Is india really shining?

Corruption is a major systemic problem in India. Studies by the World Bank (World Development Report 2005) have found that corruption was the number one constraint for firms in South Asia and that the two most corrupt public institutions identified by the respondents in India (as well as in most countries in South Asia) were the police and the judiciary. Based on Transparency International’s Corruption Perception Index, India has a score of 3.5 out of 10 in 2009 (a higher score means less corruption), and, tied with China to rank 76 out of 177 countries (with the range being 1.4 to 9.4).

Next, we consider two measures for the quality of accounting systems. The
disclosure requirements index (from 0 to 1, higher score means more disclosure; LLS
2006) measures the extent to which listed firms have to disclose their ownership
structure, business operations and corporate governance mechanisms to legal authorities and the public. India’s score of 0.92 is higher than the averages of all LLSV subgroups of countries, including the English origin countries, suggesting that Indian firms must disclose a large amount of information. However, this does not imply the quality of disclosure is also good. In terms of the degree of earnings management (higher score means more earnings management; Leuz, Nanda, and Wysocki 2003), India’s score is much higher than the average of English origin countries, and is only lower than the German origin countries, suggesting that investors have a difficult time in evaluating Indian companies based on publicly available reports. It seems that while Indian companies produce copious amounts of data, form triumphs over substance in disclosure and with an accounting system that allows considerable flexibility, there is enough room for companies to hide or disguise the truth.


The efficiency and effectiveness of the legal system is of primary importance for
12 contract enforcement, and we have two measures. First, according to the legal formalism (DLLS 2003) index, India has a higher formalism index than the average of English origin countries, and is only lower than that of the French origin countries. The legality index, a composite measure of the effectiveness of a country’s legal institutions, is based on the weighted average of five categories of the quality of legal institutions and government in the country (see Berkowitz, Pistor, and Richard 2003). Consistent with other measures, India’s score is lower than the averages of all the subgroups of LLSV countries, suggesting that India’s legal institutions are less effective than those of many countries, and that it will be more difficult for India to adopt and enforce new legal rules and regulations than other countries.

Finally, as for the business environment in India, a recent World Bank survey
found that, among the top ten obstacles to Indian businesses, the three which the firms surveyed considered to be a “major” or “very severe” obstacle and exceeding the world average are corruption (the most important problem), availability of electricity, and labor regulations. Threat of nationalization or direct government intervention in business is no longer a major issue in India. With rampant tax evasion, the shadow economy in India is significant. It is estimated to be about 23% of GDP.6 Creditor and investor rights were largely unprotected in practice, with banks having little bargaining power against willful defaulters. Large corporate houses often got away with default, or got poor projects financed through the state-owned banking sector, often by using connections with influential politicians and bureaucrats.