The Hindu Business Line : Corruption dynamics in India’s growth story

Why has the Indian economy not outpaced its Chinese counterpart in the business growth curve? This question was posed by economists of the World Bank. Notwithstanding the early start of the Chinese economy, there are four inherent facets that have deterred business growth among small and medium enterprises in India: corruption, power shortages, poor access to finance and rigid labour markets.

These deterrents have not only curbed the pace of growth in the country, but have generated uneven spatial spread with certain regions experiencing accelerated development, while others continue to be smothered in depravity.

However, the report by World Bank economists, Maddalena Honorati and Taye Mengistae found that while most States with high levels of per capita income in 1994 have been able to record sterling growth performances, a few with low levels of per capita income have also been able to clamber aboard the high-growth bandwagon. The most significant exception has been Punjab.

Four categories

The level of development was calculated based on the per capita income of the individual State in 1994, while growth was gauged by the annual GDP increase in real terms in the ensuing decade. Based on this categorisation, the report Corruption, Business Environment and Small Business Fixed Investment in India, classified States into four categories — high-income high-growth; low income-high growth; low-income low-growth; and high-income low-growth states. While Punjab has been left out of this high growth club, Gujarat, Haryana, Kerala, Maharashtra and Tamil Nadu have found a place in the high-income high-growth list. They were also the least afflicted with deterrents to business growth.

Predictably, Andhra Pradesh, Karnataka, Rajasthan and West Bengal were on the low-income high-growth list. While these States in transition continued to portray the spatial divide in the business growth story, they were also case studies in helping to bridge the economic divide through their accelerated business growth cycles.

In the last rung

Not surprisingly, Bihar, Madhya Pradesh, Orissa, Uttar Pradesh and Jharkhand were in the low-income low-growth bracket. And their sluggish growth continue to reinforce the persistent regional imbalance in India’s growth story. These conclusions are based on two successive ‘Firm Analysis and Competitive Survey of India’ conducted by the World Bank in association with the Confederation of Indian Industry in 2002 and 2005. It was undertaken across 2,287 small and medium enterprises spread across 16 States.

‘Speed money’

Most of the respondents rated corruption and power shortages as the two principal factors which stifled their growth aspirations. “When managers rate corruption as an obstacle to the growth of their business, they usually have in mind payment of bribes as speed money or for access to services or markets,” the report pointed out.

Poor access to finance was another problem hindering the growth of business. Most of the complaints about lack of access to finance referred to the inability to borrow at the going interest rates due to non-price barriers such as high collateral requirements, too much hassle and unpredictability of loan processing.

Complaints about labour regulations often meant restrictions on hiring and firing practices, including restrictions on hiring of casual temporary labour. However, this was the least cited deterrent and possibly the least pervasive among the business enterprises surveyed. But there is greater congruity for all the deterrents to exist together. For example, labour regulations and power shortages seem to beget greater corruption. The study found that labour regulations and power shortages increases with the incidence of corruption. The vice-versa could equally be true. Almost 40 per cent of the respondents reported corruption as a modest to severe obstacle to business growth in the first survey in 2002. Overall, the incidence of corruption, at least in responses has fallen in the survey of 2005.

However, high-income high-growth States reported a sharp decline in corruption, but it grew significantly in the low-income high-growth States. Across all the Sstates, corruption was cited as a major deterrent, almost as high as power shortages in reducing business growth momentum. And, twice as many business enterprises rated power shortages as a major deterrent as against those who rated labour rigidity.

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