Crony Capitalism and Mega Scams
AS Marx pointed out long ago, “The executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie”. In other words, business-state or business-politics nexus is an essential ingredient of capitalist polity. This has been the case in our country too ever since the Indian state was born.
However, since in a parliamentary system the government also has to take some care of the voters, a continuous tug of war ensues between the popular masses and the exploiting rich, with each side trying to influence and bend state policy in its own favour and the outcome is determined, within the broad limits of the system, by the balance of forces between the two sides. In the Indian context, in proportion as the capitalist class became more powerful economically, it came to exert ever stronger political influence on successive governments. This became glaringly visible since 1980s and the more so since 1990s, when the role of the state was changed from regulator of the economy to facilitator of investment.
So what is now popularly called “business-politics nexus” is the product of a long process of evolution, which has now reached a stage that needs a new name to adequately describe itself. That term is crony capitalism or simply cronyism, where “crony” refers to old friends or favoured ones to whom undue privileges/concessions/lucrative posts are offered irrespective of their merits
Similarly, we all know that economic scandals or scams – corruption in more general terms – are nothing new. What is new is the incomparably larger scale of corruption today, which is a gift of neoliberalism. This will be evident if we compare pre-1991 economic scandals with recent ones. Take for example the Bofors scandal. It involved a ‘mere’ 64 crore rupees. Even after adjusting for inflation, the figure would now come to, say, 300 crore rupees. The 2G spectrum scam involved Rs. one lakh seventy-six thousand crore! That is, nearly 600 times the Bofors amount!
Also take a look at the amount of money being illegally siphoned off our country to Switzerland and other tax havens. According to a report prepared by the US-based research body Global Financial Integrity, in the 60 years between 1948 and 2008, more than Rs 20 lakh crore has exited the country in this way. Nearly half of this drainage occurred in the 1992-2008 period, i.e., in 16 years, while about a third occurred in just 8 years of the 21st century.
These mind-boggling figures show that the eclipse of the “license-quota-permit raj” – yesteryears’ convenient whipping boy for rampant corruption – did not lead to any decline in the menace. On the contrary, all-pervasive liberalisation, privatisation and globalisation have thrown the floodgates of corruption wider open. The 2G scam, it should be noted, surfaced recently but had its origin long ago – during the booming 2000s. The same is true for most other scandals that came to light after the deceleration in growth rate started. This shows that the period of the biggest leap in growth rate was also the one marked by the biggest explosion in corrupt practices.
So what is new is that the age-old collaboration between politics and business has now developed into a coalescence of the two in the crucible of power. The Vadra-DLF deals and the operations of Gadkari’s Purti group of companies give us an idea of the intricate ways in which political influence is converted into corporate wealth with impunity and the latter is further used to buy necessary ‘connections’. But it is not the “political class” alone that is to blame. A whole host of companies and conglomerates, both old and new, have revelled in ill-earned profits in all kinds of scams involving, for example, modernisation of airports, allotment of coal blocks or even purchase of trucks and coffins for the armed forces. In some cases, such as the Tatra truck contract, foreign MNCs are involved, while in some others like the sale of 2G spectrum, companies which took part in the bidding without the required expertise or capacity, offloaded majority stakes to foreign players at huge profits. Moreover, a good many big players routinely take capital out of the country by illegal means like transfer pricing, mis-invoicing and hawala.
Testimony of a Morgan Stanley Chief
Cronyism and scams are to be condemned not just on moral and political grounds. No less serious are the economic consequences. This is excellently brought out in the essay “The Great Indian Hope Trick” by Ruchir Sharma.
“Under the current regime of drift in India, crony capitalism has become a real worry. Widespread corruption is an old problem, but the situation has now reached a stage where the decisive factor in any business deal is the right government connection. When I made this observation in a September 2010 Newsweek International cover story titled ‘India’s Fatal Flaw’, I was greeted as a party spoiler. Top government officials told me that such cronyism is just a normal step in development, citing the example of the robber barons of nineteenth-century America. (See how Sharma refutes this argument at the end of these excerpts – A Sen)...
“Since 2010, the issue has exploded in a series of high-profile scandals... India’s place on Transparency International’s annual survey of the most and least corrupt nations fell to number 88 out of 178 nations in 2010 – down from number 74 in 2007. India is approaching the point that Latin America and parts of East Asia hit in the 1990s, when a backlash started to form against economic reforms because any opening up of the economy was seen to favour just a select few. The first stirrings of the middle class discontent appeared in 2011 as many urban Indians started to rally behind social activist Anna Hazare.”
Is there a link between the crony-scam double menace and excessive concentration of wealth? Yes there is, says Sharma, and draws attention to certain special features and trends of Indian capitalism, notably its disproportionately top-heavy nature and stagnation at the summit, which militate against growth:
“... [T]he country has no wealth inheritance taxes. But wealth at the top is exploding, perhaps faster than in any other country. In 2000 there were no Indian tycoons among the world’s top-one-hundred billionaires, and now there are seven, more than in all but three countries: the United States, Russia and Germany. In this category India outranks China (with one) and Japan (with zero).
“A rule of the road: watch the changes in the list of top billionaires, learn how they made their billions, and note how many billions they made. This information provides a quick bellwether for the balance of growth, across income classes and industries. If a country is generating too many billionaires relative to the size of its economy, it’s off balance.... If a country’s average billionaire has amassed tens of billions, not merely billions, the lack of balance could lead to stagnation. (Russia, India and Mexico are the only emerging markets where the average net worth of the top-10 billionaires is more than $10 billion.)...
“If a country’s billionaires make their money largely from government patronage, rather than productive new industries, it could feed resentment (which is what sparked revolt in Indonesia in the late 1990s). Healthy emerging markets should produce billionaires, but the number must also be in proportion to the size of the nation’s economy; the billionaires should face competition and turnover at the top; and ideally they should emerge predominantly from productive economic sectors, not cosy relationships with politicians.”
It would be interesting at this point to see how the biggest billionaires actually emerge in our country and what level of monopoly power they can reach. As an example, let us cast a glance at Mukesh Ambani, who with net worth of $21.5 billion has retained his title as India’s richest person for the sixth year in a row.
The Ways of a Super Crony
It is an open secret that the shifting of Jaipal Reddy from the Ministry of Petroleum and Natural Gas towards the end of 2012 was effected to help Reliance Industries raise the price at which they can sell gas from the Krishna-Godavari (KG) basin. Reliance had earlier demanded a steep rise in the price of gas from the previously agreed (the contract was valid up to 31st March 2014) $4.2 per million British Thermal Units (mm BTU) to more than $14 mm BTU – i.e., by more than 300 per cent. In a note prepared for the Empowered Group of Ministers (EGoM), Reddy had pointed out that acceptance of RIL’s demand would mean an additional profit of Rs 43,000 crore ($8.5 billion) to the company in 2 years even at current levels of low production and impose an additional financial burden of Rs 53,000 crore ($ 10.5 billion) on central and state government. This would in turn mean either higher electricity and fertilizer prices in the country, or a higher subsidy burden on the government. On these very valid grounds he turned down the request. The company retaliated by reducing production by half, falsely claiming that this was on account of technical hitches. It had also refused to allow a full audit of its operations and put pressure on Reddy alleging that “policy logjams” had been holding up investments in their facilities. The Congress High Command surrendered to the blackmail. Reddy was shifted to the portfolio of Science and Technology and a docile Veerappa Moily brought in. Thanks to the bribe power of RIL, the principal opposition party and the corporate media remained almost silent about the whole episode till “India Against Corruption” substantially exposed the case.
The change immediately proved effective. When in mid-2013 the Comptroller and Auditor-General (CAG) complained to the concerned Ministry about RIL’s failure to cooperate in the audit of the KG-D6 gas block, Moily gave RIL a clean cheat. About a month later, in September, the CAG again lodged a complaint with the government that the company was withholding information on important issues and once again it was of no avail.
All this is nothing new. Back in 2006, Mani Shankar Iyer was replaced by Murli Deora, who was quick to sanction the enhancement of RIL’s capital expenditure estimate from $ 2.39 billion to $ 8.8 billion (which meant a big tax advantage) and of gas price from $2.34 per mm BTU to $ 4.2 per mm BTU. It seems as if, right from Ram Naik in Vajpayee regime
There have been many other irregularities too, all condoned by successive governments. For example, RIL signed a contract with National Thermal Power Corporation (NTPC) in 2004 to supply gas for its power plants at $ 2.34 per mm BTU for 17 years and a similar contract with Reliance Natural Resources Limited (RNRL). However, RIL went back on its word. Under RIL’s pressure, an EGoM headed by Pranab Mukherjee revised gas price in September 2007 to $ 4.2 per mm BTU. NTPC and RNRL were forced to accept gas from RIL at the enhanced price, allowing the latter a huge extra profit.
In July 2011 the company sold 30% stake in 21 of 29 oil blocks to British Petroleum at $ 7.2 billion with government approval, much like the sale of coal blocks and spectrum for 2G telecommunications by some of the original allottees at huge illegitimate profits.
In a word, RIL is allowed to behave as if it owns the resources, ignoring the fact it is but a contractor hired by Government to extract gas, which is owned by the people of India. Moreover, the performance of the company in terms of capacity utilisation, cost of production etc. has been much worse than public undertakings in petrochemicals. Thanks to such shameless state patronage, in FY 2011 it earned more than Rs.20,000 crore in profit, while its revenues exceeded Rs.2.5 lakh crore.
And more was yet to come. Using the fig-leaf of the so called “expert” Rangarajan Committee
The RIL empire is not limited to petrochemicals, oil, natural gas and its original breeding ground of polyester fibre. It now covers special economic zones, fresh food retail, high schools, life science research, stem cell storage services and what not. It boasts 95% stakes in Infotel, a TV consortium that controls 27 TV news and entertainment channels including CNN-IBN, IBN Live, CNBC, IBN Lokmat and ETV in almost every regional language and owns the only nationwide licence for 4G broadband. The emperor controls the “Mumbai Indians” IPL team and his residence “Antilla” has 27 floors, three helipads, nine lifts, hanging gardens, ball rooms, weather rooms, several swimming pools, gymnasiums, six floors for parking and there are 600 employees to serve their master.
It is not difficult to estimate what could be the combined wealth of the Ambani family had Mukesh not separated from his billionaire brother Anil. In April last year he became the first individual from the private sector to be provided with Z category security, because he is “a national asset”, as a spokesperson of the Indian Government put it.
Cronyism as a Deterrent to Growth
To come back to Ruchir Sharma,
“Crony capitalism is a cancer that undermines competition and slows economic growth. That is why the United States confronted the problem and moved to take down the robber barons by busting up their monopolies in the 1920s. Ever since the passage of the anti-trust laws, the American economy has seen constant change in its ranks of the rich and powerful, including both people and companies. The Dow index of the top-30 US industrial companies is in constant flux and, on average, replaces half its members every 15 years. India’s market used to generate heavy turnover too, but in late 2011, twenty-seven – 90 per cent – of the top 30 companies tracked by the benchmark Sensex index were holdovers from 2006. Back in 2006 the comparable figure was just 68 per cent.... This is emblematic of a creeping stagnation at the upper echelons of the elite...”
It is not that Sharma denies the high growth rate and certain strong features of the Indian economy. But he believes that the hullabaloo about the growth ‘miracle’ is nothing but an illusion – much like the rope tricks Indian street magicians used to play in colonial India, from which he derives the highly suggestive title to his essay.
Like Sharma, Raghuram Rajan (previously Chief Economist at the IMF, brought in first as Chief Economic Adviser to the PM and then promoted to the Governorship of RBI) used to be highly critical of what he saw as ‘privatisation by stealth’ (his version of what we call accumulation by dispossession/encroachment?). He argued that the predominant sources of wealth in India are land, natural resources, and government contracts and pointed out that after Russia, India has the largest number of billionaires in the world per trillion dollars of GDP. “If we let the nexus between the politicians and the businessmen get too strong”, he warned, “we could shut down competition. That could slow us down tremendously...” (Times of India, Jul 31, 2010). Rajan also warned about the possibility that the emerging oligarchies could control major businesses and consequently government policy and lead the country to a middle income trap due to corruption and cronyism – as evidenced in countries like Mexico. It is another matter that now Rajan is ensconced as the RBI Governor and we hardly hear him say anything about the pitfalls of cronyism.
Meanwhile, the power of cronies is growing apace. The Radia tapes have demonstrated how Members of Parliament, under the influence of corporate lobbyists, acted to benefit specific corporations on a host of policy issues. Rather than punishing the guilty, it is being proposed that lobbying should be legalised even as the official Lokpal Bill says that such corrupt conduct by elected representatives cannot be investigated by the Lokpal. Indeed, extrapolating what Mukesh Ambani commented in a private conversation, we can say all ruling parties have really become “apni dukan” – own shops – of the biggest corporate houses.
Deceptive White Paper on Black Money
The issue of black money is one that is raised now and then, hotly debated in every public forum, demands and promises are made for unearthing it, and then with the dust slowly settling down, other issues come to occupy the centre stage. What we are left with are updated estimates of black money, even as the parallel economy goes on flourishing more vigorously than the official economy.
Soon after independence, Cambridge economist Nicholas Kaldor had estimated the size of India’s black economy at 2-3% of its official or “white” GDP for the financial year 1955-56, and a Direct Taxes Enquiry Committee (Wanchoo Committee) had arrived at an estimate of 7% of white GDP for late 1960s. Arun Kumar in The Black Economy of India (Penguin Books, New Delhi, 1999) estimated the size of India’s black economy as approximately 40% of its white GDP for the financial year 1995-96. From Kaldor’s to Arun Kumar’s estimate, it is a 16-fold increase in the relative size of the black economy. As per Kumar’s estimates for 1995-96, around four-fifths of India’s black gross domestic income is generated through legal economic activity, and overwhelmingly this tends to be property incomes rather than incomes derived from business or other work.
The latest document on this topic is the Government of India’s White Paper on Black Money which, as expected, is only an exercise in mass deception. It does not call for abolishing the most widely used methods of money laundering, such as participatory notes (PNs) – an instrument which allows a foreign investor to invest in Indian securities but remain anonymous to Indian regulators. Nor does the document disapprove of the preferential routing of foreign investment through Mauritius, Cayman Islands and Singapore (which is frequently used by resident Indians for “round tripping”, i.e., for investing black money in their own companies and also by foreign investors to avoid payment of taxes) even after admitting that huge investments coming in from these tiny states could be black money re-entering India as “white”. And the big question – the actual amount of black money in India – was left totally unanswered.