Beset by a New Set of Scams, the Indian Government Struggles to Function

Anna Hazare, the social activist who has been instigating a campaign against corruption, is back in Delhi. Through hunger strikes and other protests, he had forced the government to cave in and agree to a tough Lok Pal (ombudsman) bill. After a disappointing appearance in Mumbai, where the public treated him more as a “Brand Anna” campaigner than anti-corruption crusader, Hazare is trying to re-establish his credentials. And he has been gifted with fresh ammunition.

Like Hazare, back in action is the Comptroller and Auditor General (CAG). He has unearthed another scam, this time related to the auction of coal blocks. According to a draft report that has been leaked to the media, the government had lost US$200 billion by not auctioning coal blocks during 2003 and 2009. Some 100 companies had acquired 155 coalfields without competitive bidding; the “undue benefits” went to both private and public sector organizations.

Prime Minister Manmohan Singh initially denied there was a report. (He was technically correct; it was only a draft.) Then, the government selectively released part of a letter sent by the CAG to the Prime Minister. The relevant portion read: “The details being brought out were observations which are under discussion at a very preliminary stage and do not even constitute our pre-final draft and, hence, are exceedingly misleading.”

When the full text of the letter (another leak) was published by the media, the thrust was seen to be very different. It turned out that the CAG was actually protesting against the leaks. At no time was the report denied. “Coalgate”, as it has been dubbed, is some five times larger than the US$40 billion telecom scam. But no one is calling it a US$200 billion scam. The main reason is that in the 2G telecom scam, some of the winners of the licenses were able to sell off stakes in the companies that owned these licenses at very high valuations. As these companies had no assets but the license, it was possible to get an estimate of what they were really worth and calculate the loss to the government. In addition, there was an identifiable villain in the picture — former telecom minister Andimuthu Raja, who is now in jail. This time, there is no charge that any individual has made gains.

Coal is also a different kettle of fish; the US$200 billion may only be on paper. “The report is short on reliability and high on sensation,” says Nantoo Banerjee, author of “The Price: When Bookkeeping means Bookcooking,” a book on the Satyam scam. There is no guarantee that an auction would have fetched a higher price. “The coal mining business is not the same as the telecom business. There is not much money in mining poor quality domestic coal, regarded among the worst in the world. Being the super auditor, CAG has to be more careful about its investigation and intent.”

“It is important that the coal issue not be hyped up,” adds Sunil Bhandare, advisor (government and economic policies) at Tata Strategic Management Group (TSMG). “It needs to be seen in a holistic perspective. Auctions are a great concept to distribute limited natural resources, provided the industry is mature and the economy is solid. In this case, if coal were to be priced on the basis of market-driven auction systems, then it would have an impact on the cost of various mega infrastructure projects. So auctioning would not necessarily be the right way of going about it. Also, the assumptions underlying the figure of US$200 billion may not be fully accurate.”

But Rajesh Chakrabarti, professor of finance at the Hyderabad-based Indian School of Business (ISB) counters by noting “The issues and the amounts at stake are significant, so it is difficult to say that it is hyped up. This is a more complex scam than others, with room for multiple interpretations. This is a typical dual-master problem for all listed public sector undertakings (PSUs). If in a normal company, the promoters (even if they are majority shareholders) affect corporate policy so as to benefit their own interests at the cost of corporate profits, we call it minority shareholder expropriation. The same situation applies here. The only difference is that the interest of the promoter here — the government — is supposed to be that of the nation. So while the minority shareholder expropriation part is obvious, the ‘national interest’ part is less clear. The government’s obligation to minority shareholders is much more clearly defined than its obligation to taxpayers.”

Casting a Wider Net for Scams

It’s not just coal that is keeping the CAG busy. Having tasted blood in the telecom audit report, the CAG is casting its net wider. ‘Coalgate’ aside, the auditor to the nation has recently put the government of Andhra Pradesh in the dock for land allotment to IT projects. The loss on land allotment (including allotment to some other categories) has been put at US$20 billion. This, too, seems like a huge scam until you realize that all states are looking for investments and are sweetening the proposition by offering subsidized land and tax holidays.

In Gujarat, the CAG has alleged a loss of US$3 billion in the purchase and sale of gas by state enterprises. Many other states have come in for the CAG’s strictures recently. “We have become more active,” CAG Vinay Rai told India Knowledge@Wharton during the Wharton India Economic Forum (WIEF) meeting in Mumbai earlier this year. “We have become more active.”

Not everybody welcomes that, however. “The CAG has joined the ranks of the Gandhi-topi-wielding Anna Hazare brigade to trigger a fresh burst of competitive activism against a battle-scarred ruling coalition,” comments weekly news magazine India Today.

The CAG talks in billions. But there are smaller scams that may cause more damage. Creating waves now is the army chief General V.K. Singh. In India, the Army does not normally enter the public eye or politics. But the past few months have seen controversy between Singh and the government over the general’s date of birth. This effects his date of retirement. Singh took the case to the Supreme Court, which threw it out.

Now he has opened another front. In an interview to the media, he has alleged that a former general had offered him a bribe of US$3 million to recommend purchase of 1,500 Tatra trucks for the army. These trucks — manufactured in the Czech Republic — have been bought by the army for many years; it already has some 7,000 of them. The Central Bureau of Investigation (CBI) has swung into action, a First Information Report has been filed and the government is once again under attack.

To compound matters, Singh has written to the Prime Minister alleging that the preparedness of the Indian Army forces is at an alarming level. This letter was duly leaked to the media. The Army is one of India’s holy cows and such a letter has caused a huge uproar. India is now the world’s largest arms importer (having overtaken China this year). Delhi is crawling with agents for Western arms manufacturers and corruption and bribery are standard practices.

Will the Government Survive?

The question now is whether the government will be able to survive these new crises. Survive it probably will; nobody wants a fresh election, observers note. But will it be able to function? The recently-introduced Railway Budget had included a provision to hike up fares. But Mamata Banerjee, leader of the Trinamool Congress (TMC), a key Congress ally, got the railway minister removed for that. The minister — Dinesh Trivedi — was a member of her own party. The fares were rolled back.

Finance Minister Pranab Mukherjee was so hamstrung by coalition politics that he failed to deliver a single new reform measure in the Union Budget. Now Defense Minister A.K. Antony is also under attack because of the general’s charges; Singh says that he had kept Antony informed of the bribery attempt, but no action was taken. Meanwhile Hazare, defanged though he may be, has issued a list of 14 ministers he says are corrupt and must be sacked.

If the Congress were reasonably sure it would do better, it would probably take the plunge and call for a fresh mandate. But it might do worse, observers say. Take West Bengal. “If there are elections today, Banerjee and her TMC will sweep most of the state,” says Sumit Mitra, a Kolkata-based political commentator and former journalist. “The Congress on its own has very limited support. And the Left parties will take a long time to get back into the reckoning. So nothing will change in terms of equations at the center. No political party in India wants elections because nobody is confident of winning.”

“The opposition is not united, or very strong at present,” adds Bhandare of TSMG. And according to Chakrabarti of ISB, “as of now, it does not look like there is a survival crisis for the government. But the political winds are too volatile and the re-reading of shifting electoral tea leaves can lead to a switch in the stance of one or more major ally to change the situation suddenly. Also, a midterm election can happen if the Congress seeks to project an image of a leader unshackling itself by seeking a fresh mandate.”

While the politicians work out the equations, industry counts the losses of inaction. Says Bhandare of TSMG: “One can tolerate economic slowdown for maybe a few months, but prolonged policy paralysis can have a deep negative impact. The government has not brought in any reforms. The macro-fundamentals of the economy are under great stress.

“The core of the problems in India today is the duality and multiplicity of the political power structure,” Bhandare notes. “Because of this, the prime minister is not able to offer a statesman-like leadership.”

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