Will Corruption and Income Inequality Scupper India’s Economic Revival?

image2 (2)As anyone who has spent any length of time travelling in India will attest, it is a country of stark contrasts. In few ways is this more obvious than the vast disparities in wealth between 500 million of India’s total 1.27 billion citizens living on less than $1.25 per day and a small but increasingly wealthy elite who enjoy incomprehensibly ostentatious lifestyles wholly detached from the reality experienced by most of their fellow Indians.

Although India boasts the tenth largest economy in the world, predicted by the IMF to grow at a rate of around 6-6.4% annually between 2015 and 2016, income per capita languishes at $1,509, ranking it 142nd out of 184 countries – somewhere between Yemen and Côte d’Ivoire. It is, unsurprisingly, home to the largest population of impoverished people in the world, but simultaneously counts 103 dollar billionaires among its citizenry, the 6th largest concentration in the world.

image1As many Indians will therefore attest, inequality is on the rise, doubling in the past 20 years according to the OECD. The richest 10% now earn 12 times as much as the poorest 10% (an increase from 6% in 1990). The wealthiest 1% of Indians now own 8-9% of national income, in a country where 28% of children are born underweight, and 48% of children under five  are affected by moderate to severe growth stunting as a result of malnutrition. Gujarat, one of India’s richest states and home to India’s new Prime Minister Narendra Modi, suffers worse levels of malnutrition than the average in Sub-Saharan Africa. One mother dies every ten minutes giving birth, a rate worse than that of Sudan, Ethiopia or Bangladesh

Considering these statistics, it is unsurprising that the effects of rising income inequality are borne predominantly by the poor. However, the severely unequal economic system affects all strata of Indian society. Studies by leading economists and the IMF concluded that inequality not only provides a drag on growth, but renders what growth a country does achieve more volatile and prone to sudden downturns. It is for these reasons, among others, that the World Economic Forum has consistently ranked ‘severe income disparity’ in its top ten list of global risks faced in the coming decade. In the most recent WEF publication – inequality is ranked fourth between water crises and the failure of climate change mitigation and adaptation.

image2 (4)The vast and growing disparity between the haves and the have nots in India is partly the result of widespread liberal economic reforms in the 1990s which disproportionately benefited the rich. It is also a reflection of the pecuniary advantage that a minority enjoys as a result of inherited wealth – a particularly efficacious force in India due to the historical influence of the caste system. Other sources of rising inequality include poor fiscal management, the increasingly pervasive effects of globalisation, and inadequate infrastructure spending. The most fundamental and insidious catalyst of rising inequality in India, however, is the systematic and internecine effect of corruption which affects public and private transactions at all levels of the country’s economy.

Graft has long exercised a nefarious influence on Indian politics and economics. Following Indian independence in 1947, a licensing system was introduced requiring all new industrial operations to obtain a permit from the central government. The legislation was originally conceived and designed to ensure that resources were utilised as economically as possible, but in reality facilitated the comprehensive and unabated spread of corruption. Vast sums of public revenue intended for aid, infrastructure and social welfare were instead diverted into the pockets of the corrupt and well-connected.

image1 (6)This period, known colloquially as the ‘License Raj’, ended in the early 1990s as part of widespread economic liberalization. Years of strong economic growth followed. Unfortunately, the rapid expansion of the Indian economy amplified opportunities for graft, triggering an evolution in the nature of Indian corruption. Rent-seeking was conducted on a previously unimaginable scale, resulting in $462 billion of capital illicitly migrating the country after the 1991 reforms – a staggering 68% of India’s total capital loss. If current trends continue, India risks losing $200 billion in fiscal year 2017 (or 10% of GDP) due to endemic corruption.

As one would expect, India has consistently ranked poorly in Transparency International’s corruption perception index (currently 85th out of 175 countries surveyed). India’s current ranking reflects the growing significance of corruption as a fundamental electoral issue for a substantial portion of the Indian electorate. Prime Minister Narendra Modi’s landslide victory in May 2014 was, in large part, a consequence of his campaign pledge to reinvigorate the Indian economy and tackle corruption and inequality. Although it is too early to provide any definitive assessment of Modi’s tenure, the rhetoric, at least, has been encouraging.

image1 (3)Many Indians however, remain unconvinced. A recent IPSOS poll surveying a representative sample of 1,200 Indians across eight major cities, discovered that a mere 40% of respondents believed that the Modi government had successfully reduced corruption. 45% felt that things had remained the same, while 8% concluded that the situation had in fact gotten worse. Modi responded to his critics in a recent address at the Economic Times Business Summit, reiterating his commitment to reduce poverty through cohesive economic growth and the utilisation of new technology to improve governance. If the Prime Minister is successful in implementing his planned reforms the World Bank estimates that Indian growth could soon outpace that of China.

image2Crucially, Mr Modi must ensure that any accelerated growth gleaned through enhanced deregulation, increased infrastructure spending, and, most importantly, corruption alleviation, benefits all of India’s citizens and not just a privileged few. India is frustratingly close to blossoming into a twenty-first century economic powerhouse. In technical terms, the necessary reforms appear obvious and relatively simple to enact. The real difficulty, as is often the case, lies in persuading and coercing the India’s many powerful and reactionary interest groups that progress cannot and will not be obstructed for the benefit of a privileged minority. Only then will it be possible to lift hundreds of millions out of poverty through the creation of a modern functioning democratic market economy – capable of providing strong and sustainable economic growth that benefits all.

All photos courtesy of Nick Watts and Tilly Manning.

Nick Watts

About Nick Watts

Nick is a security analyst for a world-renowned risk management and crisis avoidance firm. He holds a BSc in Politics and an MSc in International Security with a focus on Asian geopolitics and human security. Follow him on Twitter: @NickWatts1988

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