CORRUPTION IN INDIA AND THE HIDDEN ECONOMY

This paper argues that corruption, in terms of bribes and kickbacks, i s primarily generated by firms due to regulatory conditions. To recove r the cost of bribery, firms hide their production output which then r emains unrecorded in the official statistics. Hence, by estimating the unrecorded income of the industrial sector, it is possible to examine the growth of corruption. A method for estimating sectoral unrecorded income is suggested in this paper, and from the estimated unrecorded income of the industrial sector we demonstrate that the large increase s in corruption signalled by recent reported cases are justifiable. Ou r empirical results also suggest that the disaggregated 'hidden econom y' estimates are more informative than aggregated estimates.