The Billionaire Raj

by James Crabtree

  Rather than Mukesh, Pahuja went by “Michele,” pronounced the Italian way, so the final syllable rhymed with “hay.” He was given the nickname as a younger man by a visiting Alitalia air steward, who stayed at the nearby Taj Mahal Palace hotel and came to his store to buy cheap made-to-measure clothes. Black money had been part of the industry since before his own shop opened in 1994, he told me. Most “black” transactions involved nothing criminal, beyond the fact that the tax man was not to know. But the larger a purchase—a wedding dress, a gold watch, even a house—the more likely it would be made under the table. Buying an apartment was an extreme example, which often involved an official “check” price and then a side payment of half as much again. “In a big jeweler’s store, even a solitaire that costs two million rupees [$30,000], it is all exchanged in black,” Pahuja said. “Nothing is official.” Still, he seemed conflicted. His business paid its taxes, or so he claimed, but now even “white” customers were spooked by the cash crunch. “How can you do this?” he asked. “You are squeezing people who are honest taxpayers. But Modi, he has to do something, to stop all this corruption. Maybe this will help.”

  India’s black money problem dated back at least as far as the heights of Prime Minister Indira Gandhi’s tryst with socialism during the 1970s. For a time, wealthy Indians faced punitive top rates of tax as high as 97.75 percent, teaching the prosperous to hide their assets and entrepreneurs to disguise profits.13 “In theory, this should have ushered in a socialist paradise,” as economist Swaminathan Aiyar once put it. “In practice, it converted India into a massive black economy.”14 Any family with means learned to buy and sell off the books. “My dad had to sell his car,” a friend who worked in finance in Mumbai once recalled of his upbringing in the 1980s. “We went down the road to the local store, where we used to buy eggs, bread, and milk. Dad told the shopkeeper what he wanted to do and the shopkeeper said he’d sort it out. So next day some guy came to our house with a suitcase full of money, and we gave him the keys, and that was how we and everyone else would have sold a car.”

  This same ingenuity in evading the authorities became clear as demonetization took hold. Those stuck with hoards of illicit cash quickly found clever ways to launder it. One technique involved using middlemen, who bought up old notes at a discount and distributed them in small amounts to poor villagers in rural areas. In exchange for a fee, these villagers then deposited the money into their bank accounts, as if it was their own, before returning it to its original owner at a later date in new, clean bills. Modi’s evocative image of cash-filled suitcases hidden beneath beds turned out to be largely illusory, because anyone who earned black money typically invested their cash quickly in hard assets like gold or real estate. Vast quantities of illicit wealth were stored in so-called benami properties, meaning those registered in someone else’s name, or transferred around India through “hawala” networks of informal money traders. No one knew for sure the size of this shadow economy, beyond the fact that it was huge. A World Bank study put it at a little over a fifth of GDP in 2007, while another academic estimate suggested it could be as high as two-thirds.15

  For all the hardship it inflicted on others, Modi described his new corruption battle in self-sacrificial terms. “My dear countrymen, I have left my home, my family, everything for the nation,” he said in an emotional press conference a few weeks after his first announcement, at times seeming to struggle to hold back tears. “Didn’t you vote me into power to fight corruption? Didn’t you choose me to curb black money?”16 In his own mind, this meant taking on powerful vested interests, albeit ones he could never quite name. “I will not stop doing these things, even if you burn me alive,” he said in the same speech. “They may not let me live, they may ruin me because their loot of seventy years is in trouble.”17 Rather than the rational explanation of a technocrat, this language of purification and cleansing lent demonetization an almost ritualistic feel, and one delivered in moral terms reminiscent of the Rashtriya Swayamsevak Sangh ideologies of his youth. To those who questioned his capacity for boldness, he had delivered a sharp rebuke, and one presented as part of a painful process of national rebirth.

  Demonetization was a flawed weapon with which to battle corruption, not least because it caused such needless collateral economic damage. But it also smacked of an alarming kind of arbitrary populism, as Modi courted public opinion by whipping up anger against the wealthy. In the weeks after demonetization began, television reporters searched fruitlessly for irate customers in bank queues, or farmers unable to sell their produce. Instead they found that Indians mostly seemed to support the ban. Modi cleverly targeted a cast of villains in the public mind—the bribe-taking policeman, the dishonest bureaucrat and the inexplicably wealthy politician—all of whom demonetization appeared to punish. “Psychologically, this is seen as a slap in the face of the all the cronies and the corrupt, which pleases the middle class so much,” I was told by Rajiv Kumar, an economist in New Delhi. “Those who got rich by all the wrong means have gotten their comeuppance and people are delighted.”18

  Scam-a-Lot

  Corruption has appeared in one way or another throughout modern Indian history. Graft allegations dogged generations of British Imperial administrators, from the fortunes pillaged by Robert Clive, the buccaneer who seized Bengal for the East India Company, to the trial in 1788 of Warren Hastings, the first governor general, on charges of profiteering. These graft problems became so severe that “loot,” an old Hindi word for plunder, soon took its place in the English language, as historian William Dalrymple is fond of pointing out.19 Matters had barely improved by the twentieth century, as the clamor for independence grew ever louder. “We seem to have weakened from within,” Mahatma Gandhi raged in 1939, dismayed over financial misbehavior within his own party. “I would go to the length of giving the whole Congress a decent burial rather than put up with the corruption that is rampant.”20 Optimistic Indian nationalists expected that freedom from British rule would bring clean governance. These hopes had largely died out by the time Indira Gandhi took power in the 1960s. So common was corruption under the License Raj that it even became a mainstay of newspaper horoscopes. “All round improvements but not without strings,” the Hindustan Times warned Virgos in 1985, before adding: “If paying a bribe to anyone, see that the job is done.”21

  Advocates for economic liberalization then predicted that the demise of the socialist state would bring an end to corruption. In some ways they were right. After 1991, no one any longer had to pay bribes to buy a bag of cement or a scooter, or to get a new telephone connection. But rather than putting a stop to bribery entirely, the process of reform merely ended up creating new and far grander avenues for the unscrupulous. Previously unimportant parts of the economy, such as telecoms or airlines, began to grow rapidly as state controls were relaxed. The value of assets like land and commodities shot up too, especially in sectors that were closely connected to the global economy. “These price increases have multiplied the scope for government officials (and colluding businessmen) to make vast sums of illegal money,” as Jagdish Bhagwati put it.22 Small-scale retail corruption did not disappear, but a new species of grand wholesale corruption grew up alongside it. As a result, the scandals that washed over India in the 2000s were of an entirely different order from those that had come before, both in terms of their focus and the sheer scale of the looting.

  The term “corruption”—often defined to mean the abuse of public office for private gain—is vague, covering everything from bribery and vote buying to racketeering and nepotism. But in India, as in other emerging markets, what mattered was the rise of a new crony capitalism—defined by political scientist Minxin Pei as “collusion among elites”—and the big-ticket graft that went with it.23 The sight of politicians, bureaucrats, and businesses plotting to seize valuable public resources occurred across developing nations. In Russia, entire industries were ransacked after 1989 an
d subsequently passed into the hands of pliant oligarchs. There was no full-scale privatization program as part of China’s economic reform process, but Communist Party officials still worked with businesses to take control of, or extract resources from, giant state companies. India’s story was similar, as liberalization took an economy long under state control and moved large parts of it back towards the private sector.

  As this happened, political leaders and civil servants found themselves in control of suddenly valuable state assets. The kinds of rent-seeking that followed came in many shades, as Milan Vaishnav pointed out in When Crime Pays, his study on Indian corruption and criminality. Some flowed from the ability to change rules to suit one business interest or another. Others involved doling out scarce natural resources, from mineral rights to land. A third variety involved politics, and in particular the need to provide illegal funding to political parties.24 Economic growth itself was not to blame for this: some countries, such as Poland, managed to introduce market reforms without an accompanying wave of cronyism. Rather, corruption turned out to be a political problem, in which liberalization required changes to the way the state managed and regulated India’s economy. When this did not happen, it was all too easy for those with power and connections to build what was often described as a “nexus,” linking together tycoons, politicians, and bureaucrats to their own ends. The word “corruption” implied rottenness in something previously healthy, but in India corruption was in fact a dynamic and highly entrepreneurial process, marked out by crafty backroom deals and daring attempts at regulatory capture. Indeed, for a time during the 2000s, it looked as if the cronyism that India’s reform process had unleashed would simply be unstoppable.

  Cronyism, Pure and Simple

  Yet this was never an entirely one-sided fight, and if any figure could be credited with bringing the country’s new spate of corruption under control, it was Vinod Rai, a quiet, bespectacled former civil servant, whom I met one humid morning in Singapore in 2016. At that time, Rai had taken up a part-time post at a local university. He looked relaxed, wearing brown trousers and a blue and red checked shirt, with swept-back silver hair and black eyebrows that shot up as he talked. His office looked out over a leafy campus, a view that seemed worlds away from the hubbub of New Delhi, where in 2008 he signed on to become India’s eleventh comptroller and auditor general.

  The chief auditor’s role was traditionally as dull as it sounds: a post for cautious, elderly men who churned out dry reports that almost nobody read. But Rai arrived in a city swirling with intrigue. New Delhi was being turned into a construction site as preparations raced ahead for the Commonwealth Games in 2010, an event—designed to showcase India’s economic rise—that soon turned into a corruption-ridden fiasco. At the time, Manmohan Singh’s government was also busily handing out telecoms and mining licenses to large industrial houses in circumstances that reeked of favoritism. Dozens of bribery and graft scandals soon erupted in what became known as the “season of scams.” And just as India seemed to be losing its moral bearings, so Rai became an unlikely public hero, publishing sparsely written reports that exposed the true scale of his country’s corruption problems, while showing a mixture of quiet decency and thinly veiled anger at the venality of its political class.

  Rai took up his role in January 2008. “Of course, lots of people in Delhi circles knew bad things were going on,” he told me. “There was talk and gossip. But you needed proof.” That arrived two years later with his first blockbuster report, which dealt with the misallocation of the second-generation (or 2G) telecoms spectrum. Until then, telecoms had been one of India’s post-liberalization successes. Shashi Tharoor, the author and Congress politician, once described his memories of making intercity phone calls back in the 1980s. This meant booking a line many hours in advance, unless he was willing to pay extra for a special “lightning” connection, which required a wait of merely thirty minutes. “This being India, even lightning took a long time to strike,” he said. Prior to 1991, home landlines were a luxury available only to the rich. Just two decades later more than half a billion Indians had mobile phones, making it the world’s second largest market after China.25 “The mobile phone is to my mind the instrument that is most emblematic of India’s transformation over the last twenty years,” Tharoor said. It was about to become the greatest symbol of its corruption.

  The “2G scam” kicked off just a few days after Rai took up his new position. Singh’s government planned to hand out valuable telecoms spectrum licenses using a murky “first come, first served” system, rather than an open auction. On January 10, 2008, the telecoms department summoned bidders to its office in New Delhi, at just a few hours’ notice. “Fifteen applicants assembled at the appointed time, armed with bankers’ cheques, bank guarantees, and the relevant papers—preparations that would normally have taken days,” as one account put it. “It was clear that the favored few had been tipped off.”26 Chaotic scenes ensued, as executives rushed to fill forms and dashed from room to room. By day’s end, more than one hundred licenses had been handed to eight companies in a deal that would besmirch India’s reputation for years to come. Details began to dribble out bit by bit, revealing a story that seemed to have everything, from shell companies fronting for major industrial houses to leaked salacious calls between lobbyists and tycoons. Behind it all stood telecoms minister Andimuthu Raja, a colorful politician from the southern state of Tamil Nadu.

  It was only when Rai published his 2010 report that the scale of the alleged telecoms scandal became clear, costing the state Rs1.8 trillion ($26 billion) in lost revenues, the auditor claimed, at least when compared to what might have been raised had the license been auctioned.27 A criminal investigation put Raja behind bars pending trial in 2011, while the Supreme Court canceled all 122 licenses one year later.28 Various telecoms executives were imprisoned for a time too. The resulting media storm turned Rai into a controversial figure, at once hailed as a crusader and attacked as a zealot bent on sullying corporate India’s good name. Unbowed, the auditor began churning out more reports, examining everything from irregularities in the run-up to the Commonwealth Games to corruption in natural gas contracts. These in turn covered only a portion of the many scandals that erupted in the later 2000s, in which “hundreds of billions of dollars” were siphoned away, according to one estimate.29 In the 1980s, economist Robert Klitgaard defined corruption as a process involving “monopoly plus discretion minus accountability.”30 Until Rai came along, India’s scandals followed this formula almost exactly.

  Perhaps the most significant scandal was the last to come to light: the “coal scam,” which the auditor revealed in a 2012 report.31 For the best part of a decade India handed out free coal-mining licenses to industrial companies, on the proviso that the fuel would be used only in nearby industrial projects, such as steel mills and power plants. At first almost no one applied, because coal was available cheaply on international markets, or via Coal India, the state-owned mining giant. But as global prices rose in the 2000s, driven by breakneck Chinese growth, the value of domestic mining rights skyrocketed. More than two hundred licenses were awarded between 2004 and 2009. Many were handed out to well-known industrialists. Others went to companies that, until then, had shown little interest in mining. “Let’s say I’m a newspaper magnate in a particular state with good connections with the minister of coal,” Rai told me, explaining the process. “And I say: ‘I am contemplating setting up a power project, so why don’t you give me a mine?’ And so they get given a mine, in exchange for who knows what.” Taken together, his team calculated that the mining policy handed the various tycoons windfall gains in the region of $30 billion.32

  India’s scams followed a pattern, although each had its own modus operandi. The Commonwealth Games was a cash-for-contracts affair, presided over by the head of the national Olympic committee. Wrongdoing first came to light with stories of inflated costs, including the purchase o
f toilet rolls for the athletes’ village at Rs4,000 ($62) each.33 Other allegations involved handing out contracts to companies with ties to the organizers in exchange for kickbacks. The 2G scandal, by contrast, appeared to involve the payment of bribes to acquire licenses, as well as smaller firms acting as fronts for larger conglomerates. However, those caught up in the scandal consistently denied they had done anything wrong, and claimed vindication in late 2017 when a special court set up to bring prosecutions in the case cleared Raja and a host of others, including representatives from various companies involved. The judge’s ruling followed a seven-year investigation, and harshly criticized prosecutors for failing to provide enough evidence to justify a conviction.34

  Coal was perhaps the most complicated of the scams, only brought to a close when in 2014 the Supreme Court suddenly canceled all of the various licenses handed out during the Congress years, describing their original allocation as “arbitrary and illegal.”35 It was also the only scandal that indirectly affected Manmohan Singh, who served as a stand-in coal minister for a period during the early portion of his two terms as prime minister. Although badly weakened by the various scandals, the embattled Congress leader staggered on. At various points he tried to stop the coal giveaways, but such were the limitations of his authority that he failed to get his way.36 Instead the scam pressed on, as an array of politicians, bureaucrats, industrialists, and sundry middlemen carved up the mining rights between them. Perhaps more than any other scandal, it was collusion of this type that came to represent the rot at India’s heart. “It was cronyism,” Rai said, summing up the whole affair with a sigh. “Absolute cronyism. Pure and simple.”