We should celebrate the events of November 2010 for in the space of 15 days we have had four blockbuster episodes of scam busting. First, the Adarsh Co-operative Society scam claimed the scalp of the Maharashtra CM and embarrassed the Army. Then we saw meaningful progress in the Commonwealth Games (CWG) investigation with the arrest of two of Suresh Kalmadi’s aides. Hot on the heels of that we have seen a scathing indictment by the Comptroller and Auditor General (CAG) of India of not just the erstwhile Telecoms minister (for the irregular dispensation of 2G licenses) but also two of India’s largest corporates.
In addition, the Supreme Court has criticized the PM for his unwillingness to move against the erstwhile Telecoms minister. Finally, Ratan Tata, our most iconic corporate captain, has said publicly that his group could not enter the airline business in the 1990s because he did not want to satisfy the greed of the then Aviation minister.
Such a bumper month of scam busting allows us to understand the broad contours of the corporate-political nexus that defines our economy. Three clear patterns are evident:
The first well known trend in play is the misuse of taxpayers’ money. Whether it is in CWG or more generally in the infrastructure sector, the party being conned most regularly is the Indian taxpayer. Whilst the hoo-hah around the CWG investigation makes for good newspaper copy, the scale of the cash pilferage from the Exchequer’s purse is such that it is unlikely that the “infrastructure” gravy train for our politicians can be brought to a halt.
The second and less appreciated trend is the fleecing of corporate India. What Mr.Tata’s example and the 2G scandal reveals is that our elected politicians extract “rents” for opening the regulatory door for corporates. If we look at the numbers involved in the 2G auctions, the telcos which were not being able to satisfy the relevant politician(s) have literally lost out on billions of dollars of revenue. And since such episodes are in all likelihood being repeated across a range of sectors (mining, power, banking, oil & gas being just four other big ticket sectors where regulation plays a big role), we can assume that the sums moving from corporate Balance Sheets to politicans’ offshore bank accounts run into many billions of dollars.
The final trend is that Army, formerly seen as a relatively clean institution, and India’s broader national security is also being compromised by the extent of the rot in our system. A former Army officer (who was offered and turned down a flat in Adarsh) told me last week that the armed forces’ extensive landholdings are controlled by the Defence Estates. Real estate promoters, he said, are constantly trying to cut deals with the officers involved with this arm of the Army. Separately, a senior Government official told me that whenever the Government tries to prevent the entry of Chinese equipment into sensitive sectors (such as telecoms and power) on the grounds of national security, the Indian private sector finds ways around the Government’s directives and brings in low-cost Chinese kit.
So what will become of India? Will the fleecing of taxpayers’ cash leave us with permanently high budget deficits and perpetually gutted roads? Will corporates continue recovering the bribes they have paid to politicians by charging their customers high prices? Will the madness ever stop?
The madness will eventually be arrested because as our corporates get bigger and gain respectability at home and abroad, they will become more outspoken about politicians. Secondly, as our Media sector becomes more competitive, the need for the press to go public with exposes will increase thereby making it riskier for politicians to cash-in. Thirdly, as the Western economies become more strapped for tax revenues, they will exert more pressure on offshore tax havens and at some stage, under pressure from the US and the EU, these tax havens will spill the beans.
As I saw the CAG officials let rip on TV, my mind went back to a relative of mine who passed away a decade ago. In the 1980s, as the man-in-charge of CAG he investigated the mega arms scandal of that decade. For his troubles and for wishing to articulate what he found, he was forced into early retirement. He would have been a happier man had he been running CAG today.
(Saurabh Mukherjea is the Head of Equities at Ambit Capital. The views expressed here are his own and are not related to Ambit Capital.)