused by corruption in government funded projects are not limited to the state of Uttar Pradesh. According to The World Bank, aid programmes are beset by corruption, bad administration and under-payments. As an example, the report cites that only 40% of grain handed out for the poor reaches its intended target. The World Bank study finds that the public distribution programmes and social spending contracts have proven to be a waste due to corruption.
For example, the government implemented the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) on 25 August 2005. The Central government outlay for this welfare scheme is ₹400 crore (US$61 million) in FY 2010–2011. After 5 years of implementation, in 2011, the programme was widely criticised as no more effective than other poverty reduction programmes in India. Despite its best intentions, MGNREGA faces the challenges of corrupt officials reportedly pocketing money on behalf of fake rural employees, poor quality of the programme infrastructure, and unintended destructive effect[clarification needed] on poverty.
Hospitals and health care
In Government Hospitals, corruption is associated with non-availability/duplication of medicines, obtaining admission, consultations with doctors and receiving diagnostic services.
National Rural Health Mission is another health care-related government programme that has been subject to large scale corruption allegations. This social spending and entitlement programme hoped to improve health care delivery across rural India. Managed since 2005 by the Ministry of Health, the Indian government mandated a spending of ₹2.77 lakh crore (US$42 billion) in 2004–2005, and increased it annually to be about 1% of India's gross domestic product. The National Rural Health Mission programme has been clouded by a large-scale corruption scandal in which high-level government appointed officials were arrested, several of whom died under mysterious circumstances including one in prison. Corruption, waste and fraud-related losses from this government programme has been alleged to be ₹1 lakh crore (US$15 billion).
Science and technology
CSIR, the Council of Scientific and Industrial Research, has been flagged in ongoing efforts to root out corruption in India. Established with the directive to do translational research and create real technologies, CSIR has been accused of transforming into a ritualistic, overly-bureaucratic organisation that does little more than churn out papers.
There are many issues facing Indian scientists, with some, such as MIT systems scientist VA Shiva Ayyadurai, calling for transparency, a meritocratic system, and an overhaul of the bureaucratic agencies that oversee science and technology. Sumit Bhaduri stated, "The challenges of turning Indian science into part of an innovation process are many. Many competent Indian scientists aspire to be ineffectual administrators (due to administrative power and political patronage), rather than do the kind of science that makes a difference". Prime minister Manmohan Singh spoke at the 99th Indian Science Congress and commented on the state of the sciences in India, after an advisory council informed him there were problems with "the overall environment for innovation and creative work" and a "war-like" approach was needed.
Income tax department
There have been several cases of collusion involving officials of the Income Tax Department of India for preferential tax treatment and relaxed prosecutions in exchange for bribes.
Preferential award of mineral resources
See also: Illegal mining in India
In August 2011, an iron ore mining scandal became a media focus in India. In September 2011, elected member of Karnataka's legislative assembly Janardhana Reddy, was arrested on charges of corruption and illegal mining of iron ore in his home state. It was alleged that his company received preferential allotment of resources, organised and exported billions of dollars' worth of iron ore to Chinese companies in recent years without paying any royalty to the state government exchequer of Karnataka or the central government of India, and that these Chinese companies made payment to shell companies registered in Caribbean and north Atlantic tax havens controlled by Reddy.
It was also alleged that corrupt government officials cooperated with Reddy, starting from government officials in charge of regulating mining to government officials in charge of regulating port facilities and shipping. These officials received monthly bribes in exchange for enabling the illegal export of illegally mined iron ore to China. Such scandals have led to a demand in India for consensually driven action plan to eradicate the piracy of India's mineral resources by an illegal, politically corrupt government officials-business nexus, removal of incentives for illegal mining, and the creation of incentives for legal mining and domestic use of iron ore and steel manufacturing.
A study conducted between 2004 and 2005 found that India's driver licensing procedure was a hugely distorted bureaucratic process and allows drivers to be licensed despite their low driving ability through promoting the usage of agents. Individuals with the willingness to pay make a significant payment above the official fee and most of these extra payments are made to agents, who act as an intermediary between bureaucrats and applicants.
The average licensee paid Rs 1,080, approximately 2.5 times the official fee of Rs 450, in order to obtain a license. On average, those who hired agents had a lower driving ability, with agents helping unqualified drivers obtain licenses and bypass the legally required driving examination. Among the surveyed individuals, approximately 60% of the license holders did not even take the licensing exam and 54% of those license holders failed an independent driving test.
Agents are the channels of corruption in this bureaucratic driver licensing system, facilitating access to licenses among those who are unqualified to drive. Some of the failures of this licensing system are caused by corrupt bureaucrats who collaborate with agents by creating additional barriers within the system against those who did not hire agents.
Professor Bibek Debroy and Laveesh Bhandari claim in their book Corruption in India: The DNA and RNA that public officials in India may be cornering as much as ₹921 billion (US$14 billion), or 1.26 per cent of the GDP through corruption. The book claims most bribery is in government delivered services and the transport and real estate industries.
Bribery and corruption are pervasive, but some areas tend to more issues than others. A 2013 EY (Ernst & Young) Study reports the industries perceived to be the most vulnerable to corruption as: Infrastructure & Real Estate, Metals & Mining, Aerospace & Defense, and Power & Utilities. There are a range of specific factors that make a sector more susceptible to bribery and corruption risks than others. High use of middlemen, large value contracts, and liasioning activities etc. drive the depth, volume and frequency of corrupt practices in vulnerable sectors.
A 2011 KPMG study reports India's real estate, telecommunications and government-run social development projects as the three top sectors plagued by corruption. The study found India's defence, the information technology industry and energy sectors to be the most competitive and least corruption prone sectors.
CMS India claims in its 2010 India Corruption Study report that socio-economically weaker sections of Indian society are the most adversely affected by government corruption. These include the rural and urban poor, although the study claims that nationwide perception of corruption has decreased between 2005 and 2010. Over the 5-year period, a significantly greater number of people surveyed from the middle and poorest classes in all parts of India claimed government corruption had dropped over time, and that they had fewer direct experiences with bribery demands. Whereas in reality corruption has increased ten folds since 2010 and continues to grow relentlessly on a daily basis.
The table below compares the perceived anti-corruption effort across some of the major states in India. A rising index implies higher anti-corruption effort and falling corruption. According to this table, the states of Bihar and Gujarat have experienced significant improvements in their anti-corruption efforts, while conditions have worsened in the states of Assam and West Bengal. Consistent with the results in this table, in 2012 a BBC News report claimed the state of Bihar has transformed in recent years to become the least corrupt state in India.
Main article: Indian black money
Black money refers to money that is not fully or legitimately the property of the 'owner'. A government white paper on black money in India suggests two possible sources of black money in India; the first includes activities not permitted by the law, such as crime, drug trade, terrorism and corruption, all of which are illegal in India and secondly, wealth that may have been generated through lawful activity but accumulated by failure to declare income and pay taxes. Some of this black money ends up in illicit financial flows across international borders, such as deposits in tax haven countries.
A November 2010 report from the Washington-based Global Financial Integrity estimates that over a 60-year period, India lost US$213 billion in illicit financial flows beginning in 1948; adjusted for inflation, this is estimated to be $462 billion in 2010, or about $8 billion per year ($7 per capita per year). The report also estimated the size of India's underground economy at approximately US$640 billion at the end of 2008 or roughly 50% of the nation's GDP.
Indian black money in Switzerland
India was ranked 38th by money held by its citizens in Swiss banks in 2004 but then improved its ranking by slipping to 61st position in 2015 and further improved its position by slipping to 75th position in 2016. According to a 2010 The Hindu article, unofficial estimates indicate that Indians had over US$1,456 billion in black money stored in Swiss banks (approximately US$1.4 trillion). While some news reports claimed that data provided by the Swiss Banking Association Report (2006) showed India has more black money than the rest of the world combined, a more recent report quoted the SBA's Head of International Communications as saying that no such official Swiss Banking Association statistics exist.
Another report said that Indian-owned Swiss bank account assets are worth 13 times the country's national debt. These allegations have been denied by Swiss Bankers Association. James Nason of Swiss Bankers Association in an interview about alleged black money from India, holds that "The (black money) figures were rapidly picked up in the Indian media and in Indian opposition circles, and circulated as gospel truth. However, this story was a complete fabrication. The Swiss Bankers Association never published such a report. Anyone claiming to have such figures (for India) should be forced to identify their source and explain the methodology used to produce them."
In a separate study, Dev Kar of Global Financial Integrity concludes, "Media reports circulating in India that Indian nationals held around US$1.4 trillion in illicit external assets are widely off the mark compared to the estimates found by his study." Kar claims the amounts are significantly smaller, only about 1.5% of India's GDP on average per annum basis, between 1948 and 2008. This includes corruption, bribery and kickbacks, criminal activities, trade mispricing and efforts to shelter wealth by Indians from India's tax authorities.
According to a third report, published in May 2012, Swiss National Bank estimates that the total amount of deposits in all Swiss banks, at the end of 2010, by citizens of India were CHF 1.95 billion (₹92.95 billion (US$1.4 billion)). The Swiss Ministry of External Affairs has confirmed these figures upon request for information by the Indian Ministry of External Affairs. This amount is about 700-fold less than the alleged $1.4 trillion in some media reports. The report also provided a comparison of the deposits held by Indians and by citizens of other nations in Swiss banks. Total deposits held by citizens of India constitute only 0.13 per cent of the total bank deposits of citizens of all countries. Further, the share of Indians in the total bank deposits of citizens of all countries in Swiss banks has reduced from 0.29 per cent in 2006 to 0.13 per cent in 2010.
Domestic black money
Indian companies are reportedly misusing public trusts for money laundering. India has no centralised repository—like the registrar of companies for corporates—of information on public trusts.
2016 Evasion attempts after note ban
In Gujarat, Delhi and many other major cities, sales of gold increased on 9 November, with an increased 20% to 30% premium surging the price as much as ₹45,000 (US$690) from the ruling price of ₹31,900 (US$490) per 10 grams (0.35 oz).
Authorities of Sri Jalakanteswarar temple at Vellore discovered cash worth ₹4.4 million (US$67,000) from the temple Hundi.
- Multiple bank transactions
There have also been reports of people circumventing the restrictions imposed on exchange transactions and attempting to convert black money into white by making multiple transactions at different bank branches. People were also getting rid of large amounts of banned currency by sending people in groups to exchange their money at banks. In response, the government announced that it would start marking customers with indelible ink. This was in addition to other measures proposed to ensure that the exchange transactions are carried out only once by each person. On 17 November, the government reduced the exchange amount to ₹2,000 (US$31) to discourage attempts to convert black money into legitimate money.
As soon as the demonetisation was announced, it was observed by the Indian Railways authorities that a large number of people started booking tickets particularly in classes 1A and 2A for the longest distance possible, to get rid of unaccounted for cash. A senior official said, "On November 13, 42.7 million passengers were nationally booked across all classes. Of these, only 1,209 were 1A and 16,999 for 2A. It is a sharp dip from the number of passengers booked on November 9, when 27,237 passengers had booked tickets in 1A and 69,950 in 2A."
The Railways Ministry and the Railway Board responded swiftly and decided that cancellation and refund of tickets of value ₹10,000 and above will not be allowed by any means involving cash. The payment can only be through cheque/electronic payment. Tickets above ₹10,000 can be refunded by filing ticket deposit receipt only on surrendering the original ticket. A copy of the PAN card must be submitted for any cash transaction above ₹50,000. The railway claimed that since the Railway Board on 10 November imposed a number of restrictions to book and cancel tickets, the number of people booking 1A and 2A tickets came down.
- Municipal and local tax payments
As the use of the demonetised notes had been allowed by the government for the payment of municipal and local body taxes, leading to people using the demonetised ₹500 and ₹1,000 notes to pay large amounts of outstanding and advance taxes. As a result, revenue collections of the local civic bodies jumped. The Greater Hyderabad Municipal Corporation reported collecting about ₹1.6 billion (US$25 million) in cash payments of outstanding and advance taxes within 4 days.
Income Tax officials raided multiple branches of Axis Bank and found bank officials involved in acts of money laundering.
Business and corruption
Public servants have very wide discretionary powers offering the opportunity to extort undue payments from companies and ordinary citizens. The awarding of public contracts is notoriously corrupt, especially at the state level. Scandals involving high-level politicians have highlighted the payment of kickbacks in the healthcare, IT and military sectors. The deterioration of the overall efficiency of the government, protection of property rights, ethics and corruption as well as undue influence on government and judicial decisions has resulted in a more difficult business environment.
According to Transparency International[unreliable source?], Judicial corruption in India is attributable to factors such as "delays in the disposal of cases, shortage of judges and complex procedures, all of which are exacerbated by a preponderance of new laws". Over the years there have been numerous allegations against judges, and in 2011 Soumitra Sen, a former judge at the Kolkata High Court became the first judge in India to be impeached by the Rajya Sabha, (Upper House of the Indian Parliament) for misappropriation of funds.
Right to Information Act
Main article: Right to Information Act
The 2005 Right to Information Act required government officials to provide information requested by citizens or face punitive action, as well as the computerisation of services and the establishment of vigilance commissions. This considerably reduced corruption and opened up avenues to redress grievances.
Right to public services legislation
Main article: Right to Public Services legislation
Right to Public Services legislation, which has been enacted in 19 states of India, guarantee time bound delivery of services for various public services rendered by the government to citizen and provides mechanisms for punishing the errant public servant who is deficient in providing the service stipulated under the statute. Right to Service legislation is meant to reduce corruption among the government officials and to increase transparency and public accountability.
Anti-corruption laws in India
Public servants in India can be imprisoned for several years and penalised for corruption under the:
Punishment for bribery in India can range from six months to seven years.
India is also a signatory to the United Nations Convention against Corruption since 2005 (ratified 2011). The Convention covers a wide range of acts of corruption and also proposes certain preventive policies.
The Lokpal and Lokayuktas Act, 2013 which came into force from 16 January 2014, seeks to provide for the establishment of the institution of Lokpal to inquire into allegations of corruption against certain public functionaries in India.
Whistle Blowers Protection Act, 2011, which provides a mechanism to investigate alleged corruption and misuse of power by public servants and also protect anyone who exposes alleged wrongdoing in government bodies, projects and offices, has received the assent of the President of India on 9 May 2014, and (as of 2 August) is pending for notification by the Central Government.
At present there are no legal provisions to check graft in the private sector in India. Government has proposed amendments in existing acts and certain new bills for checking corruption in private sector. Big-ticket corruption is mainly witnessed in the operations of large commercial or corporate entities. In order to prevent bribery on supply side, it is proposed that key managerial personnel of companies' and also the company shall be held liable for offering bribes to gain undue benefits.
The Prevention of Money Laundering Act, 2002 provides that the properties of corrupt public servants shall be confiscated. However, the Government is considering incorporating provisions for confiscation or forfeiture of the property of corrupt public servants into the Prevention of Corruption Act, 1988 to make it more self-contained and comprehensive.
A committee headed by the Chairman of Central Board of Direct Taxes (CBDT), has been constituted to examine ways to strengthen laws to curb generation of black money in India, its illegal transfer abroad, and its recovery. "The Committee shall examine the existing legal and administrative framework to deal with the menace of generation of black money through illegal means including inter-alia the following: 1. Declaring wealth generated illegally as national asset; 2. Enacting/amending laws to confiscate and recover such assets; and 3. Providing for exemplary punishment against its perpetrators." (Source: 2013 EY report on Bribery & Corruption)
The Companies Act, 2013, contains certain provisions to regulate frauds by corporations including increased penalties for frauds, giving more powers to the Serious Fraud Investigation Office, mandatory responsibility of auditors to reveal frauds, and increased responsibilities of independent directors. The Companies Act, 2013 also provides for mandatory vigil mechanisms which allow directors and employees to report concerns and whistleblower protection mechanism for every listed company and any other companies which accepts deposits from public or has taken loans more than 50 crore rupees from banks and financial institutions. This intended to avoid accounting scandals such as the Satyam scandal which have plagued India. It replaces The Companies Act, 1956 which was proven outmoded in terms of handling 21st century problems.
In 2015, Parliament passed the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Bill, 2015 to curb and impose penalties on black money hoarded abroad. The Act has received the assent of the President of India on 26 May 2015. It came into effect from 1 July 2015.
Anti-corruption police and courts
The Directorate General of Income Tax Investigation, Central Vigilance Commission and Central Bureau of Investigation all deal with anti-corruption initiatives. Certain states such as Andhra Pradesh (Anti-Corruption Bureau, Andhra Pradesh) and Karnataka (Lokayukta) also have their own anti-corruption agencies and courts.
Andhra Pradesh's Anti Corruption Bureau (ACB) has launched a large scale investigation in the "cash-for-bail" scam. CBI court judge Talluri Pattabhirama Rao was arrested on 19 June 2012 for taking a bribe to grant bail to former Karnataka Minister Gali Janardhan Reddy, who was allegedly amassing assets disproportionate to his known sources of income. Investigation revealed that India Cements (one of India's largest cement companies) had been investing in Reddy's businesses in return for government contracts. A case has also been opened against seven other individuals under the Indian Penal Code and the Prevention of Corruption Act.
Civic anti-corruption organisations
A variety of organisations have been created in India to actively fight against corrupt government and business practices. Notable organisations include:
- [Bharat Swabhiman Trust], established by Ramdev, has campaigned against black money and corruption for a decade.[when?]
- 5th Pillar is most known for the creation of the zero rupee note, a valueless note designed to be given to corrupt officials when they request bribes.
- India Against Corruption was a popular movement active during 2011–12 that received much media attention. Among its prominent public faces were Arvind Kejriwal, Kiran Bedi and Anna Hazare. Kejriwal went on to form the Aam Aadmi Party and Hazare established Jan Tantra Morcha.
- Jaago Re! One Billion Votes was an organisation founded by Tata Tea and Janaagraha to increase youth voter registration. They have since expanded their work to include other social issues, including corruption.
- Association for Social Transparency, Rights and Action (ASTRA) is an NGO focused on grass-roots work to fight corruption in Karnataka.
- The Lok Satta Movement, has transformed itself from a civil organisation to a full-fledged political party, the Lok Satta Party. The party has fielded candidates in Andhra Pradesh, Tamil Nadu, and Bangalore. In 2009, it obtained its first elected post, when Jayaprakash Narayan won the election for the Kukatpally Assembly Constituency in Andhra Pradesh.
See also: Electoral reform in India
A number of ideas have been in discussion to improve the efficiency and effectiveness of electoral processes in India.
Factors contributing to corruption in India
In a 2004 report on Corruption in India, one of the world's largest audit and compliance firms KPMG notes several issues that encourage corruption in India. The report suggests high taxes and excessive regulation bureaucracy as a major cause; India has high marginal tax rates and numerous regulatory bodies with the power to stop any citizen or business from going about their daily affairs.
This power of Indian authorities to search and question individuals creates opportunities for corrupt public officials to extract bribes—each individual or business decides if the effort required for due process and the cost of delay is worth paying the bribe demanded. In cases of high taxes, paying off the corrupt official is cheaper than the tax. This, according to the report, is one major cause of corruption in India and 150 other countries across the world. In the real estate industry, the high capital gains tax in India encourages large-scale corruption. The KPMG report claims that the correlation between high real estate taxes and corruption is high in India as it is other countries including the developed economies; this correlation has been true in modern times as well as throughout centuries of human history in various cultures.
The desire to pay lower taxes than those demanded by the state explains the demand side of corruption. The net result is that the corrupt officials collect bribes, the government fails to collect taxes for its own budget, and corruption grows. The report suggests regulatory reforms, process simplification and lower taxes as means to increase tax receipts and reduce causes of corruption.
In addition to tax rates and regulatory burdens, the KPMG report claims corruption results from opaque process and paperwork on the part of the government. Lack of transparency allows room for manoeuvre for both demanders and suppliers of corruption. Whenever objective standards and transparent processes are missing, and subjective opinion driven regulators and opaque/hidden processes are present, conditions are ripe for corruption.
Vito Tanzi in an International Monetary Fund study suggests that in India, like other countries in the world, corruption is caused by excessive regulations and authorisation requirements, complicated taxes and licensing systems, mandated spending programmes, lack of competitive free markets, monopoly of certain goods and service providers by government controlled institutions, bureaucracy, lack of penalties for corruption of public officials, and lack of transparent laws and processes. A Harvard University study finds these to be some of the causes of corruption and underground economy in India.
Impact of corruption
Loss of credibility
In a study on Bribery and Corruption in India conducted in 2013 by global professional services firm Ernst & Young (EY), a majority of the survey respondents from PE firms said that a company operating in a sector which is perceived as highly corrupt may lose ground when it comes to fair valuation of its business, as investors bargain hard and factor in the cost of corruption at the time of transaction.
According to a report by KPMG, "high-level corruption and scams are now threatening to derail the country's its credibility and [its] economic boom".
Corruption may lead to further bureaucratic delay and inefficiency if corrupted bureaucrats introduce red tape in order to extort more bribes. Such inadequacies in institutional efficiency could affect growth indirectly by lowering the private marginal product of capital and investment rate. Levine and Renelt showed that investment rate is a robust determinant of economic growth.
Bureaucratic inefficiency also affects growth directly through misallocation of investments in the economy. Additionally, corruption results in lower economic growth for a given level of income.
Lower corruption, higher growth rates
If corruption levels in India were reduced to levels in developed economies such as Singapore or the United Kingdom, India's GDP growth rate could increase at a higher rate annually. C. K. Prahalad estimates the lost opportunity caused by corruption in terms of investment, growth and jobs for India is over US$50 billion a year.
By Dr Martin Patrick*
The demonetisation of currency after a long period of 38 years was a welcome and bold step taken by the Government of India on November 8, 2016. The last demonetisation was implemented in 1978 by withdrawing Rs 1000, Rs 5000, and Rs 10,000 notes that were in circulation. Every reform will have its merits and demerits. The question is whether the merits outweigh the demerits. A careful analysis is required to answer the question.
Black Money and Counterfeit Currency
The Modi Government has taken the bold step of demonetisation of Rs 500 and Rs 1000 notes in circulation with the intention of curbing terrorism, black money and counterfeit currency. Over the last seven decades, each has reinforced the other. The Prime Minister himself claimed this in his forty- minute speech to the nation. In his own words, “… on the one hand is the problem of terrorism, on the other is the challenges posed by corruption and black money.” The big bet in demonetising is to break the unholy nexus of corruption, black money and terrorism.
It is expected that the problem of counterfeit currency can be addressed at least for a short period, until anti-nationals develop the technology to print the newly issued currency. This is not a simple advantage. Once counterfeit currency is curbed, the intensity and spread of terrorism can be addressed. Quoting Modi’s words, “… the five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become worthless pieces of paper.” We do not have clear statistics regarding fake currencies. A study in 2015 showed that at any given point of time, Rs 400 crore worth of fake notes are in circulation (The Indian Statistical Institute, Kolkata, 2015). It also said that Rs 70 crore worth of fake notes are pumped into the economy every year. The National Crime Records Bureau (NCRB) revealed that various enforcement agencies seized 1,78,022 pieces of Rs 1000 and 2,99,524 pieces of Rs 500 notes in 2015. To that extent, it will address the problem of terror financing and fake currency. Naturally, this will be a blessing for the common man and the middle class. The same advantage cannot be reaped in the case of black money.
Demonetisation will not act as a successful strategy for curtailing black money, as the major chunk of black money is invested with financial institutions outside the country. But it is a useful tool to make black money, reserved by anti-nationals in the form of currency, non-legal tender and valueless. It is true that those who have bought land and housing property, gold and jewellery, art treasures etc using black money cannot be penalised through the demonetisation process. It must be remembered that no country has enacted a reform that would help cure all problems. However, a detailed investigation is needed to evaluate the effectiveness of demonetisation on controlling black money.
A Note on Black Money
Two central issues with black money are, ‘Who has it?’ and ‘How much do they have?’ What are the major sources of black money? There is no clear data on the quantum of black money in Indian economy. Estimates vary from 10 to 40 per cent of GDP, i.e. anywhere between $100 billion to over $400 billion. According to the Government of India (2012), the extent of black money is somewhere between $500 billion and $1400 billion. Certain estimates show the following statistics:
- Rs 45 lakh crore (FICCI, July 2012)
- Rs 7,24,000 crore or $1.4 trillion (Professor R Vaidyanath)
- Rs 24.5 lakh crore or $500 billion, as on February 12, 2012 (A P Singh, CBI Director)
- Rs 9,295 crore stashed in Swiss banks by Indians (White Paper, GoI)
- An average of Rs 1,36,466 crore or $27.3 billion stashed annually during 2002–06; which means about Rs 6,92,328 crore or $136.5 billion hoarded in the five-year period (Global Financial Integrity Report, 2006)
Black money is accumulated through different sources. The three main sources of black money are corruption, hawala and crime. Among these, corruption is the chief villain.
Key Episodes of Corruption
In 2011, Corruption Perception Index ranked India 94 among 176 countries with a score of 36. India’s rank has now improved to 76. It is not at a satisfactory achievement, as it is evident that cross-border flow of money derived from criminal or corrupt activities is around $1.5 trillion annually. Nearly $40 billion of this is accounted for bribes paid to public officials in developing countries. There was widespread corruption at the top, middle and bottom levels of governance in India during the import substitution regime. Economic reforms could be a source of huge one-time rents to politicians in power, for example, privatisation of public monopolies. This reduces their ability to use the public sector for political patronage in the future. The sources of corruption can be traced to scarcity, property rights and their enforcement, transaction costs and information asymmetries, and political position (Patibandla and Sanyal, 2009).
Corruption through scarcity is generally seen in terms of a mismatch between demand and supply. In the case of goods, the market structure of an industry (monopoly versus competition), price regulation, quantity limits, zoning and differential tax treatment in different states result in scarcity, which creates opportunities for rent (corruption). In the case of service sector, a supplier or a government body may refuse to provide a service, unless a bribe is paid. In the post-reform era, some sources of scarcity-related corruption have been magnified, owing to weak property rights and high transaction costs of enforcement. As a result, corruption has been part of the society, including the pre-reform period. The following evidences, though do not form an exhaustive list, substantiate the argument.
- Nehruvian Period (17 years): The Jeep Scandal (1948), The Mundra Scandal (1958) and The Dharma Teja Loans. The values were Rs 80 lakh, Rs 1.2 crore and Rs 22 crore, respectively. The indexed value for all three was Rs 869.57 crore in 2011.
- Indira Gandhi’s Tenure (16 years): The Nagarwala Scandal (1971), The Kuo Oil Scandal (1976) and The Cement Scam. The values were Rs 60 lakh, Rs 2.2 crore and Rs 30 crore, respectively. The indexed value for all three was Rs 244.7 crore in 2011.
- Rajiv Gandhi’s Term (Five years): The Bofors Scandal (1987). The actual value was Rs 64 crore and the indexed value was Rs 313.72 crore in 2011.
- Narasimha Rao’s Regime (Five years): The Lakubhai Pathak Pickle’s Scam (1994), The Sugar Import Scam (1994), The Sukhuram Telecom Scandal (1996), The Fertiliser Scam (1996) and The C R Bhansali Scam (1998). The total indexed value was Rs 4381.56 crore in 2011.
- A B Vajpayee’s Regime (Six years): The Kargil Coffin Scandal (1995) and The Barak Missile Scandal. The total indexed value was Rs 68 crore in 2011.
- Manmohan Singh’s Regime (Over nine years): The Scorpene Submarine Deal (2006, Rs 500 crore), The Adarsh Housing Society Scam, The Common Wealth Scandal (Rs 8000 crore), The Telecom Scam–2G (Rs 1,76,000 crore) and The Loan Waiving Scheme for Farmers (latest in the scene). The total indexed value of corruption so far is Rs 1,98,546 crore.
Mining scam in Karnataka, land grabbing in Tamil Nadu, Madhya Pradesh and Chandigarh are a few other scandals that are not cited here, due to space constraints. The ultimate effect is the accumulation of black money. All these amounts are invested safely outside the country and hence demonetisation is a helpless tool in combating black money.
Hawala and Crime
Hawala works by transferring money without actually moving it. It is estimated that an amount ranging from $100 billion to $300 billion flows through informal remittance systems globally every year. ‘White hawala’ is used to refer to legitimate transactions. ‘Black hawala’ refers to illegitimate transactions, specifically hawala money laundering (associated with some serious offence such as narcotics trafficking and fraud). In the case of India, Interpol estimates the size of hawala at possibly 40 per cent of the country’s GDP. In India, hawala is only a civil offence and persons violating its provisions are penalised with fine up to three times the amount detected in a contravention. This is a grossly inadequate deterrence to terrorists indulging in hawala for their sustenance and operation. There is fake currency circulated through the hawala system. Hence, demonetisation would help check the flow of hawala money.
Criminal offence includes drug trafficking, gunrunning, money laundering and extortion, murder for hire, fraud, human trafficking, poaching and prostitution. Many criminal operations engage in black markets, political violence, religiously motivated violence, terrorism and abduction. Other crimes are homicide, robbery, assault etc. Property crimes include burglary, theft, motor vehicle theft and arson. Demonetisation will be effective to the extent these activities are carried out with Indian high-denominated currencies. A sizeable volume of business is done by way of high-denominated currencies, though no scientific data is available in this respect.
Illicit black money not only finances terrorism but also fuels inflation. There is a possibility that inflation will be contained through demonetisation, especially land and housing prices. Counterfeit currency and black money are largely used in the real estate sector (particularly in unorganised sector and for secondary sales), where prices continuously remained high, due to the presence of black money. It is a known fact that a sizeable portion of the transaction value of land and building is done through black money, which is in currency form. Though some have converted a part of this amount into real assets, demonetisation is a useful tool to address the amount that is kept in currency form. This will reduce the prices of land and houses and thereby act as a blessing to the poor and middle-income groups. Likewise, there are a number of intermediaries in the fishing sector, agricultural sector and service sector with unaccounted money in currency form. Arresting this phenomenon will be beneficial to the society. However, there should be proper institutional reforms to address these issues. Otherwise, demonetisation is not going to produce any wonderful results for the country’s economy. Sometimes, a deflationary situation cannot also be neglected which will hamper the economy.
Earlier, the high tax rate was considered a source of black money in India. Now, India has moved to a low tax regime. Yet, tax reforms are not adequate and the issue of black money is not settled. It means that low tax regime will not address the problem of black money. In this context, demonetisation is a relief to a certain extent. What is necessary is to rein in corruption and for that, institutional measures should be taken. The government has already taken some steps in the direction. For the effectiveness of demonetisation, some drastic steps are required. An urgent remedy is to withdraw all high-denominated currencies from the economy. The decision to print Rs 2000 notes is not a wise step, as it would aggravate the problem of black money and related issues. Small denominations up to Rs 100 (or maximum Rs 500) should be allowed, which should be accompanied by a mechanism to propagate the wider use of debit/credit cards in place of currency.
In conclusion, whoever expects that the demonetisation process will be a great success is mistaken. The inherent limitation of demonetisation has to be kept in mind, while evaluating it. To make the final point, the effects of demonetisation can be split into three periods, such as very short, short and long periods. In the very short period (three to seven days or less than one month), there will be some adverse effects, especially for the poor and middle-income groups. Hence, it will be in a pain economy. In the short period (less than a year), it will produce positive outcomes, barring a few limitations. This period will naturally be in a pleasure economy. In the long period, counterfeit currency and black money (which is not the result of demonetisation but bad governance)may make a comeback, unless proper institutional measures are taken. This coupled with the spread effect of the positives in the short period will usher in a ‘neutral economy’. No doubt, demonetisation will not produce bad outcomes in the long run, except a few hardships faced by low-income aam aadmi for three to five days. The possibility of some positive outcomes like bringing all the black money out of hiding and throttling terror funding in due course cannot be neglected.
*Dr Martin Patrick is Chief Economist at Centre for Public Policy Research. Views expressed by the author is personal and does not reflect that of CPPR.
Gupta, S (1992): Black Economy in India, New Delhi, Sage
NIPFP (1985): Aspects of Black Economy in India, New Delhi: National Institute of Public Finance and Policy
Patibandla, M and Sanyal, A (2009) Corruption: Market Reforms and Technology in Rajesh Kumar and Mutr Patibandla, Institutional Dynamics and Evolution of the Indian Economy, Palgrave
Demonetisation, in simple terms, is the withdrawal of a particular form of currency from circulation. It is the act of stripping a currency unit of its status as legal tender. Demonetisation is necessary, whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit.
The High Denomination Bank Notes (Demonetisation) Act, 1978
Corruption is generally defined as the ‘misuse of public office’ to extract an illegal rent. It is a major political and economic issue in India.
Money transfer without money movement is an easy definition of hawala.