Corporate Law

Fighting Corruption: The Need for Technology Based Solutions

Prof. Dr. T.S. Somashekar

The primary objective of any solution must be the elimination of information gaps and reduction in the need for contact between welfare recipients, service providers, bidders etc., and the government official.


The word ‘corruption free’ is an ideal which we aspire for but, a typical economist would say ‘inefficient’ to do so. Although it is what we would certainly want, fighting corruption entails resources and given scarcity of the same, what is opted for is an ‘efficient’ level of corruption. This sounds strange. In a simple sense it means that resources should be allocated for fighting corruption to the extent that the marginal benefit exceeds marginal costs of doing so. The marginal benefit is essentially the additional gain derived for every additional rupee spent on reducing corruption. The marginal benefit can be in terms of monetary gains such as increased GDP growth and non-monetary benefits such as reduced inequality and efficient allocation of welfare benefits. The marginal cost would be the benefits sacrificed due to forgone benefits of alternate uses of such resources i.e., opportunity costs. Governments have various contesting demands for the limited resources. Fighting poverty, defense expenditure, maintaining law and order and, public administration, to name a few, are some of the compelling needs. These various needs have to be balanced in the budgeting process. Hence, in the present context, while we aspire for our dream of a corruption free India, we must at also accept that there are limits to what the tax payer money[1] can deliver. It is therefore, essential that institutional attempts to tackle corruption must itself be executed in an ‘efficient’ or cost minimizing manner.  Fortunately, present day innovations provide for ample solutions to minimize corruption with the limited resources at our disposal.

Corruption can be simply stated as the misuse of power, by those in public offices, for personal gain. Studies have shown corruption to adversely impact the rate of growth of an economy, growth of trade, development of infrastructure, investment, cause inflation and asset prices bubbles, distort the allocation of government resources, adversely impact the tax base and also increase inequality and poverty.[2] Dreher and Herzfeld calculate that an increase by one point on their corruption index causes a 0.13 fall in GDP growth rate. Corruption can take place in various ways. A public official- elected or appointed, can deny a resource or service which is legitimately claimed, delay the same or even misallocate it i.e., allocate a contract to a bidder who bribes rather than to the best bidder. Denying services or resources can be particularly devastating for the poor – for instance when the police refuse to play their role to protect the innocent or when public hospitals refuse care, unless bribed. Delaying can force a person to pay a bribe to speed-up the process. Misallocation can lead to sub-optimal use of tax payer money and exclusion of an efficient firm.

Studies have viewed corruption as a principal agent problem. The principal (public) delegates responsibilities to the agent (public official). The inability of the principal to constantly supervise the functioning of the agent, enables the latter to behave in self-serving manner. The lack of transparency leads to information asymmetry allowing the agent to abuse the property rights over government resources vested in them.[3] The key to tackling corruption is in altering the benefits to the parties to the transaction – the briber and the bribed or the corrupt official.[4] Both parties expect a benefit (which we will assume is certain) from the transaction and at the same time face an ‘expected cost’ – the product of the probability of being convicted multiplied by the penalty. The net of this can be defined as the ‘expected benefit’ of an act of corruption. Any policy must aim to reduce this benefit and even reduce it to negative to deter such acts. This approach is based on the assumption that the actors are rational from an economic perspective. How have we fared so far? Transparency International’s latest survey places India at 81 out of 180 countries in the corruption perception index. Red tape and corruption have also contributed to a low rank of 100 out of 190 countries, in the World Bank ‘ease of doing business’ ranking for India.

The Prevention of Corruption Act, 1988 (POCA), the principal legal instrument for fighting corruption, envisages a punishment of six months to five years of imprisonment and a fine for bribe taking or abetment. For criminal misconduct the sentence is higher at one to seven years and habitual offenders attract a higher minimum of two years. POCA, so far, has not proven to be a sufficient deterrent for the simple reason that the probability of conviction is extremely low. At present the conviction rates vary across states with some reporting zero convictions and the highest not crossing 24 percentage. Let’s not forget that this statistic deals only with ‘detected acts’ of alleged corruption and not numerous other ‘undetected acts’. The low probability of conviction from cases under review combined with the low probability of detection renders the expected cost of corruption low enough to give the official, almost always, a net benefit. Hence it is perfectly rational to indulge in such crime. There are other limitations of the POCA.[5] It requires prior sanction of an appropriate authority which is not always forthcoming. Further it neglects the supply side of corruption as it exempts the bribe giver.[6] The POCA Amendment Bill (2013) seeks to rectify some of these gaps by removing the exemption for the bribe giver and increasing the penalty.[7] This, in effect, increases the expected cost of corruption. While these are positives, the requirement of prior sanction for prosecution of former officers is debatable. Further, there are limits to which we can increase punishment levels in a democratic society.

Besides amending POCA, there have been two significant measures undertaken in the recent past to stifle corruption. The first attempt was demonetisation. This was a shock and awe approach – a costly attempt to root out illegal wealth and create a sense of insecurity among the corrupt and tax evaders. Well-intentioned, but it cost the economy an estimated 1.96 million jobs and around 1.28 trillion rupees in GDP growth slowdown. Unfortunately, it barely scratched the surface of illegal wealth as almost 99 percentage of the demonetized notes were returned back.[8]  Given the large cost it is unlikely to be repeated and hence the corrupt are, very likely, back to their nefarious ways. The second development worthy of note is Aadhaar. Initially designed to deliver welfare benefits it has now emerged as a Trojan horse – with every service, private or public, being linked to it. An Aadhaar enabled ‘direct benefit transfer scheme’ (DBTS) was expected to eliminate corrupt intermediaries between recipients of welfare benefits and the government. It is estimated to have saved the government enormous amounts of money in terms of administration costs and in eliminated corruption. Although a good step forward, the social cost in terms of privacy lost may be very high. Further corruption continues to persist as even the reduced intermediaries find innovative means to line their pockets while denying the poor of basic rations. But, with modifications and time this can emerge as effective mechanism.

The primary objective of any method must be the elimination of information gaps and reduction to a minimum the need for contact between welfare recipients, service providers, bidders etc., and the government official. The present day technology provides much scope for anonymous electronic applications and surveillance of the entire process. A bidder can submit her application through an electronic portal or even a mobile app in a format that has all specifications clearly mentioned. Evaluations of the bids and final allocations can then be disclosed on a platform for the public to view. Similarly most public documents which do not need secrecy can similarly be digitized and put online. This enhances transparency and public scrutiny. All files/applications can be digitized and secured by block chain technologies. This can deal a blow to bureaucrats attempting to manipulate details or slow down files for speed-money. A vigilance official or a departmental head, with guided parameters, can then maintain a close scrutiny on the position of files and the time taken for disposal of pending work. An applicant can similarly be given a code to view the progress and complain online, if necessary. Implementation of field work can be assessed by public or users giving their feedback through apps. In other words – make it easy to provide and assess data. With digitization massive amounts of ‘big data’ can be generated. This in turn can be mined for detecting deviant behavior.

Corruption in India is a vicious cycle that is propagated by costly elections and paid bureaucrat postings. Bringing in a performance based evaluation of government employees and making relevant portions of these reports available on a public platform can provide scrutiny for posting and transfer decisions. Again technology can prevent manipulation of assessments. Such assessment mechanisms must be based on clear goals and a transparent evaluation mechanism. It should provide for fixing responsibility and rewarding performance. Decisions which have no rational basis i.e., would not have been the outcome in normal circumstances, must attract investigation of all relevant officials, elected or otherwise, by the vigilance commission. Since electronic files have digital signatures, it will be impossible to escape responsibility or merely implicate lower rung or worse, innocent officials. Technology can enhance the probability of detection of crimes of corruption to very high levels thereby reducing the present positive benefits to zero or negative levels. This will be a strong mechanism to break the vicious cycle as costly elections and postings will no longer be viable as one cannot hope to recoup their ‘investments’.  Of course one must be aware that in a country like India, digitisation could exclude those who are less familiar with the use of technology. These are not impossible issues to be solved and can be tackled on specific feedback.

One can also learn from research in ‘behavioural economics’ or even the famous ‘nudge theory’ of Thaler and Sunstein.[9] This approach calls for gently encouraging people to perform desirable acts through positive reinforcement. For instance, publicising high performing officers, informing officials of their average file disposal time and rating offices on the basis transparency levels can provide a positive impact.

To sum up – make it easy to be non-corrupt by incorporating binding solutions that make deviance a non-option.

Dr. T.S. Somashekar is a Professor of Economics and Director- Center for Competition and Regulation, National Law School of India University, Bengaluru. He was an Erasmus Mundus Fellow in the Institute for Law and Economics at the University of Hamburg, Germany and has also been an advisor to the Government of Karnataka.

[1] The author initially considered using the word ‘government’ but on second thoughts settled for ‘tax payer money’ as the government is both the enforcer and the subject of anticorruption instruments.

[2] See for instance : Mauro, P. (1995), Corruption and Growth, The Quarterly Journal of Economics, 110(3), 681-712; PH Mho, Corruption and Economic Growth, Journal of Comparative Economics 29 (1), 66-79; Dreher, Axel and Herzfeld, Thomas, (June 2005), The Economic Costs of Corruption: A Survey and New Evidence;  Bardhan, P. (1997). Corruption and Development: A Review of Issues, Journal of Economic Literature, 35(3), 1320-1346.

[3] Krueger, in an early study of corruption, points out that pervasive government controls over the economy, particularly in international trade, leads to ‘competitive rent seeking’ resulting in the economy operating below its potential.

[4] Corruption includes activities other than bribe taking such as misusing public resources for one’s own self.

[5] For a discussion of the legal instruments see A Comparative View of Anti-Corruption Laws of India , Nishit Desai Associates , June 2016.

[6] Section 24 , Prevention of Corruption Act, 1988

[7] There are several discussions on this. See for instance : ; Sebastian P.T , Five Steps to Transparency , Business Today.

[8] Of course most of the illegal wealth was never held in the form of cash and therefore not touched by demonetisation. See authors blog : T.S.Somashekar, Demonetisation – Assessing the Payoffs, December 7, 2016.

[9] Richard H. Thaler , Cass R. Sunstein, Nudge: Improving Decisions about Health, Wealth, and Happiness, Yale University Press, 2008

Image Source: WorldBank Blog