When Crime Pays

by Milan Vaishnav

  Detailed research studying the impact of India’s industrial de-licensing, the rolling back of one of the central elements of the License Raj, has found that these reforms left the dominance of large incumbents—many of which are state-owned enterprises—largely unchallenged (figure 2.10).110 Thus in 2005, nearly a decade and a half after India’s “big bang” economic reforms, as much as three-quarters of the economy was still in the hands of state firms and long-standing private firms born before the mid-1980s.111

  Figure 2.10. Economic dominance of incumbent firms, 1988–2005. “Incumbent firms” are defined as state-owned enterprises and private firms incorporated before 1985. (Data from Laura Alfaro and Anusha Chari, “India Transformed: Insights from the Firm Level 1988–2007,” India Policy Forum 6 [2009]: 153–224)

  Second, the Indian state was unable (or unwilling) to address issues of regulatory capture. As with many countries making the transition from a state-controlled to a market-based economy, India found itself trapped in a “partial reform equilibrium.”112 In many sectors, powerful incumbents exploited their political connections amid the unique window of economic opening to entrench their own favorable positions while stymieing further reform that would introduce competitive pressures and, hence, limit their market power. This was a result of what Rajan calls an “unholy alliance” between elements of the political class and shady, aggressive entrepreneurs he dubs “the connected” (italics in original).113

  Deregulation introduced a rash of new, predominantly small firms, while at the same time entrenching the importance of powerful incumbent firms. Although political connectedness is not the only driver, this evidence is consistent with the notion that liberalization “may have created a winner-take-all environment where the largest firms drive out” competition, hollowing out the middle.114 For example, research shows that Indian firms operating in industries that are relatively concentrated (in terms of the number of established important players) have been more successful at preventing the entry of foreign firms, who might pose a competitive threat.115

  In the pre-liberalization days, politicians often used India’s onerous regulatory environment to engage in decentralized bribe taking. Back then, firms paid politicians to circumvent onerous regulation. The 1991 reforms liberalized markets—yet without establishing robust legal and regulatory checks and balances. In the post-liberalization era, firms have gone from trying to evade the rules to trying to rewrite them in their favor.116

  It is perhaps no surprise that of the Indian billionaires Walton and Gandhi study, 43 percent of them (accounting for 60 percent of overall billionaire wealth) are connected to “rent-thick” sectors, or sectors where the state’s role in granting licenses and permissions remains intensive. Such industries include real estate, infrastructure, construction, mining, telecom, cement, and media.117 A 2011 survey by accounting firm KPMG ranked sectors according to business perceptions of the prevalence of corruption. This ranking correlates exceptionally well with regulatory intensity, or “rent-thickness.”118

  But there was a third, almost opposite, infirmity. At the same time the state could (or would) not fend off regulatory capture, it also itself engaged in predatory behavior with abandon. As is typical with many economic reforms, “the withdrawal of the state in one form . . . necessitated its reappearance in another.”119 Patronage opportunities did not disappear; they merely relocated. There is plenty of evidence to suggest that the greatest exchange of favors between firms and politicians exists in sectors of the economy where the regulatory intensity of the state is highest. This is not necessarily an India-specific observation but a more generalizable pattern validated by the Indian case.120

  For instance, in research undertaken with the economist Sandip Sukhtankar, we set out to document the biggest public corruption scandals that were uncovered between the years 2000 and 2014. Most of the scams we identified involved simple embezzlement by a senior government official or politician or bribes paid by firms to obtain lucrative government contracts or licenses. There was also an obvious correlation with sectors where the state exercised a heavy regulatory hand. For instance, 35 percent of the scams we documented were in the mining and land sectors.121

  Extractive Rents

  The second type of grand corruption that has taken off involves rents stemming from natural resource or extractive industries.122 Typically, corruption here involves the discretionary allocation of public resources to private (or other public) players for their development and/or refinement. The economist Arvind Subramanian has further classified extractive rents into three subcategories: “terrestrial” rents, derived from the allocation of land or resources located above ground; “subterranean” rents, drawn from the allocation of rights to coal mining and oil and gas exploration, which take place below ground; and “ethereal” rents, from the allocation of telecommunications spectrum.123

  Land is essential to agriculture, manufacturing, mining, real estate and construction, and large infrastructure—the sectors that constitute the lifeblood of modern, industrial economies. Because of land’s intrinsic role in the growth process, its lucrative nature, and the state’s fundamental role in setting the conditions for how land markets in India operate, there is ample scope for malfeasance. As scholar Pratap Bhanu Mehta has written, “The discretionary power the state has with respect to land is the single biggest source of corruption” in India.124

  India’s byzantine system of land regulation, which dates back to colonial-era statutes, provides ample opportunity for politicians and bureaucrats to grant discretionary access to land. As the Indian economy gathered strength in the 2000s and the size of the upwardly mobile classes grew, there was a mad dash to acquire land—for residential buildings and commercial real estate, as well as for industrial and manufacturing-related activities. Nearly every deal involves intense interaction with the state, which tightly regulates supply.125

  One of the most memorable recent cases of cronyism when it comes to land is the case of the Adarsh Housing Society, a tony apartment complex located in one of the most expensive sections of South Mumbai. The Adarsh building was ostensibly constructed for the purpose of housing widows of soldiers who had fought in the 1999 Kargil War with Pakistan and other Ministry of Defense personnel. Instead, thanks to the connivance of several of the state’s leading politicians, bureaucrats, and regulators, flats within the complex were distributed among themselves and their cronies.

  In addition to using the complex as a vehicle for political patronage, the politicians and bureaucrats responsible for Adarsh openly flouted an untold number of land, zoning, and environmental rules and regulations to get the project done. The scam, which created a political uproar in the state of Maharashtra and even forced the sitting Congress chief minister to resign in 2011, became a symbol of the sleaze and corruption that characterize many land deals consummated across India. An independent investigation into what the media began calling “Mumbai’s Tower of Shame” called the plot “a shameless tale of blatant violations” that reflected “greed, nepotism and favouritism” on the part of several former chief ministers and cabinet ministers of the state.126 Yet most politicians implicated in the scheme got off scot-free. After initially refusing even to entertain the report, the state government—forced to act under mounting pressure—set its sights on complicit bureaucrats, thereby absolving their political masters. Asked years later about this decision, the former chief minister of Maharashtra stated plainly: “If I had sent them [the politicians] to jail, it would have hit the party organisation. . . . The party would have split. Nobody articulated that openly then. Neither could I.”127

  The dash to control land was restricted not only to the land itself but also access to the resources that lay beneath the surface, which produce what Subramanian has referred to as subterranean rents. As domestic and Chinese demand for raw materials intensified, and commodity prices skyrocketed, mining and quarrying became hugely lucrative.

  The land and natural resources se
ctor was left virtually untouched by the reforms of the early 1990s, not necessarily due to venal motivations but at least in part because few could foresee at the time how well India’s economy would take off and, hence, how important the allocation of natural resources would be in later years. The end result of the toxic mixture of oppressive regulation, regulatory incapacity, and ill-defined rules for allocation created new space for corruption. Within ten years, India had moved from the “License Raj” to the “Resource Raj.”128

  One of the most prominent poster children for the Resource Raj is the son of a tribal farmer hailing from one of India’s poorest states. Madhu Koda was a quietly ambitious politician from the eastern state of Jharkhand, home to an estimated 40 percent of the nation’s known mineral wealth and 30 percent of its coal reserves.129 Koda’s risky gambit to launch a rebellion against his state’s BJP government in 2005 resulted in a fractious scrum, out of which he emerged as the new chief minister at the ripe old age of 35.130

  Koda executed this maneuver only after he had secured the lucrative mining portfolio, which he held onto after becoming the state’s chief executive. Within a few years, Koda allegedly created an international mining empire worth billions of dollars built on a complex foundation of kickbacks, suspicious hawala (informal money transfer system commonly found in South Asia) transactions, secret Swiss bank accounts, fraudulent shell companies, and lavish offshore investments.131 Koda was finally arrested in December 2009 on money-laundering charges and a special CBI court framed corruption charges in the case in July 2015.132

  According to one account, Koda and his aides would compile a list of companies that had applied for mining licenses, invite their representatives to his residence, and then grant licenses to companies based on the size of the bribes they promised.133 In one instance, Koda is said to have cleared 48 mining licenses in less than one hour.134 As for existing mines, it was rumored that Koda and politicians loyal to him would receive up to a 25 percent cut of the mining companies’ financial turnover in exchange for continued support.135

  But all of this money needed a home that would avoid detection. So large chunks of cash allegedly moved informally, sometimes in suitcases ferried by bus or train, often winding their way across country to Mumbai to be channeled into shell companies located in tax havens. By the time his alleged mining racket came undone, Koda had reportedly plundered roughly one-fifth of his state’s annual revenue, according to law enforcement sources.136

  One of the most hotly debated scams of the recent era, however, involves the allocation of telecommunications spectrum and the generation of ethereal rents. After the government liberalized the once-closed telecommunications sector to private players in the 1990s, the sector—especially the wireless component—witnessed explosive growth. Mobile telephony surged, as did the revenues of leading telecom providers in the early 2000s (see figure 2.9).

  To facilitate the introduction of “2G,” or second-generation technology, the government announced its intention in 2007 to award new telecom licenses and spectrum allocations. However, the rules for allocation had not yet been determined. Enter A. Raja, the union minister for telecommunications. Raja was a prominent leader of the Dravida Munnetra Kazhagam (DMK), a political party in the state of Tamil Nadu and member of the ruling coalition in New Delhi, and a favorite of the DMK’s octogenarian leader, M. Karunanidhi.137 The telecom ministry was a “DMK post,” a position the Congress Party (as leader of the ruling alliance) ceded to the party as part of its power-sharing arrangement. Without the support of smaller parties such as the DMK, the Congress did not have the numbers to sustain a parliamentary majority.

  Irrespective of the policy morass in Delhi, Raja himself had very clear designs for how licenses should be awarded, if federal authorities are to be believed. According to the Central Bureau of Investigation (CBI), rather than auctioning off licenses to the highest bidder, his ministry adopted a first-come, first-served policy.138 If the ministry had truly followed a first-come, first-served policy, based on a set of transparent requirements, perhaps Raja’s decision could have been defended. But what followed instead was an arbitrary muddle. With very little warning, the Department of Telecommunications announced that it would stop accepting applications for new licenses on October 1, 2007. Without justification, on January 10, 2008, it retrospectively revised the deadline to September 25, 2007. That same January afternoon, at 2:45 to be precise, the Department added an additional wrinkle: if applicants wished to preserve their current standing in the license queue, they would have to show up at the ministry between 3:30 and 4:30 that very day with bank guarantees worth 16.5 billion rupees (or a quarter of a billion U.S. dollars).139 This had all the makings of an inside job.

  It was only a matter of time before the “2G scam” earned the attention of India’s law enforcement and anticorruption authorities. The comptroller and auditor general (CAG) found that of the 122 licenses handed out by Raja’s ministry in 2008, 85 were given to companies that were ineligible to receive them—at 2001 prices to boot. These 85 firms had “suppressed facts, disclosed incomplete information and submitted fictitious documents” in order to win licenses, the auditor alleged.140 Many were real estate companies with zero telecommunications experience but with ready access to millions of dollars in cash. After winning the lucrative licenses, these firms immediately turned around and sold them to legitimate operators for a much higher price, reaping massive windfall gains overnight.

  In February 2011 Indian prosecutors ordered the arrest of A. Raja (along with DMK leader Karunanidhi’s daughter, Kanimozhi, herself an MP) and several others on corruption charges. Their criminal cases are still ongoing.141 Although the allegations have not yet been proven, anticorruption investigators also suspect that Raja received a handsome bribe (channeled via a television station owned by the Karunanidhi family) as a result of his ministerial machinations.142 Raja also stands accused of acquiring “disproportionate assets” while serving as an MP.143

  Political Rents

  The third and final pillar of grand corruption has to do with India’s political and electoral system, which will be covered in detail later in the book. But it suffices to say that politics is the linchpin that holds India’s corrupt ecosystem in equilibrium. There are two primary aspects of the political system that are relevant to this discussion.

  The first is the nature of political finance in India, which is opaque, highly dependent on undocumented cash, and utterly corrupt. As subsequent chapters will show, the ineffectual regulation and monitoring of how politics in India is financed both allows for the continuation of policies which do not benefit the public interest and explicitly props up corruption in the other domains.

  For instance, political finance serves as the glue that holds together India’s dubious system of regulating land, lubricating the well-oiled machine that benefits land sharks, builders, and politicians. As previously discussed, politicians (and the bureaucrats they control) exercise considerable discretion over the acquisition and allocation of land and what the land is ultimately used for. This provides politicians with a steady supply of favors they can dole out to prospective builders and developers, who must come with hat in hand to politicians for policy and regulatory favors.144 There is a good reason, therefore, for India ranking 183rd (out of 189 countries) in the ease with which firms can obtain a construction permit.145

  Oftentimes, politicians will use their regulatory leverage to demand a cut of the builders’ investment; one prominent member of the Legislative Assembly (MLA, or state legislator) in Gujarat, for instance, was known to demand a 5 percent “silent equity” stake in any new development built within his constituency.146 Come election time, politicians need to amass large war chests to cover the costs of campaigning, and, here, their builders (who are often their business partners) are expected to funnel cash back to the campaign.147 What helps grease the wheels of this quid pro quo is the construction industry’s heavy reliance on cash, which makes it a perfect venue fo
r such laundering.148

  In research carried out with Devesh Kapur, we actually found hard evidence of this quid pro quo by studying fluctuations in the consumption of cement. Given that builders rely heavily on cash and frequently lack adequate sources of bank financing, one would expect that firms in the real estate and construction industries will experience a short-term liquidity crunch as elections approach because of their need to reroute funds to campaigns as a form of indirect election finance, thereby momentarily reducing their consumption of cement (an indispensable ingredient in modern construction). Indeed, that turns out to be exactly what the data reveal.149 The month elections are taking place cement consumption exhibits a statistically significant decline. This effect is stronger for state elections (it is India’s state governments that regulate land), urban states, and in more competitive elections.150 Undoubtedly, this transaction of cash for favors imposes a short-term cost on builders, but the exchange brings long-term benefits in terms of future goodwill, which is vital for commercial success.

  The interplay between politicians and builders highlights two aspects of how money in Indian politics works. The first is that money serves to bankroll politics; politicians and political parties are beholden to vested interests that can organize and deploy sizeable amounts of largely undocumented cash. But while money greases the wheels of politics, political office can also be used to generate large quantities of money. Once ensconced in power, India’s politicians have many lucrative levers they can wield to make money for themselves, their families, and their associates.151