How to Be a Crony Capitalist
Hyderabad, capital of the newly independent Telangana and home to most of the Andhrapreneurs, has long been associated with wealth. It was the largest city in India’s grandest princely state, led until 1948 by a monarch known as the Nizam, the head of an Islamic dynasty dating back to the early eighteenth century, and a successor state to the Mughal Empire. Osman Ali Khan, the title’s final holder, was not just the world’s richest man but also said to be one of the wealthiest who had ever lived, the recipient of a fortune drawn both from vast land holdings and from ownership of the state’s lucrative Golconda diamond mines.
Even as his rule crumbled, the Nizam’s eccentricities were legion: the fleet of Rolls-Royces he employed to collect rubbish from Hyderabad’s streets; the eunuchs that guarded his mighty jewelry collection; and above all the intricate complexities of his love life, with its dozens of concubines and countless illegitimate children. “The last Nizam had a total of 14,718 employees when he died,” according to one account. “In his main palace alone, there were about 3,000 Arab bodyguards, 28 people paid to fetch drinking water, 38 to dust chandeliers, [and] several specifically to grind walnuts.”31 His rule ended in 1948, when his state was forcibly folded into a newly independent India. But the excess of his rule left behind a city known as much for the splendor of its palaces and the sophistication of its culture as for the stunning rocky terrain of the surrounding Deccan Plateau.
More recently, Hyderabad has grown into one of southern India’s most important business hubs, and one known for wealth of a different sort. Visitors land at a shiny new airport, developed by GMR, one of the more prominent Andhrapreneur conglomerates, and then whizz into the city along an elevated expressway built by another local contractor, which offers impressive views over the glass and steel buildings downtown. During the 1990s, parts of Hyderabad were officially rebranded as “Cyberabad,” as its enterprising chief minister, Chandrababu Naidu, began to transform the city from a sleepy provincial capital into a major IT hub, attracting investment from Microsoft and Oracle. India’s tech sector is often thought to be largely free of corruption, but here Hyderabad was also an exception: Satyam Computer, the city’s most prominent outsourcing group, collapsed spectacularly in 2009 when its chairman admitted to inventing more than $1 billion of revenue, in one of Asia’s largest cases of corporate fraud. Yet the city’s modern wealth, as well as its reputation for financial chicanery, have come from traditional sectors like land and construction dominated by the Andhrapreneurs, the new class of “carpetbagging but hugely risk-taking Telugu infrastructure entrepreneurs” whom Shekhar Gupta dubbed the “Andhra oligarchs.”32
“You are now in a part of the country where the situation is arguably the worst,” anti-corruption campaigner Jayaprakash Narayan told me, sitting in his office in the city one afternoon in mid-2016. The room was sparsely decorated, with a single map of India on the wall and a small bust of Gandhi in the corner. A slim, elegant man, Narayan had once founded his own political party, campaigning for clean government and even at one point winning a seat for himself in the Andhra Pradesh state assembly. But over time he grew disenchanted with the rough-and-tumble of India’s elections, and set up instead the Foundation for Democratic Reforms, a think tank headquartered on the eighth floor of a shabby residential building, next to one of the city’s larger hotels.
Narayan ushered three of the think tank’s interns into his room as he began to talk, before painting a grimly detailed picture of the state of local corruption. Both Andhra Pradesh and Telangana, he claimed, had some of the nation’s most expensive elections, and thus almost certainly its highest levels of illegal campaign financing as well. These rising election costs then pushed the region’s political leaders to dream up ever more devious schemes to bring in black money from their allies in business, funds they then deployed for the mass acquisition of votes. “We are probably the innovators,” he went on, describing the growth over recent decades of a highly refined local model of cronyism, in which the interests of politicians and developers grew so closely intertwined that they became virtually indistinguishable. “This is a land where this process has been institutionalized and professionalized—although much of the rest of the country is quickly following suit.”
Narayan explained the genesis of this system by way of the rivalry between two men who came to dominate politics in Andhra Pradesh in the decades after liberalization. First came Naidu, the architect of Hyderabad’s renaissance, who ran the state for the best part of a decade from the mid-1990s as the head of the Telugu Desam Party. A business-friendly technocrat, he focused on infrastructure and had a knack for luring in foreign tech companies. His record won plaudits: in 1999, Time dubbed him “the subcontinent’s most visionary politician”; a year later President Bill Clinton came to visit the new HI-TEC City technology park, and heaped praise on his investment-friendly policies.33 Yet for all his economic nous, Naidu was roundly defeated in elections in 2004 by his great antagonist Y. S. Rajasekhara Reddy, or just “YSR,” a more pugilistic and overtly populist Congress leader, who governed until his death in a helicopter accident in 2009.
“These were two exceptional politicians, who were unscrupulous, ambitious, hardworking, and bitter political rivals,” Narayan said. “They were both identical in their totally amoral approach to power.” Both men were masters of political machine–building, wielding influence through powerful patronage networks. Naidu’s reputation was cleaner, although even he began his life in modest circumstances and ended up a wealthy man. But of the two it was YSR who cemented Andhra’s reputation as a hotbed of cronyism, with an ability to bring together economic development and incorrigible corruption that perhaps only Jayalalithaa could rival.
As chief minister, YSR launched a slew of new state spending programs in areas like health care and housing, which also provided rich pickings for graft. Andhra Pradesh’s economic vitality pushed up the price of land, which the chief minister doled out happily to favored business contacts. There were economic reforms too—YSR streamlined the state’s bureaucracy, cut its deficit and made it easier for businesses to invest—but these were obscured by populist largesse and shady development schemes. Among the most prominent was a huge irrigation plan known as Jalayagnam, later dubbed “the mother of all frauds” by the Times of India.34 Auditors found many billions of dollars had gone missing from contracts handed out to half a dozen politically connected local companies. An American diplomatic cable, released by WikiLeaks, noted dryly how “corruption beyond the pale (even for India)” had become a hallmark of YSR’s rule.35 “We thought Naidu was bad,” the same document quotes a local newspaper editor as saying, “but that was child’s play compared with what is happening now.”
At one level this reputation for adventurous cronyism did Andhra Pradesh little harm. Much like Tamil Nadu, it enjoyed strong growth and enviable levels of social development in the decades after 1991, all seemingly unencumbered by the greed and collusion of its elites. The efforts of its two dueling leaders left behind some of India’s best infrastructure, almost all of it built by half a dozen local contracting groups. Companies such as Lanco, GMR, and their rival GVK grew into powerful national conglomerates. But while others like Jayalalithaa also presided over a system in which corruption and development coexisted, the genius of Andhra Pradesh was to fashion the nexus between politics and business so tightly that it became virtually impossible to judge where the line between the two was drawn.
“The links between the politicians and the contracting class became very deep,” Narayan told me. The benches of the state assembly were filled with politicians who also happened to be businesspeople, or at least who were drawn from the same families and caste groups as prominent industrialists. Some industrialists, like Lagadapati Rajagopal, became national politicians too. As chief minister, Naidu used the slogan “Bye-bye Bangalore, hello Hyderabad” to boast that his city would soon s
urpass its more famous rival as India’s premier technology hub. But one venture capitalist from Andhra Pradesh made a different distinction. “The difference between Bangalore and Hyderabad is that the guys in Bangalore who are making money are separate from the guys who run the city,” he told me. “In Hyderabad the businessmen and the politicians are intertwined. It is people who are from there, the entrepreneurs and their families, who have ties with people who are in politics.” It was this overlap, and the bonds of trust that came with it, that provided uniquely fertile grounds for corruption.
At one level the deals struck in Andhra Pradesh worked in the same way as elsewhere in India, as valuable infrastructure contracts and government land were doled out to friendly companies in exchange for kickbacks. There were plenty of entrepreneurs eager to receive such bounty. But the politicians still had to be cautious, according to Harish Damodaran, author of India’s New Capitalists, a book about the often-complex interplay between caste and business. For figures like YSR the risk was that one party to a deal would run off with the cash, or not deliver what they promised, or let details slip to the media. In Andhra Pradesh, caste bonds often provided a sense of reassurance; nearly all those involved in big infrastructure schemes were drawn from either the Kammas or the Reddys, the two mercantile communities who dominated commerce in the state. “They wanted someone they could really trust,” Damodaran told me. “That meant someone from the same caste, or ideally the same family.”
In a perfect world, this meant having kin on both sides of a deal, and often the easiest way of achieving this was for one member of a business family to enter politics directly. As legislators they could then cut deals from the inside, lobbying for rule changes and providing useful intelligence. “Blatantly, what some of them said was ‘Damn it, why don’t we influence them, why the hell don’t we become politicians?’ ” I was told by Konda Vishweshwar Reddy, another wealthy businessman turned national MP, who represented a constituency which included Hyderabad’s airport. “Andhra Pradesh took the leadership in that,” he added, with a thinly disguised sense of pride, pointing to the success of the state’s infrastructure companies. “Those guys are the big guys. They got plum power projects, they got plum land, they got plum infrastructure contracts.”
It also went the other way round, as politicians set themselves up in business and gifted contracts and favors to their own operations. Sometimes this happened openly. More often the process was clandestine, with a politician’s ultimate control disguised via benami chains of relatives or associates. Common in southern India, these arrangements soon spread to New Delhi, as politicians realized that corruption’s grandest profits were often to be made by owning businesses and then fiddling the rules to help them grow. “We have a completely unique phenomenon in India, which I call political entrepreneurship, that has taken root in the last five to six years,” I was told in 2012 by Rajeev Chandrasekhar, the former telecoms entrepreneur and then-member of India’s upper house of parliament. “They [the politicians] are saying: ‘We don’t want briefcases full of cash and Swiss bank accounts and all that any more. We want to own businesses ourselves. We want equity stakes.’ ”36
Profiting from this required operators adept at “managing the environment,” an often-used Indian euphemism for influence-peddling. Companies seeking public contracts in competitive tenders often entered unrealistically low bids, for instance, in the expectation that their connections would allow the contract to be renegotiated later for a much higher fee. On other occasions contracts would be gifted without bidding, or through a process so clearly fixed in advance that other serious bidders were discouraged from entering the fray. Then overbidding was the preferred method: a company would make an unusually generous offer and siphon away the difference between that figure and what the work actually cost.
Yet even here there was a balance to be struck, as one civil servant who worked with various governments in southern India explained. Rather than going for the very lowest bidder, or the one who was likely to extort the most money, wise politicians like Jayalalithaa and YSR tended to avoid outright cowboy contractors. Instead, they favored those companies who were both willing to play the game and competent in delivering projects, meaning that they would make a decent fist of building the irrigation schemes and airport terminals in question, while also being generous with their profits. “They [the better contractors] will charge you 140 rupees for work which should have cost 100 rupees, but they will actually spend 100 rupees and do a good job,” the civil servant said. “You have others who will quote 105, and will spend 80 of it, and do a substandard job, which will fall apart three years from now, so them you want to avoid.”
Other techniques were craftier still. Under YSR, the most infamous were pioneered by his son, Jagan Mohan Reddy, who set himself up as an entrepreneur during his father’s time as chief minister. Handsome and charming, the younger Reddy founded a slew of companies in sectors from cement to real estate, in addition to a media group whose newspaper acted as a mouthpiece for his father. Reddy had little background in business but proved a curiously successful fund-raiser. This in itself was not unusual: India’s family-run enterprises were adept at raising capital, including from naive global private equity funds, many of whom sank significant sums into Hyderabad-based contracting companies. But Reddy’s strategy was more ingenious, police investigations later claimed, as investors were said to have bought stock at hugely inflated rates in exchange for favors from his father’s government.37 Government auditors later claimed that YSR had handed out thousands of hectares of land to friendly contacts, a good portion of which went to companies controlled by his son.38
The scheme eventually caught up with Jagan Reddy: he was arrested on corruption charges in 2012, and spent the best part of two years in jail awaiting trial before being released on bail. (Reddy’s case remained pending at the time of writing.) The year prior to his arrest, he had been elected to parliament in New Delhi and declared his personal worth to be $57m, making him India’s richest MP. Prison time did not dent his ambitions: he split from the Congress following his father’s unexpected death and set up a new party—the YSR Congress—to capitalize on his legacy. His popularity was partly explained by a local population thoroughly inured to the corruption of their leaders, according to essayist Praveen Donthi, as well as the fact that Reddy’s schemes tended to involve private sector transactions, rather than the ransacking of government spending programs.39
Of all the techniques pioneered in Andhra Pradesh, shady land deals were perhaps the most infamous. Many of Hyderabad’s bustling main roads snaked alongside tall, white concrete pillars, ready to support rail lines for a long-promised urban metro. The project was unusual both for its longevity—it had been conceived in the early 2000s, but there were still no signs of trains when I visited in 2017, more than a decade later—and for the inventiveness of its financing. “Unlike the vast majority of the world’s rail transit systems, this metro would not be wholly funded by public money,” journalist Mark Bergen wrote of the scheme. Instead, Hyderabad’s government gifted plots of land to developers near planned rail stations, on the theory that they would recoup the costs of developing the project from increases in value of the land itself.40
The resulting plan was widely questioned. “[The] Metro is only a mask,” as one protestor put it; “the real agenda is real estate.” It was accepted wisdom in Hyderabad that the various planned metro lines would in time be extended to connect with plots of land owned by powerful political families, vastly increasing their value. This kind of brazen dealmaking still seemed somewhat unlikely, but in a state whose infamous “land mafia” often snapped up cheap plots from farmers after tip-offs about development plans, and where real estate itself acted as a kind of informal currency between the political and business elite, it was always hard to tell for sure.
It was land that also often provided the final piece in the state’s el
egant system of cronyism, providing the link between infrastructure kickbacks and illicit election funding. Here political leaders faced a problem of timing, namely that having raised cash through some misdeed or other, they then needed to store it until they next went to the polls. “Politicians will park their money with people involved in real estate,” political scientist Devesh Kapur once told me. “They are confident the real estate guys aren’t going to run away with it, because they still need the politicians to get more land in the future.” Such deals worked well for both sides. Real estate developers got cheap capital from their friends in politics, which they could then deploy as they liked, at least until polling time came around and the politicians asked for it back. There were various ways businesses could realize these funds quickly, one senior politician told me, “but mostly they [the tycoons] sell land, because if you sell land, you get seventy or eighty percent of the value in cash.”
Kapur and coauthor Milan Vaishnav once tested this theory via an ingenious academic study. Construction magnates suddenly asked to take capital out of their businesses to refund their political allies would then be short of cash for other activities, they hypothesized, most notably starting new buildings.41 “Cement is an indispensable ingredient for construction,” Kapur told me. “So we looked for data to see if cement demand would fall around election time. And it did. In fact, the link shows up beautifully.” Such relationships need not even have a precise quid pro quo, just an understanding that over time each party would help one another as needed. “It was all goodwill, what you give in elections,” one industrialist from the state told me. “In India, business still depends on the government. So you need the goodwill of the rulers to make friends with them.”
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