In a 2011 report on Corruption in India, one of the world’s largest audit and compliance firms KPMG notes several causes 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 to search and question creates opportunities for corrupt public officials to extract bribes; each individual or business decides if the effort required in due process and the cost of delay is worth not paying the bribe demanded. In cases of high taxes, paying off the corrupt official is cheaper than the tax. This, claims the report, is one major cause of corruption in India and 150 other countries across the world. In real estate industry, the high capital gains tax in India encourages large-scale corruption. The correlation between high real estate taxes and corruption, claims the KPMG report, is high in India as well as other countries including the developed economies; this correlation has been true in modern times as well as for centuries of human history in numerous 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, state 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 burden, the KPMG report claims corruption results from opaque process and paperwork on the part of the government. Lack of transparency allows room for maneuver for both the demanders and suppliers of corruption. Whenever objective standards and transparent processes are missing, and subjective opinion driven regulators and opaque/hidden processes are present, the conditions encourage 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.
Effects of corruption
An excellent study on Bribery and Corruption in India conducted in 2013 by one the largest 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 credibility and [its] economic boom”.
Corruption may lead to further bureaucratic delay and inefficiency as corrupted bureaucrats may 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.According to the neoclassical growth model, institutional variables contribute to determining steady-state per capital income levels and speed of convergence to its steady state, hence affecting its growth rate.
Bureaucratic inefficiency also affects growth directly, such as 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.
The level of corruption varies in different parts of India. In a July 2011 report, The Economist as an example cites the state government of Gujarat, which has kept red tape to a minimum, does not ask for bribes, and does not interfere with entrepreneurial corporations. The state, the article claims, has less corruption, less onerous labour laws and effective bureaucracy. With growth rates matching some of the fastest growing economic regions of China, Gujarat continues to outpace growth in other Indian states.