Corruption Impacts our Governance and Ethics

 Corruption Impacts our Governance and Ethics. 

Dinesh Kumar Kapila, CGM NABARD (Retd)

(Published in The Business Sandesh of 05/11/2026)

 

Centuries ago Chanakya (Kautilya) viewed corruption as an inherent risk of human nature when individuals are granted administrative power and financial custody. In his magnum opus, the Arthashastra, he dedicated entire chapters to state revenue, bureaucratic conduct, and the detection of embezzlement. His insights on public corruption are strikingly realistic, blending dark psychological observations with highly structured, pragmatic solutions.

 

The off the book incentives required to set up a business in our nation are known but we obfuscate the issue or are resigned to the process. Permissions required in transfers of title deeds often entail a cost of servicing the process. It could be argued that these are lower order functionaries but it could be a reasonable assumption that it filters upwards too. A start up founder had a point, if inspite of the fullest compliance, he still had to lubricate channels and build relationships he would rather not invest in, then why would he strive to comply fully as per the law. These are just a broad sample of concerns which impact effective governance. And in the construction of a more ethical society. When an individual sought to transfer an industrial plot in his name, the parents being deceased, in fact only their names had to be struck off, the off the books incentive was reasonably high. Stories such as these abound across a wide spectrum of businesses and industries. This deserves more attention and debate rather than a quite resignation as the impact is significant in terms of ethics and governance.    

 

Chanakya argued that putting a person in charge of public funds and then expecting absolute

abstinence is fundamentally contrary to basic human impulses.He took this realism a step further by highlighting how naturally and invisibly corruption occurs within government machinery.In the Arthashastra (Book 2, Chapter 8), he meticulously categorized forty distinct methods of public embezzlement..Chanakya’s Anti-Corruption Framework, rather than relying purely on moral appeals or persuasion, was designed as a multi-layered, structural system to deter, detect, and penalize administrative malpractice. He advocated for a robust network of public informants. If a citizen or fellow official successful exposed a corrupt official, they were rewarded with a significant share of the recovered property. To prevent malicious or false allegations, Chanakya decreed that if an informant failed to prove their accusation after three hearings, they would face the exact punishment the accused would have received.

 

Chanakya recognized that prolonged tenure in a single department breeds deep-seated networks of graft. An official succumbs to vices when given unchecked authority. Therefore, he mandated frequent, unannounced transfers of department heads and subordinates to prevent them from establishing friendly local alliances to cover up financial wrongdoings. He also instituted independent, multi-tiered accounting audits. His strategy balanced harsh deterrents with positive reinforcement, ifan official was convicted of hoarding wealth illegally, Chanakyainsisted on total confiscation of their assets, public exposure, and immediate demotion or exile. He also held superiors accountable if they turned a blind eye to their subordinatesmisconduct. Conversely, he argued that those who met or exceeded revenue targets through righteous management without exploiting the public must be publicly honored, granted permanent office, and given substantial salary hikes and promotions.

 

Ultimately, Chanakya believed that a State and its economic health and social stability (Yogakshema) relied entirely on the integrity of its treasury. For him, curbing corruption was not a moral luxury, but the absolute cornerstone of effective statecraft.The discourse surrounding the economics of corruption in India reflects a profound disconnect between micro-level governance friction and macro-level academic modeling. While citizens, civil society, and administrative professionals encounter corruption as a tangible tax on daily life, mainstream economic literature in India frequently treats it through structural abstractions.

 

There is a perception that mainstream Indian economists avoid analyzing administrative corruption. This phenomenon is primarily driven by academic and empirical constraints, the measurement and estimation hurdle, mainstream economics operates on robust, auditable datasets. Because corrupt exchanges are inherently concealed, they leave no formal audit trail. When economists attempt to quantify it, they run into massive under-reporting. Instead of analyzing corruption directly under its own label, Indian development economists often study its structural macroeconomic consequence: the massive informal (shadow) economy. 

 

Research demonstrates that stifling bureaucratic interference and localized rent-seeking directly drive and sustain the informal sector in India. By allowing substantial localized corruption, the economic system inadvertently creates a safety valve for unregulated employment, which economists then analyze through the lens of labor economics and market dualism rather than administrative criminality. Rather than diagnosing the moral or administrative failures of specific desk-level actors, economists shifted their focus toward designing systemic workarounds, such as market-based deregulation and Direct Benefit Transfers (DBT), effectively trying to engineer the human element out of the equation. Invariably, the system re-engineers. While certain basic services are certainly transparent and effective, however the system stays opaque on a host of services. 

 

The survival of deeply entrenched corruption in India can be stated to be driven primarily by the following reasons. Despite the formal dismantling of the post-independence "License Raj," state and local authorities still hold a vast web of regulatory permissions, penal powers, and subjective clearance criteria. When regulations are overly complex  (not always the case), paying "speed money" becomes an entirely rational economic decision for individuals and businesses attempting to mitigate the high opportunity cost of bureaucratic delays. This includes the seeking of permissions to set up a business. The institutional design for holding public servants accountable is deliberately bottlenecked. Legal frameworks and specific provisions within the Prevention of Corruption Act are barriers. While designed to protect honest officers from malicious harassment, this mechanism creates a massive insulation layer that dampens the probability of swift detection and punishment. Field-level administrative rent-seeking does not operate in isolation; it is deeply intertwined with the financing demands of competitive local, municipal, and state elections. And businesses. The regular extraction of administrative rent acts as a decentralized mechanism to fund political machinery, creating a powerful, self-sustaining loop of mutual protection between local political actors and executive bureaucrats.

 

The perception that digitisation has been a powerful tool for governance but has failed in some ways to fully eliminate administrative corruption highlights an acute design gap.Government led digitalization significantly improves overall public expenditure tracking, yet its localized anti-corruption dividends remain highly uneven. Digital platforms excel at automating the intake of data, such as uploading a land mutation request, a commercial license application, or a building plan layout. However, they rarely automate the vetting and validationstage. The application still travels to a localized digital dashboard controlled by a human official who retains a structural monopoly over the physical verification or final sign-off. 

 

Complex digital architecture often creates a technical barrier for rural or less tech-savvy populations. This drives citizens toward intermediate service kiosks, cyber-cafés, and informal digital brokers. Instead of eliminating intermediaries, digitisation can simply alter the nature of the middleman, introducing new transaction costs. A corrupt official can easily weaponize digital workflows by exercising intentional, passive delays. By raising arbitrary technical queries, claiming documentation mismatches, or simply letting an online file languish unapproved on a digital dashboard, an official can recreate the exact pain points of the old paper-file system. The citizen is left with no option but to visit the local office physically to resolve the artificial digital deadlock, returning the transaction entirely to the offline, rent-seeking arena. My interactions with simple village folk to architects seeking approvals and restaurant owners say seeking liquor licenses to real estate professionals and small vendors indicate the above. 

 

At the Revenue Department, off the book transactions create an artificial barrier to formal property transactions, severely depressing the velocity of the real estate market. It forces transactions into the unrecorded cash economy ("black money"), stripping the state of legitimate stamp duty revenue and preventing smallholders from efficiently collateralizing their land for formal credit. In As regards Taxation, this causes a direct fiscal leakage from the state's own-tax revenue. More critically, it creates severe market distortion, dishonest firms that collude to evade taxes gain an unfair pricing advantage over compliant competitors, undermining the broader rule of law and penalizing formal economic corporate behavior. 

 

Within the governance structures at higher levels, the informal levies introduces a steep quality tax on public assets. It results in structural premature capital depreciation, such as state highways washing away in a single monsoon season. The state is trapped in a loop of compounding capital inefficiencies, spending limited public funds on recurring repairs rather than creating long-term productive assets. Within the law and order and local governance systems, corruption functions as an informal, highly regressive transit and logistics tax. It artificially inflates supply chain turnaround times and adds a structural inflationary markup to essential goods and consumer commodities by the time they reach retail markets. It impacts local vendors and their incomes too. This also brings about an atmosphere of toeing the line so to say, thus normalizing the transactions. 

 

A worrisome development is the extension of corruption to certain functions of the corporate sector. In large corporations, procurement officers or division heads often receive unauthorized commissions or favors from vendors in exchange for awarding contracts, approving substandard quality, or accepting inflated billing. Often heard are off the record incentives for placement of students and ratings. The older modes such as promoters or controlling shareholders sometimes funneling corporate funds to private family entities or shadow companies controlled by associates and thus draining capital from public or institutional shareholders into private hands through unmarket-rate leases, artificial consulting fees, or over-invoiced equipment purchases still occurs. The systemic challenge of Non-Performing Assets (NPAs) in the banking sector often stems from intentional corporate defaults. Loans sanctioned for capital expenditure or infrastructure development are occasionally diverted to high-risk speculative activities or personal assets through complex layered holding accounts. To inflate stock valuations or secure debt funding, some corporate entities engage in aggressive revenue recognition, concealing liabilities, or setting up circular trade transactions across shell entities. The malaise thus now impacts us a society.  

 

There is a need to reiterate cultural foundations and to embed ethics early. The fascination, quiet acceptance and even pride in recognizing the wealth generated by corruption must be sternly  deprecated. In an inherently feudalistic society, this is a major challenge as often power and wealth aggrandizement is equatedand accepted. Embedding systemic ethics, conflict-of-interest awareness, and civic duty into formal curricula from primary to higher education, shifting the focus from passive rote learning to active ethical reasoning is one route. Fostering a public culture where administrative rent-seeking and rule-breaking are universally socially and culturally discouraged, rather than normalized as practical survival skills is another mode. In addition, enforcing strict, transparent ethical standards at senior levels is a must to signal that compliance applies universally across hierarchy.

 

Structural re-designing to minimize administrative discretion could be another mode. Discretion without objective parameters is the primary locus of corruption. Standardizing procedures, setting strict statutory processing times, and codifying clear decision criteria reduce opportunities for rent extraction. A strong system of review, of pending permissions and requirements and delays, starting from the senior most official will be a plus point. Ensure that no single official holds unmonitored control over approval, verification, and disbursement stages in public finance or regulatory sanctions.Establish independent ethics counselors within administrative bodies to provide confidential guidance on conflict-of-interest disclosures before violations occur. Ensuring civil service compensation remains competitive with equivalent skilled professions and linking career progression strictly to objective performance metrics rather than tenure linked promotions. Standardizing formal recognition for integrity alongside operational performance, paired with statutory protections for whistleblowers exposing systemic wrongdoing. Audits, digital audits, concurrent audits, pre audit risk thresholds and independent evaluation are some pathways. 

 

To neutralize rent-seeking where it harms administrative efficiency most, institutional and process architecture must be redesigned to eliminate human discretion and enforce strict accountability: Digital workflows must be structurally decoupled from indefinite human delays. Under state Right to Service Acts, if an administrative official fails to approve an application or issue a formal, legally grounded rejection within a strict, hard-coded window (e.g., 14 business days), the system must automatically generate the approval or license via a system-driven script. This completely strips the local official of the leverage of intentional delay. Technology cannot fix bad administrative design. If a business license requires five separate departmental clearances, digitizing five separate web forms achieves very little. True reform requires the absolute elimination of redundant regulatory touchpoints. In addition, deterrence by way of penalties and punishments is a must, we waffle on executing this, biased often by networks, caste and religion or regional considerations or prolonged legal processes.  

 

Reducing the number of licenses required does reduce the opportunity for rent-seeking at those stages. To eliminate the quality tax in public procurement and civic works, the vetting of infrastructure projects must be taken away from internal departmental engineers. Quality verification should be outsourced to accredited, independent academic institutions, structural engineering bodies, or randomized social audit panels whose evaluations are instantly made public on open data portals before payments are disbursed. Following the structural blueprint of the central government’s Faceless Income Tax Assessment scheme, regional administrative tasks, such as building plan reviews, transport permit validations, and land record processing, should be pooled at the state level and randomly assigned via algorithm to officials in completely different districts. If a local petitioner does not know which specific official is evaluating their file, the structural capacity to establish a localized, transactional rent-seeking relationship is entirely neutralized.

 

Ultimately, it has to be an effective mix of a change in social attitudes, embedding ethics, effective deterrents and punishments and re-engineering work processes which shall work.

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