Institutional Flaws and Corruption Incentives in India

Abstract

India has achieved a respectable rate of economic growth in an environment that is quite permissive of corrupt practices to the extent that acts of corruption, if sufficiently clever, are not scorned but praised. Despite the coexistence of corruption and unprecedented economic growth we argue that there is unrealised potential for further growth that is held back by the institutions of administration and associated corruption. With growth as substantial as it has been there is less pressure on those at the top to restrain corruption. There is still significant room for the Indian economy to accelerate its growth through steps to reduce corruption particularly as it impacts businesses and individuals in their day-to-day economic pursuits. A simple framework is sketched to describe the transactions that lead to grand, systemic and petty or retail corruption. The focus of this paper is on the institutions of administration that foster corruption at all levels and the consequences of petty corruption on the poor, particularly in urban areas. Our argument is that it is difficult for India to achieve its economic potential when a large portion of the population cannot mobilise what capital it possesses and continually finds interactions with authority met with requests for bribes and other forms of harassment. However, actual and perceived corruption in a vigorous democracy like India is also an integral part of the political process. Accusations of illegal behaviour are often a routine part of the election process and campaign finance.

Acknowledgements

The authors would like to thank a class of students at IIM, Bangalore, for generating some of the examples cited; T.N. Srinivasan for useful comments on a preliminary draft; and to Michael Gadbaw and other participants in the Economic Reforms workshop at the Centre for the Advanced Study of India, June 2004 for comments on a later draft. Remaining errors can be attributed to the authors.

Notes

1. For example, these include the Board for Industrial and Financial Reconstruction, Debt Recovery Tribunal and Corporate Debt Restructuring

2. The National Stock Exchange (NSE) began electronic trading in March 1995. This offered an alternative to the century old Bombay Stock Exchange (BSE) whose members had long thwarted fundamental reforms. The establishment of the NSE was made relatively easy because of improved technology that permitted electronic settlement, a change long overdue at the BSE. Furthermore, the NSE was not broker owned. Immediately transaction costs dropped from 5 per cent on the BSE to 0.5 per cent on the NSE, increasing volume as many securities were listed on both exchanges.