Wednesday, April 27, 2011

Corruption in India- does it affect growth?

Arvind Subramaniam poses the question in today's BS. His answer is equivocal, as is to be expected (of any economist, on the subject of corruption). Contrary to what the popular press would have us believe, the evidence from economic analysis does not suggest that corruption- or bad governance- necessarily derails growth. It's not just India's example that is telling; there is China's and, before that, of numerous other countries, such as Indonesia.

Subramaniam argues that India has managed to sustain growth by intense use of skilled labour, while not making the most of unskilled labour. Since skilled labour is drying up fast, he says, land will become an important factor. Since corruption will push up land costs, it will impact adversely on growth.

I am not so sure. Land is already mired in corruption and its costs have already shot up in many parts without affecting growth. I suspect that the contention that the 'governance deficit' will undermine growth is fated to go the same way as the contention about the 'infrastructure deficit', especially the shortage of power in the nineties. Remember the figures put out as required for investment in infrastructure? Investment, especially FDI, did not come anywhere near the projection but that did not prevent the Indian economy from taking off in the last decade.

Indian business found ways around the infrastructure shortage. They will do the same with shortage of labour or land. The Economist, in another article, talks about the 'Hindu rate of self-deprecation'. It suggests that grumbling about approvals required or corruption has not stopped India from growing so far. I would venture to suggest it won't do so in the future either.


'Bade mian' said...

Your argument appears specious. Just because the Indian economy achieved growth in the last few decades(fastest in services, IT etc.) does not mean corruption does not affect growth. The correct thing would be to compare costs of lack of infrastructure - by comparing, say, costs of same item to produce and ship in India vs China. It is known that bad infrastructure adds costs to final products in India as compared to China. Maybe, without corruption, the improved infrastructure could have ensured even faster growth.
And while on infrastructure, why not compare the cost of building it? Example - the current cost per km of the Golden Quadrilateral is about Rs 10 cr per km. I am sure you brilliant economists can figure out the "corruption premium" in this number. That number will be the amount that corruption affects growth - the 'less' length of road that India gets.

T T Ram Mohan said...

Bade Mian,

There is corruption in China too. How much has it added to costs there and how much faster could they have grown?

There is a fallacy in assuming an improvement in one area, keeping all else constant. If infrastructure had been cheaper; if the financial sector had been more efficient; if food processing had resulted in less wastage... if all this had been done, would India have grown at 12%? I doubt it. How many large countries have even shown sustained growth of 10%?

The fallacy is that when one area sees change, all else will not stay constant. If corruption in infrastructure is curbed, it will move elsewhere. The people in the game need to make money anyway.


Manshu said...


Is there any research that compares the growth of a country in a period in which it had relatively high corruption against a period in which they were able to reduce corruption?

Thank you for your time.

Anonymous said...

Prof you are wrong this time. Of course growth for you is a moronic GDP number but if you think from the POV of commoner (95% of population), sure it corruption does affect growth for the rest. On the other hand the a tiny % gains if corruption is there. Corruption skews the balance of growth, without it there is much better chance of more people participating in growth.

T T Ram Mohan said...


Well, there are studies that try to evaluate the relationship between corruption (or governance) and growth over various periods. Other studies compare a cross-section of countries. It is not clear that governance determines growth.

If you consider the US, it grew very fast at a time when its laws and regulations were evolving, say, the time of the robber barons. Corruption does have a bearing on the quality of life, though, the sort of society we all want to live in.


T T Ram Mohan said...


The effects of growth itself in a country like India are skewed, so, yes, one would not be surprised if the gains of corruption were also skewed.

But this has little bearing on the discussion of growth. If you accept that growth pulls up more people, then it's hard to make out a case that corruption prevents people from participating in growth.


K.R.Srivarahan said...

You are dangerously close to justifying corruption.

T T Ram Mohan said...


No question of justifying corruption. One is merely citing the academic evidence on the subject.Just because corruption is revolting, we cannot conclude blithely that it impacts adversely on growth.


'Bade mian' said...

Hi Prof
Here is some data on change in the composition of GDP of India between 1990 and 2008 (and the % points change):

1990 2000 %age
Agri 30 23.2 -6.8%
Indl 27.6 26.4 -0.8%
Svcs 42.4 50.4 8%

Clearly, services has been the key driver here, and within that, technology and outsourcing, and financial, probably the biggest ones.
Industry, barely changed in composition - actually went down. And that is where the bulk of corruption was.

So, Indian entrepreneurs kind of 'bypassed' corrupt areas, and progressed in areas where corruption was not big.
China grew industry composition at 7% points in the same period. A huge difference with India.

Why did our industry show a much less growth, despite being robust - both compared to Services as well in comparison to China? We could have grown much more (if not similar to China).

Corruption will be there. But it will show its deleterious effects. Now its showing its effects in the services areas as well (telecom being a case in point is frozen in growth). We shall see how that effects the growth rates now.

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