In the last one year, corruption in India has become increasingly rampant. As the veil has been lifted off successive scandals, the political economy of corruption has raised fears of foreign investors shying away from the country at a time when they are desperately needed for its economic health.
Yet Richard Hunter, managing director for corporate ratings at Fitch, claims that what bothers foreign investors about India isn’t corruption, which he says is less than in China or Russia, but excessive regulation and tax structures. To be sure, FDI in India has been falling even as it has increased in other parts of Asia, but there is little evidence of how much of that decrease has been due to corruption.
A paper published last year by the National Bureau of Economic Research is interesting in this context. C. Simon Fan, Chen Lin and Daniel Treisman draw a distinction between two forms of corruption—bribery and embezzlement. Firms are particularly vulnerable to the former, because it raises their cost of doing business. Embezzlement, on the other hand, siphons off public funds, affecting the larger society.
India’s public projects are infamous for the amount of money they leak out. The Commonwealth Games last year and sundry ongoing government programmes are ample evidence. Compared with these, bribery manifests on a smaller scale, making it more profitable for firms to tackle bribes as an added cost of production rather than to stop functioning in the country. Contrast that with furniture maker IKEA’s decision in 2009 to freeze its investments in bribery-riddled Russia.
That said, the line between bribery and embezzlement is often blurred in India. In the absence of genuine investigations, it is difficult to extricate one from the other, further complicating policy choices.
An ancient wisecrack goes somewhat like this: The more corrupt the state, the more numerous the laws. Economic wisdom suggests that companies faced with a surfeit of regulation would seek to circumvent excess rules through other means, thus increasing the possibility of bribes. India may not be as corrupt as China and Russia, but that says little about the demand and supply of economic rents in this country.
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