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posted on 18 October 2017

Does Corruption Hinder Economic Growth?

from Qruis (formerly The Indian Economist)

-- this post authored by Ishita Misra

According to a research done by a State Bank of India (SBI) team, corruption and economic growth are intrinsically related. Data from around the world shows that a lower level of corruption corresponds to a higher economic growth rate in a country. The report claims that demonetisation has had a positive impact on curbing corruption. Furthermore, lower levels of corruption have led to an increase in foreign fund inflows. However, even though corruption levels have decreased, it is still a rampant problem in India that needs to be weeded out to ensure economic growth in the country.

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Corruption ranking and economic growth

Transparency International, a global coalition against corruption, ranks countries each year on how corrupt their public sectors are. The SBI research paper draws parallels between these rankings and their respective economic growths.

The data also shows that countries which experienced a growth in corruption levels saw a drop in GDP growth rates.

While comparing the rankings of different countries between 2011 and 2016, it was seen that nations such as India, U.K., Portugal, and Italy succeeded in improving their overall ranks in the Corruption Perceptions Index. The paper points to the fact that these countries managed to achieve GDP growth despite slowdown in the world economy.

The data also shows that countries which experienced a growth in corruption levels saw a drop in GDP growth rates. Accordingly, low rankings of countries like South Korea, Turkey, China, Brazil, and Singapore were accompanied by lower economic growth rates. Out of these countries, GDP growth rate in Turkey fell by 8.2 percent as corruption increased by 14 points.

Impact of demonetisation on corruption

One of the positive impacts of demonetisation in India was the considerable increase in the number of income-tax returns filed. The e-filing of income-tax returns till August 2017 has already crossed the three-crore mark, displaying a year-on-year growth of 24 percent. A total of 5.28 crore returns were e-filed in the fiscal year 2017. It is about 22 percent more than the level in the fiscal year 2016. Even the number of companies registered with the authorities has risen. 46,536 companies registered for the first time during April-August 2017, with an authorised capital of ₹9,350 crores.

One of the positive impacts of demonetisation in India was the considerable increase in the number of income-tax returns filed.

The number of new companies in mining, construction, manufacturing and trading has risen by more than 45 percent compared to the last fiscal year. Lastly, the rise in the number of cases being taken up by the Central Vigilance Commissioner post demonetisation also points to an attempt to fight corruption in the country.

Result of lesser corruption

The SBI report contained data which shows that there has been a significant improvement in foreign investor confidence towards India. Net foreign direct investment inflow to India has increased from $21.9 billion in the fiscal year 2012 to $35.9 billion in the fiscal year 2017. It amounts to a 64 percent increase in last six years. The report says that the improvement in corruption level in India has been the major factor behind the improvement in investor confidence and therefore, has translated into increased foreign fund inflows.

The need to erase corruption

Even though India’s ranking in the corruption index has significantly improved, with a rank of 79, it still has a long way to go to get rid of corruption. Corruption not only increases transactional costs, misallocation of resources and inefficient investments, but also distorts decision making and results in misplaced priorities. Therefore, corruption in public places is often considered as a heavy restraint on rapid growth and development. Hence, in order to ensure the rapid economic development of the country, the government needs to take firm steps to weed out corruption at all levels.

Appreared originally at Qrius 14 October 2017: Corruption and economic growth: An inverse correlation. Sidebars here added by GEI.

Featured Image Source: Wikimedia Commons

Qrius is a content sharing partner with GEI.

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