Context:
Honoré de Balzac, the French novelist, once wrote, “Behind every great fortune there is a crime.” However, this statement is only partially true, as it fails to acknowledge that the accumulation of income and wealth also fosters serious offenses and crimes.
Relevance:
GS3- Inclusive Growth
Mains Question:
Higher income inequality causes more widespread corruption, while greater confidence in the judiciary curbs it. Analyse. (15 Marks, 250 Words).
Studies on Inequality:
- Based on an analysis of the Gallup World Poll (GWP) Survey for India (2019-23) and the Centre for Monitoring Indian Economy (CMIE)’s Consumer Pyramid Household Survey, we argue that income inequality fuels corruption, particularly at the intersection of government and business.
- For instance, the approval of contracts for major infrastructure projects like highways, bridges, and ports by public officials often benefits wealthy and influential private investors.
- Once individuals become rich, their desire for more wealth can override moral concerns, leading to corrupt practices. Wealth accumulation then becomes easier, facilitated by tactics like share market manipulation, political lobbying to secure contracts, and investments in offshore funds.
- In a recent study, Thomas Piketty and his colleagues highlighted the staggering rise in wealth and income inequality in India over the past few decades, particularly between 2014 and 2022.
- Today, the top 1% of the population controls more than 40% of total wealth in India, up from 12.5% in 1980.
- The top 1% of income earners now receive 22.6% of total pre-tax income, compared to 7.3% in 1980.
- As a result, India has become one of the most unequal countries in the world, yet recent studies have largely overlooked the harmful effects of this growing economic inequality.
Methodology:
- Our goal is to examine the connection between income inequality and corruption, with a specific focus on whether increased income inequality fueled corruption between the government and businesses during the 2014-22 period.
- Due to the lack of comparability between the two recent National Sample Survey (NSS) rounds on household expenditure for 2018 and 2022 with the NSS round for 2012, we rely on data from the Gallup World Poll (GWP) and the Centre for Monitoring Indian Economy (CMIE) as alternatives.
- While the GWP has a small sample size, which limits its representativeness for a country as vast and diverse as India, it offers valuable data on variables like corruption, which are difficult to measure.
- We have used the Piketty measure of income inequality, defined as the ratio of the share of total income held by the top 1% to that of the bottom 50% of the population.
- Although inequality in the distribution of consumption expenditure is typically lower than that of income distribution, we have chosen to focus on consumption expenditure due to its greater reliability.
- Corruption is generally understood as the misuse of public office for private gain, which excludes corruption within businesses (such as insider trading).
- Therefore, a broader and more comprehensive definition considers the misuse of public resources by executives in both the public and private sectors for private gain, while also acknowledging the role of politicians.
- The GWP includes a question on whether corruption is perceived to be widespread, with a “yes” response scored as 1.
- By aggregating these responses, we obtain a measure of corruption based on individual perceptions.
- Corruption can manifest in three areas: within the government, within businesses, and at the intersection of government and businesses.
- Our focus is on the relationship between inequality and corruption at this intersection—for instance, whether government contracts for building ports are influenced by bribes from wealthy investors.
- Corruption has increased following globalization, as natural resources have become more valuable, and regulatory agencies responsible for allocating these resources have grown more compliant with powerful business interests and corrupt public officials.
- Moreover, the ‘Make in India‘ initiative has not yet achieved significant success, as macroeconomic indicators such as manufacturing, FDI, exports, and employment have not shown improvement.
- Even worse, as highlighted in a 2023 Carnegie India essay, increases in import tariffs and tax cuts have been distortionary.
Findings:
- This situation suggests a higher likelihood of rent-seeking by wealthy and influential investors. Rent-seeking refers to the use of resources to obtain unwarranted financial gain from external entities, such as government or public agencies, without providing anything of value in return to them or society.
- Economic rents lead to resource dissipation, which can be more damaging than the waste associated with the rent itself.
- Groups competing for these rents invest time and money in wealth transfer rather than wealth creation.
- Given that corruption at the intersection of government and business remained high between 2014 and 2022, it is likely that rent-seeking also persisted at elevated levels.
- Without delving into the specifics of the allegations by Hindenburg regarding the involvement of the SEBI chair and her husband with the Adani Group’s offshore fund, and the subsequent slowing of the SEBI probe, this may be indicative of a larger and growing problem.
- Our analysis shows that income inequality has been largely driven by speculative investments, such as mutual funds, while savings in fixed deposits and post offices have helped curb it.
- Trust in the judiciary is influenced by the conviction rate, but it increases at a diminishing rate.
- We find that higher income inequality leads to widespread corruption, whereas greater confidence in the judiciary helps reduce it.
Conclusion:
While the recent Budget missed the opportunity to impose higher taxes on the wealthy, achieving greater transparency and accountability in regulatory agencies remains elusive. A more competitive political system and private business sector pose significant challenges, but their potential to create a more prosperous India is undeniable.
