India's Gilded Age

The government is doubtless the prime culpable for the overflowing cupboard of large-scale financial scams. It has received its share of opprobrium from all channels. Anti-corruption crusaders, both within and outside government, have become popular heroes; those responsible, including the high and mighty, have gone to jail; and governments have been swept away by the tide of public anger. There will doubtless be more to follow.

However, amidst all the criticism of the government, its partners in crime from corporate India have gotten away lightly. India's current generation of crony capitalists, of a wide ranging variety, whose unscrupulous actions are at the center of all these scandals, need to be subjected to similar scrutiny.

When faced with such challenges, mature democracies manage to focus the public debate on the deeper underlying causes and try to address them head-on. However, in India public debates are confined to assailing the government without exploring the underlying malaise and seeking to prevent such practices.

Consider these. The largest defaulters to public sector banks are some of the biggest names from corporate India. There is more to it than meets the eye when many of them access further loans even while defaulting on their existing commitments. Public sector banks have shown a very permissive attitude towards restructuring debts, doubtless influenced by crony capitalism. All the major private banks stand accused of indulging in various fraudulent practices, including being conduits for massive black money transactions.

Infrastructure firms, especially those in telecom and petroleum, who have been allotted public resources in return for a share of their revenues, have been understating revenues and thereby evading public dues. Tax evasion through creative accounting bordering on fraud, has become the norm, and even has its supporters, not just in India but across the world. Many firms capitalize on weak corporate and financial market regulation to use their complex web of cross-holding patterns to illegally camouflage borrowings as equity.

Most of the biggest corporate names have benefited handsomely in the "land grabs" of the last decade, amassing massive extents of valuable public lands, far in excess of their project requirements, at throwaway prices, by preying on state government's anxiety to attract investments or brazenly colluding with them to aggrandize politicians and officials.   

Contract re-negotiations have become the norm in infrastructure projects. India's largest infrastructure contractors have internalized the norm of bidding aggressively, over-looking even obvious risks (eg. imported fuel price risk), confident that their political connections will help them renegotiate favorable terms and socialize their losses. The compensatory tariff scheme for imported coal based power generators and premium restructuring for road developers, while unavoidable, are surely the result of corporate recklessness and greed.

To these one could add the pervasive regulatory violations with pollution, consumer protection standards, licensing requirements (especially for professional colleges and specialty hospitals), and so on by businesses, big and small.

A culture of permissiveness and brazenness to law-breaking has become entrenched. In the circumstances, replacing one government with another, even if "less corrupt", will, at best, only serve to marginally decrease the rot. It would require changes that go far beyond cosmetic political power transfers. 

One point to start would be a transformation in India's corporate culture. Corporate India needs to realize it is in their interest to play by the rules of the game and that the greatest threat of Indian capitalism is from its own capitalists. Any income that accrues by violating law or evading dues is just not sustainable. It is only a matter of time before public outrage or a disgruntled competitor or a conscientious official exposes the fraud and bring disrepute to the firm.     

Another area of concern is state capability. In the last nearly two decades, India has liberalized at a frenetic pace and its private sector has expanded dramatically. The pace of both these trends has been much faster than the state's capability to monitor and regulate. Experience from across the world, including the growth histories of all developed economies, shows that the regulatory and state capability deficiencies that accompany such rapid growth contributes to the emergence of crony capitalism and high-profile scams.

True, we cannot wait for all the capacity and regulations to be in place before liberalizing and allowing private participation. But we need to acknowledge the importance of strong state capability to perform certain market regulatory functions which will always remain with governments.

In the ongoing public trials of all these scams, the biggest casualty is the Indian economy. Courts have elevated themselves as the primary policy makers. Auditors have become the arbiters of policy decisions. Important policy decisions are being made through populist rhetoric charged public debates. If governments abdicate on their responsibilities and capitalists collude egregiously, it is only to be expected that others will fill the vacuum.

Such functional encroachments and makeshift policy-making, while necessary to force difficult political economy reforms, which would not otherwise have been possible, also cannot be a substitute for institutionalized decision-making and governance. We need to capitalize on the turmoil to both improve corporate governance standards, clamp down on corruption, as well as strengthen public systems capacity to more effectively and transparently deliver public services and regulate private markets.