Friday, December 21, 2012

Corruption In India: Has it Increased?

Has Corruption Increased In India?

Over the last few years there has been a lot of discussion about increasing corruption in India.  This discussion has been based largely on a number of high profile cases that have hit the headlines, such as those relating to Telecom Minister A Raja’s allocation of 2G spectrum in 2008 and the visible failures relating to the building of Infrastructure for the Commonwealth Games 2010 and the subsequent Anna Hazare led movement for a radical new Lok Pal Bill.  In this note we use Transparency International’s Corruption perception Index (TI CPI) and the Corruption Control sub-index of the World Bank’s Governance index (WB CCI) to look beneath the media headlines to examine what has happened to corruption in India during the past two decades.

Corruption Trends

The corruption perception index of Transparency International scores countries on a scale from 0 to 100 (least corrupt) and is available for every year from 1995 to 2012.  This measures public perception of corruption in each country based on a number of surveys.  The World Bank Governance Indicators project constructs aggregate indicators of six broad areas of governance, one of which is “control of corruption.”  This gives scores from -2.5 to +2.5 (best), from 1995 onwards, but is only available for India for 1996, 1998, 2000 and from 2002 to 2011.   As India is a large country with over two dozen States, one has to be cautious in attributing changes in the latter index to the actions of the Central Government or of specific State Governments.
According to the CPI  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.  As the CCI is only available for a few selected years, it is difficult  to draw definitive conclusions about the trend in government efforts to control corruption during 1995 to 2002. The CCI data for 1996, 1998, 2000 and 2002 suggests that corruption control efforts reached a peak around 1998 and deteriorated thereafter and reached a trough around 2001 or 2002. Therefore, the corruption control effort made prior to 1998 resulted in corresponding changes in corruption perception.   Supporters of the 1990s reforms, such as the author, had argued prior to these reforms that they would reduce corruption in the departments and areas in which these reforms were undertaken namely (foreign trade and customs, central excise, income taxation and central licensing of industry).  As these were Central Government reforms there was no logical reason to expect any changes in State and local corruption related to State laws, rules and procedures. By 1999 it was also clear that reforms would need to be extended from economic policy to governance institutions and from Central to State level.[i]  The fact that both the overall national Corruption Control score deteriorated so rapidly after 1998 confirms the need for fundamental institutional reform (police, legal and judicial, political- election funding, LokPal) to underpin a sustained decline in corruption.
According to the WB CCI government efforts to control corruption improved substantially from 2002 to 2006, to the extent that India’s score was restored in 2006 to almost the same level as the previous peak in 1998. From 2007 to 2011 the CCI deteriorated equally sharply, and had fallen below its 2002 level by 2011.  This was mirrored, with a short lag, in the improved perception of corruption, with the CPI improving from 2004 to 2007, peaking in 2007 and then deteriorating till 2011.  The deterioration in perceptions of corruption, however, seems to be less than in the CCI, with the CPI in 2011 still higher than in 2005.
                 The two sub-periods of rise and fall coincide roughly with UPA I and UPA II respectively .  The degree  of corruption control and of  perceived corruption was significantly better at the end of the UPA I  government’s tenure than before it took  over.   This good performance was reversed during the UPAII government : Corruption control deteriorated and perceived corruption  increased steadily till last year (2011).  But for the entire period of the UPA, taken as a whole we have a contradiction between the WB CCI and the TI CPI.  The former shows that governance quality measured in terms of corruption control was much worse in 2011 than at the time the UPA government came into power, while the latter shows that even in 2011 the low point of the CPI,  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 anti–corruption agitation appears to have had a positive effect in increasing awareness and bringing about moderation in the depth of corruption.


                The improvement and subsequent deterioration in corruption control (CCI) and corruption perception suggest that the causation is from degree of corruption control to corruption to perception of corruption.  On the contrary we find that the correlation between the two indices is close to zero.  One possible explanation for this is that the corruption control index (CCI) is capturing action taken at the State level, while corruption perceptions index has more to do with the National Television media and its focus on issues of mis-governance and corruption.  Thus it could be argued that exposure various scams at the Central level since 2007 has played an important role in perceptions of corruption, but ccould have had the paradoxical effect of emboldening the corrupt at the State level to weaken governance with respect to corruption control.
   Our analysis shows that the correlation co-efficient between growth in GDP (at factor cost) and the TI CPI is 0.35 and increases to 0.5 if growth is lagged one year.
This suggests an alternative hypothesis, that fluctuations in perception of corruption are linked to changes in the growth rate of the economy. Between 2003-4 and 2007-8 the economy grew at an average of 8.9 per cent per year.  This was a dramatic change from the 5.2 per cent 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 hypothesize that the demanders of bribe were quite happy to receive, without a change in the bribe rate (and perhaps even with a slightly lower rate), the 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 lead, after a lag of 2 years, to a decline in perception of corruption from 2004 to 2007.
The economic situation then deteriorated sharply under the impact of the global financial crises 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 to 9% growth and the only issue was how to raise it even further.  Thus a growth slowdown that reduced the 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.

Anti-Corruption Drive

The sharp reduction in corruption perception (rise in CP index) in 2012 is however in clear contradiction of the growth related explanation, as GDP (FC) growth has slowed further to 5.5 per cent during the current year.  As indicated earlier, the improvement 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 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.

Corruption in India Relative to the World

NRIs and US citizens of Indian Origin often complain about their experiences in India and the degree of corruption in it.  Some explicitly claim that it is probably the most corrupt place in the World.  It is therefore useful to compare India’s ranking according to the corruption perception  index and how this has changed over time.   A common way of comparing countries is to look at their rank according to the index.  Thus India’s rank according to the CPI was 72 in 1999 and exactly the same in 2007, while it deteriorated dramatically to 95 in 2011.  This is, however, highly misleading, because the number of countries for which the index has been constructed changed over time. The total number of countries covered was 99 in 1999, 180 in 2007 and 183  in 2011, and there was considerable fluctuation from year to year, rather than a progressive increase.  As each new country can have an index lower or higher than the earlier one for India, the relative position can shift up or down.
The simplest way to adjust for this problem is to determine the percentile in which India falls in each year.  The percentile represents the proportion of all countries that have a CPI rank worse than that of India. 
India’s relative position with respect to corruption perception (TI CPI) improved fairly steadily from the 15th percentile in 1995-1997 to the 60th percentile in 2007.  Thereafter it progressively declined to the 45th percentile in 2012.  India was therefore back where it was in 2005.   In terms of the hypothesis presented earlier, it seems that the increase in Indian growth, optimism and animal spirits unleashed by the 1990s reforms improved India’s corruption ranking relative to the rest of the world in the second half of the 1990s and first half of the 2000s.  The Global financial crises of 2008 coupled with domestic developments since 2008, slowed economic growth and worsened perceived corruption relative to the rest of the World.  There is clearly a need to identify to identify and rectify these errors.
India’s Global ranking in terms of the world Bank corruption control index follows the same pattern as that of Transparency Internationals Corruption perception index, between 2002 and 2011 i.e. rising and falling, but the ranking is much worse in 2011 compared to its rank in any earlier year ( for which the rank is available).  The pattern of this index for India is a little puzzling and requires further investigation.


The time series data for Transparency International’s Corruption perception index shows that, perceived corruption declined from 2003 to 2007 and then increased till 2011.  Perceived corruption was however, less in 2011 than in 2003.  Further it declined sharply in 2012, to a level not seen earlier.  India’s global ranking mirrored this pattern till 2011, though the 2012 improvement is not reflected in an improvement in global ranking.

A shorter version of this post appeared in the Financial Express of Friday 11, January 2013,

[i] Arvind Virmani, From Poverty To Middle Income: Reforms for Accelerating Growth in The 21st Century, Chintan, April 1999.

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