Economic Development

6.1 Economic Development

Some fairly robust statistical evidence has now been furnished showing
that higher corruption is associated with (i) higher (and more costly) public
investment; (ii) lower government revenues; (iii) lower expenditures on

operations and maintenance; and (iv) ensuing lower quality of public
infrastructure. The evidence also shows that corruption increases public
investment, by making it more expensive, while reducing its productivity.
A recent study by the Peruvian economist Paolo Mauro (1995 and 1998)
found that a corrupt country is likely to face aggregate investment levels of
approximately 5 percentage points less, than a relatively uncorrupt country. The
evidence from India is particularly stark. If corruption levels in India were reduced
to that in the Scandinavian countries, investments rates could increase annually
by some 12 percent and the GDP growth rate by almost 1.5 percent each year
(Gandhi 1997). Corruption also acts as an additional tax on investment by
lowering the potential return to an investor on both the initial investment and on
subsequent returns. In India, current corruption levels mean that the implicit
corruption tax on investment is almost 20 percentage points (Gandhi 1997).
The impact of corruption on the quality of public infrastructure is all too
clearly visible in the towns and cities of India. The Public Works Department and
the State Electricity Boards which are largely responsible for the maintenance of
roads and management of power distribution respectively, are among the most
corrupt government departments in India. In the capital city of Delhi itself the
transmission and distribution losses in the power sector are estimated to be over
50% out of which almost 30% is attributed to theft which is done with the
connivance of the electricity board employees. A former Chairman of the Delhi

Electricity Board (DVB) was very recently suspended and charged with amassing
assets worth over 14 crore rupees, which is almost a hundred times more than
his known sources of income. Such massive corruption is certainly one of the
main reasons for perennial power shortages and frequent breakdowns in the
capital.
Corruption also reduces the government’s resources and hence its
capacity for investment, since tax revenues are depleted by tax evasion (Jain
1998, Shahid 1991). This has two adverse effects: first, shifts away from
investments in development areas occur as bribe-takers are less likely to invest
in activities with significant positive social benefits like education and health.
Second, overall investment levels may fall, since conspicuous consumption or
flight of illegal earnings is probably higher than legal earnings. The high potential
for capital flight of illegal earnings makes corruption more likely to be associated
with a negative impact on the balance of payments (HDC 1999).
India’s Chief Vigilance Commissioner recently observed that,” India’s
economy today is a standing monument to the corruption and inefficiency of four
specific departments, namely, Customs, Central Excise, Income Tax and
Enforcement Directorate. It is the evasion of taxes and the failure of these
departments to check illegal activities that has crystallised into the large
percentage of black money in the economy. The quantum of black money has
been estimated from Rs.40,000 crores to Rs.100,000 crores. Whole industries

today depend on black money. The film industry, a substantial part of the
construction industry and a large number of small industries are run on the basis
of black money " (Vittal 1999).