Column : Corruption perception rises as GDP slows

Written by Arvind Virmani | Updated: Jan 10 2013, 06:17am hrs
Over the last few years, there has been a lot of discussion in India about increasing corruption in the country. This discussion has been based largely on a number of high-profile cases that have hit the headlines, such as those relating to A Raja during his tenure as telecom minister and the visible failures relating to the Commonwealth Games. In this note, we use Transparency Internationals Corruption Perception Index to look beneath the media headlines to see what has happened to corruption in India during the past two decades.

The graph shows the absolute value of the corruption perception index (CPI) score given by Transparency International (TI). The index is based on a collection of surveys that ask people their perception of the degree of corruption in India and other countries. A score of 100 indicates non-corrupt. As the TI CPI started in 1995, that is the earliest year in the graph.

According to this index, there was no visible trend in corruption between 1995 and 2003, as the index fluctuated and the level of perceived corruption in 2003 was almost identical to that in 1995. The index shows a sharp improvement in corruption from 2004 to 2007 and then a deteriorating trend till 2011. These two periods coincide roughly with UPA-I and UPA-II, respectively. The level of perceived corruption was significantly better at the end of the UPA-I governments tenure than before it took over. This good performance was reversed during the UPA-II government and corruption increased steadily till 2011. However, even in 2011, the low point of UPA-II corruption was perceived to be less than at the start of the UPA-I government. In other words, the UPA surrendered only part of the gains made earlier. According to the latest CPI, which has just been released by Transparency International, the corruption situation has improved dramatically in 2012, with the score higher/better than its earlier peak in 2007. Thus, the action taken in response to exposure of corruption by the media and the Anna Hazare-led anti-corruption agitation appears to have had a positive effect in increasing awareness and bringing about moderation in the depth of corruption.

It has been hypothesised in the 1990s, including by this author, that the 1990s reforms reduced corruption in the affected departments by eliminating industrial licensing and quantitative restrictions (QRs) on imports and by simplifying and reducing customs duties, excise and income taxes. It is not, however, possible to gauge the effect of this on overall corruption, because the data is available only for the second half of the 1990s and this does not show any clear trend.

In the 2000s, in contrast to the late 19990s, we see some trends and fluctuations that are in need of an explanation. I would hypothesise that the fluctuations in the perception of corruption is linked to dramatic changes in the growth rate of the economy. Between 2003-4 and 2007-8, the economy grew at an average of 8.9% per year. This was a dramatic change from the 5.2% average of the previous six years. Further, the growth rate appeared in general perception to be on a rising trend during the five year period 2003-4 to 2007-8. Thus the economic pie was expanding fairly rapidly and there was enough for all to share in this expansion. Therefore, I hypothesise that the demanders were quite happy to receive, without a change in the bribe rate (and perhaps even with a slightly lower rate), a rising share from their usual sources. On the other side of the coin, the bribe givers, with a more rapid rise in incomes, did not feel so bad (decline in marginal effective cost) about giving bribes for the usual services. This led, after a lag of 2 years, to a decline in the perception of corruption from 2004 to 2007.

The economic situation then deteriorated sharply under the impact of the global financial crisis in 2008. The growth rate declined sharply to 6.7% in 2008-9 and remained on a declining trend from then onwards. A large majority of the public had got used to the (erroneous) idea that the Indian economy was on auto-pilot for 8.5-9% growth and the only issue was how to raise it even further. Thus, a growth slowdown that reduced income growth was a shock to the new equilibrium and increased the tussle between the bribe givers and takers, and contributed to a rise in corruption. The fact that there was no lag on the downside and the relatively gradual decline in CPI from 2008 to 2011 suggests that there may also have been an increase in corruption reminiscent of the micro licensee-permit raj era in areas such as taxation, public sector banking, environment and natural resources where such case-by-case interference is still possible.

The sharp reduction in corruption perception (rise in CP index) in 2012 is, however, in clear contradiction of the growth-related explanation, as GDP growth has slowed further to 5.5% during the current year. As indicated earlier, the improved CPI is likely due to the public outcry against corruption, led by NGOs and supported by the media. This has probably led to both greater circumspection on the bribe demander/ taker as well as greater efforts on the anti-corruption front that have increased the risk from extortive rents, resulting in a dramatic reduction in the perception of corruption.

Hopefully this will encourage the relatively sincere parties and state governments as well as the crusaders and the media to keep up the fight to improve not only corruption perceptions but governance in general.

The author is non-resident senior fellow, Brookings, former chief economic advisor, government of India and former executive director, IMF