Corruption and red tape make doing business in India difficult. This article breaks down how these issues hurt economic growth, scare away investors, and kill the startup spirit. The UPSC often asks questions that test an aspirant’s ability to connect corruption with governance, economic impact, and ethical dilemmas (e.g., “Non-performance of duty by a public servant is a form of corruption.” [GS4, 2019]). Many aspirants falter by treating corruption as an abstract moral issue rather than understanding its deep-rooted impact on governance, economy, and public trust.  This article addresses that by offering concrete examples (e.g., how frequent compliance changes increase costs and create bribery opportunities). One standout feature of this article is its focus on solutions—like a digital-first approach (One Nation, One Business identity) and global best practices (DOGE, USA)—instead of just highlighting the problems. This approach helps aspirants frame well-rounded answers that go beyond criticism and suggest practical reforms.

PYQ ANCHORING

1.  “Non-performance of duty by a public servant is a form of corruption” Do you agree with this view? Justify your answer. [GS 4; 2019]
2. It is often said that poverty leads to corruption. However, there is no dearth of instances where affluent and powerful people indulge in corruption in a big way. What are the basic causes of corruption among people? Support your answer with examples.[GS 4; 2014]

Microthemes: Challenges of Corruption,  Public/Civil Service Values

Despite India’s push for ease of doing business, corruption and red-tapism continue to choke enterprise growth. With a majority of businesses admitting to bribery under duress, the question remains—can India achieve sustainable economic progress without tackling these deep-rooted issues? Addressing the economic fallout of corruption, streamlining compliance, and embracing digital governance are critical to making India a competitive global player. But are current reforms enough to break this cycle?

The Economic Cost of Corruption

1. Higher Business Costs – Small and medium enterprises (SMEs) face repeated bribe demands for approvals, avoiding harassment, or speeding up processes, which reduces profitability.
2. Discourages Foreign Investment – An EY-FICCI survey found that 80% of investors see corruption as a major deterrent, making India a less attractive destination for investment.
3. Hinders Startups – Red tape, bribery, and unclear regulations discourage entrepreneurs, making it harder for startups to grow and innovate.
4. Fewer Jobs, Slower Growth – Money that could be used for expansion and hiring is wasted on bribes, limiting economic growth and job creation.
5. Inefficient System – Bureaucratic delays, constant rule changes, and bribery waste business resources and reduce overall productivity.
6. Hurts Global Reputation – India risks losing investment to other emerging economies that offer better transparency and ease of doing business.

ROLE OF COMPLIANCE SYSTEM IN PERPETUATING CORRUPTION

India’s compliance environment has long been a challenge for businesses, particularly due to excessive compliance requirements, constant policy changes, and outdated labour laws. These factors not only increase operational costs but also discourage investment and innovation.

1. The Ever-Changing Compliance Framework

One of the biggest hurdles for businesses is the constant flux in compliance regulations. Frequent updates create an unpredictable environment, making it difficult for businesses to plan and operate smoothly.

Key Issues:

• Unstable Compliance Environment – In 2023, India saw 9,420 compliance updates (36 per day), making business operations unpredictable and resource-intensive.
• Corruption and Bureaucratic Delays – Even legally compliant businesses face bribery demands to speed up approvals.
• Sector-Specific Disruptions – Industries like pharmaceuticals and food processing suffer due to frequent policy changes, leading to increased costs and operational difficulties.

Example – In 2021, sudden changes in the Drug Price Control Order (DPCO) impacted medicine availability and caused financial losses to pharmaceutical companies.

Proposed Solution – Regulatory bodies should adopt a structured update approach, like the Food Safety and Standards Authority of India (FSSAI), which now revises food labelling rules only once a year for predictability.

2. Outdated Labour Laws: A Missed Opportunity

India’s labour laws are notoriously complex and outdated, creating additional compliance burdens. While the government passed four labour codes in 2020, replacing 29 colonial-era laws, their implementation remains stalled.

Key Issues:

• Harsh Penalties for Minor Infractions – Many laws impose criminal liability for minor violations, discouraging business growth.
  
• Delays in Labour Code Implementation – States have yet to notify promised labour reforms, keeping businesses stuck with outdated regulations.
  
• Cumbersome Registrations & Filings – Businesses must register under multiple labour laws and submit returns in different formats, increasing administrative burden.

Example:

• Factories Act, 1948 – Still mandates outdated licensing and safety norms despite modern technological advancements.
  
• Shops and Establishments Act – Varies by state, making multi-location business expansion complex due to separate registration requirements.

Proposed Solution:

• Immediate Implementation of Labour Codes – Streamlines compliance, simplifies business operations, and promotes formal employment.
  
• Regulatory Reform – Fixing compliance update intervals, reducing criminal liability for minor violations, and simplifying labour laws can create a more business-friendly environment.

DIGITAL-FIRST APPROACH TO REDUCE CORRUPTION IN INDIA 

A digital-first approach, such as the ‘One Nation, One Business’ identity system, can significantly improve ease of doing business by reducing red tape and curbing corruption through the following measures:

Way forward: 

• Adopt a Unified Digital Governance Framework: Implement a National Business Identity System to integrate all regulatory processes (e.g., taxation, labour compliance, environmental clearances) under a single digital platform.
• Strengthen Institutional Accountability and Oversight: Establish an Independent Regulatory Oversight Body to monitor public service delivery using performance-based metrics.
• Periodic Training and Awareness Programs: Regular workshops should be conducted for employees to ensure they understand compliance obligations. Example: Cybersecurity awareness programs for IT employees to safeguard sensitive data.
• Simplification of Compliance Procedures: Governments should work towards reducing bureaucratic red tape and making compliance requirements more transparent. Example: The introduction of single-window clearance systems for businesses to obtain multiple permits efficiently.

#BACK2BASICS : COMPLIANCE SYSTEM

A compliance system consists of various elements that ensure businesses operate within legal, regulatory, and ethical frameworks. It helps organizations avoid legal penalties, maintain transparency, and build trust with stakeholders.

Key Components of a Compliance System

1. Regulatory Framework & Compliance Requirements: Businesses must adhere to laws related to taxation, labour, environmental standards, corporate governance, and industry-specific regulations.
   • Examples: Companies in India follow the Companies Act, 2013, GST regulations, and labour laws like the Factories Act, 1948.
2. Internal Policies & Standard Operating Procedures (SOPs): Organizations establish internal guidelines to ensure employees and stakeholders comply with legal requirements.
   • Example: A financial institution follows anti-money laundering (AML) policies to prevent fraud.
3. Compliance Monitoring & Reporting: Regular audits and internal reviews help identify non-compliance issues before they escalate.
   • Example: Companies listed on the stock exchange must file quarterly financial reports with SEBI.
4. Licensing & Permits Management: Businesses need approvals to operate legally, such as factory licenses, environmental clearances, and trade permits.
   • Example: The Pharmaceutical industry requires approvals from the Central Drugs Standard Control Organization (CDSCO) before launching new drugs.
5. Employee Training & Awareness Programs: Employees must be trained on legal obligations, ethical practices, and workplace compliance.
   • Example: IT firms conduct data protection and cybersecurity training to comply with the Personal Data Protection Bill.
6. Whistleblower Mechanisms & Risk Management: Companies must have mechanisms for reporting violations, ensuring accountability.
   • Example: Under the Prevention of Corruption Act, public and private organizations must implement anti-bribery policies.
7. Technology & Automation in Compliance: Many businesses use compliance management software to track deadlines, file reports, and monitor regulatory changes.
   • Example: GST e-invoicing system automates tax compliance for businesses in India.