A just-released study from Yale University points out that corruption and lower enforcement reduces adoption of productivity-enhancing technology among retailers in India. The Yale study was based on a survey of 1,948 Indian retailers, who are part of a $500 billion industry that is growing at 8-10 per cent per annum.
It found that firms tended to remain small to avoid transparency, a result of more technology, and thus avoid the risk of getting slapped with higher taxes and more regulation.
K. Sudhir and Debabrata Talukdar, Professors of Management at Yale University and the State University of New York, respectively, write in the report: “Technology adoption is lower when there is greater corruption, but higher when there is better enforcement and auditing.” They dub this the ‘Peter Pan Syndrome,’ a reference to the fictional character that never grows up. Here, firms prefer to stay small.
According to economic theory, firms make investments in technology to increase productivity. But in emerging markets such as India, where a “culture of informality” is widespread, businesses fear IT as it removes the “veil of secrecy” around business practices that are conducive for tax evasion.
With increased transparency, it is easier for the government to collect taxes and enforce regulatory compliance by bringing these transactions into the formal sector, potentially increasing the cost of operations for those who use IT systems relative to those who don’t.
In countries where “enforcement is patchy and corruption is rampant,” firms who keep much of their transactions in the informal sector can therefore gain a competitive advantage, the study found.
Professors Sudhir and Talukdar believe governments and policy makers could benefit from realising that “forceful enforcement and corruption reduction can not only have a direct positive impact on tax collection, but also an indirect positive impact on the tax revenue base.”
This would occur through the greater productivity induced by the use of modern efficiency enhancing technologies in the IT sphere, and by bringing more businesses into the transparent formal sector.
They note that “Indian retailers can and should break out of the self-defeating confines of the beliefs about the profitability of tax evasion,” thus avoiding the “informality trap of lower productivity.
However, curing the Peter Pan Syndrome would require the government to improve the business environment to be free from corruption, and enhance the level and consistency of enforcement.
As India opens up its markets to multinational, multi-brand retail, the need to increase productivity becomes even greater for domestic retailer survival, the study argues.
