India “is looking sticky” as the system crumbles

Two major industries – coal and telecoms – have been swamped with corruption scandals that are blocking development and are primarily focussed on the prime minister Manmohan Singh’s office. Other industries such as aviation and airports, gas field contracting, and highway construction have simmering crony capitalist scandals that have yet to erupt fully. The power sector is in crisis, partly for lack of coal that is unlikely to improve, and its projects are riddled with corruption. Most leading private sector companies are involved on one or more of these scandals, and now there is a fresh possible fraud case emerging that some observers say could prove as big as Satyam, India’s fourth largest software and outsourcing company, which collapsed at the beginning on 2009. Satyam and its allied infrastructure company, Maytas (Satyam spelt in reverse), turned out to be just the tip of a vast iceberg of corporate cronyism based in Hyderabad, capital of Andhra Pradesh. Now Hyderabad’s Deccan Chronicle (DCHL) newspaper-based group is in serious financial trouble with unexplained massive borrowings and possible charges of fraud. Foreign observers are shocked and worried by the degree of corruption and how far and deep the tentacles reach, and about the impact this is having on India’s institutions and its overall performance. An old banker friend, in a superb British under-statement, emailed me yesterday that “India is looking sticky”. I replied: “Sticky indeed, but nothing much that we didn't know about, just woodwork crumbling a bit and everything crawling out!” Satyam had a dubious financial reputation for several years before the 2009 collapse, but it did not suit anyone to take much notice in bull market years. The Deccan Chronicle prompters and associates were arousing concerns eight years ago. The 2G telecom scandal that erupted in 2010 had been written about (see my blog) for more than two years. Land allocations and operating review terms in the 2006 franchise won for Delhi’s new airport by Hyderabad-founded GMR, and concern about the handling of Air India’s endless crises, were widely known at the time but largely ignored. India’s current coal scandal – dubbed “Coalgate” - centres on the government approving licences on a negotiated allotment basis, without competitive tendering. The Comptroller and Auditor General (CAG) has highlighted both the telecom and coal procedures, controversially alleging that the absence of tendering led to astronomically high losses for the government. His most recent estimate is that the government has potentially lost as much as $39bn (CAG’s Rs1.76 lakh crores at pre-2012 exchange rates) on coal in recent years. The Rs1.76 lakh crores may well be far too high, but even if the real figure is really only a fraction of that, it would be significant. Coal blocks have been issued to influential people, including politicians, many of whom (as happened on 2G telecom) sold them at huge profits without developing any coal extraction. Other bigger and established companies sat on their blocks, which they were supposed to be developing to provide coal for power and other infrastructure projects, waiting for coal prices to increase so they could sell the coal at a profit. India’s Central Bureau of Investigation last week filed preliminary criminal cases (FIRs) against five companies and various individuals for criminal conspiracy and cheating – but that is only tinkering around the edges of what is involved. Manmohan Singh is under attack, with the BJP blocking parliament to demand his resignation (which won’t happen), because the coal ministry came directly under him from 2006 to 2009. During that time, he did not take firm enough action to move to competitive tendering, despite proposals from various parts of the government that this should happen. I suspect that he saw merits in the allotment system because he saw it as a way to speed up urgently needed but slow-moving infrastructure development – a preoccupation of the prime minister’s office throughout the decade. But, as happened with telecoms, he failed to tackle the underlying corruption and crony business political links. There is no suggestion that he gained any personal financial benefit, though critics say he should have resigned rather than preside over such a system. What all these events and scandals indicate is that India is now paying the price for two decades of economic growth that has been based heavily on illegal collusion between big business, politicians and bureaucrats - especially where scarce natural resources such as land, minerals, telecom space have been involved, plus other areas with government licences such as airports and ports privatisation and development. There has of course been corruption-free growth, notably in software and information technology (apart from Satyam) and areas such as the auto industry where there is little government or public sector involvement. But even there, as the problems with the Deccan Chronicle group appear to suggest, corruption breeds on the greed and ambitions that have only had free rein for just over 20 years. There is no end to this in sight – no end to the corruption itself, even though some of those involved may be more cautious, nor to the exposure of scandals through India’s right to information legislation backed by strong media and political interest. This is not implosion, but the system is beginning to crumble - and that needs strong government leadership that is sadly lacking.