The bottom line

The Modi government’s war on corruption will create a freer and more prosperous India. And it’s the poorest who stand to benefit the most. In March, Modi said his government would be a “corruption-free government”. He also said that he would like to see India enter the top 50 of the World Bank’s Ease of Doing Business Index. India’s current ranking is 142, out of 189.

India also sits a mediocre 85th on Transparency International’s Corruption Perceptions Index. A recent survey carried out by the Indo-German Chamber of Commerce found that 45 per cent of German executives said that corruption was the biggest obstacle to doing business in India.

But since November, authorities have arrested 19 people for buying and selling stolen documents from ministries relating to foreign investment proposals and energy infrastructure projects.

Helping the poor

Whilst anti-corruption measures are good for big business in India, they are also good news for the almost 300 million people who live in extreme poverty. Firstly, this is because big business provides large amounts of employment for the poor, which improves living standards rapidly. Further, reducing corruption is a boon for the hundreds of millions of small entrepreneurs in India, many of whom are extremely poor.

Bribes can be a huge extra cost for any business. Moreover, the prospect of the appropriation of business profits by corrupt officials and departments is a massive disincentive for small entrepreneurs to take the risks necessary to expand their businesses.

According to the Ease of Doing Business Index, it takes a small- to medium-sized enterprise 30 days to register a business in India and costs 16.3 per cent of annual per capita income. For individual entrepreneurs operating micro-enterprises the obstacles to business registration undoubtedly constitute an insurmountable barrier in the majority of cases. Indeed, according to a Credit Suisse report from 2013, 75 per cent of businesses in India are in the unlisted and informal category.

If businesses aren’t legally registered they are unable to utilise their assets to acquire finance from banks. It means entrepreneurs aren’t able to buy and sell business assets as effectively. And it means that small entrepreneurs aren’t able to enforce contracts through the judicial system.

The judicial system itself is another major hindrance to doing business in India. The UN estimates that there are 30-40 million pending cases in India. All of this makes it difficult for poor Indian entrepreneurs to lift themselves, their families and their communities out of poverty.

Often all it takes to tackle corruption is to shine a light on it. For example, in Uganda, a report from researchers Ritva Reinnika and Jakob Svensson found that corruption was occurring in the country’s education department. The ensuing media storm was sufficient for a dramatic reduction in corruption to take place.

Furthermore, research from the Peruvian organisation, the Institute of Liberty and Democracy, estimates that the world’s poor own $10 trillion worth of assets and enterprises that are currently unregistered. Indeed, Credit Suisse estimates that 50 per cent of India’s $1.85 trillion economy is informal.

The economic potential of accommodating all this value in the formal economy is huge. Poor people are not the problem, but the solution to poverty as Peruvian economist Hernando de Soto says. Ending corruption and streamlining business regulation will make life better for all, especially for those living in deprivation.

The writer is Research Fellow, Institute of Public Affairs, Melbourne

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