Indian economy has a relatively very large informal sector which accommodates more than
90% of the workforce and contributes around half of its GDP. In such an informal economic
environment, this paper attempts to study the preferences of households in the presence of
political/bureaucratic corruption. The related issues have been framed in an open-economy
New Keynesian Dynamic Stochastic General Equilibrium (NK DSGE) model with microfoundations
to find out in which way political/bureaucratic corruption affects the households’
preferences of consumption-leisure, consumption-saving and consumption-demand of real
balances decisions.
Corruption in India is a major issue and has adverse effects on the economy. In 2012, India
ranked 94th out of 176 countries in Transparency International’s ‘Corruption Perceptions Index’. The largest sources of corruption in India are the entitlement programs and social
spending schemes enacted by the Indian government. Indian media has from time to time
widely published allegations of corrupt Indian citizens stashing trillions of dollars in Swiss
banks. India has seen many of the big scams since 2010 involving high level government
officials, including Cabinet Ministers and Chief Ministers, such as 2G Spectrum Scam,
2010 Commonwealth Games Scam, Adarsh Housing Society Scam, Coal Mining Scam,
Mining Scandal in Karnataka, and Cash for Vote Scam. The November 2010 report of the
Washington-based Global Financial Integrity estimates that over a 60-year period, India lost
US$213 bn in illicit financial flows beginning in 1948; adjusted for inflation, this is estimated
to be $462 bn in 2010, or about $8 bn per year (i.e., $7 per capita per year). The report also
estimates the size of India’s underground economy at approximately $640 bn at the end of
2008 or roughly 50% of the nation’s GDP. According to an article published in The Hindu in
2010, unofficial estimates indicate that Indians have over $1,456 bn (approximately $1.4 tn)
of black money stored in Swiss banks. While some news reports claim that the data provided
by the Swiss Banking Association Report (2006) shows India has more black money than
the rest of the world combined, a more recent report quoted the SBA’s Head of International
Communications as saying that no such official Swiss Banking Association statistics exist.
Another report said that Indian-owned Swiss bank account assets are worth 13 times the
country’s national debt (Wikipedia, 2012).
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