The telecom scam that recently forced the resignation of telecom minister A. Raja defrauded the country to the tune of nearly US$40 billion. Since telecom is an industry that links backward and forward to several others, the total economic cost could well be hundreds of billions of dollars. This scandal shows that corruption has deep roots in Indian society, but informed voters and the democratic process can help eradicate it, argues Rajesh Jain, managing director of Mumbai-based Netcore Solutions, in this opinion piece. Jain, a member of the India Knowledge at Wharton Advisory Board, blogs every day at http://emergic.org.

Even to a nation that has long become inured through repetition to high level corruption, the numbers being reported in the so-called 2G telecom scam appear incredible. In 2008, the Union Government of India licensed the use of spectrum to nine corporations for providing mobile telephony services in 122 circles. The amount raised was around Rs. 1,658 crore (around US$370 million). The Comptroller and Auditor General of India estimates, based on the auction of spectrum for 3G services which happened subsequently, that the Indian exchequer was defrauded to the tune of Rs. 176,000 crore (around US$40 billion) in the 2G spectrum sale.

It has been alleged that A. Raja, the former minister in charge of telecommunications, awarded the licenses arbitrarily in a non-transparent process, and at prices that did not reflect the actual value of the spectrum. Prices appropriate for the much lower teledensity of 2001 (relative to 2008) were charged to give licenses to favored companies —  some of which did not even have telecom experience — on a first-come, first-served manner rather than through competitive bidding.

Although wrong-doing was alleged immediately after the sale in 2008, it was only in November this year that Manmohan Singh, India’s prime minister, forced Raja to resign. The telecom minister’s position became untenable after the Supreme Court intervened, and several potentially damaging phone recordings involving a high-powered lobbyist and prominent journalists were leaked. Besides forcing the resignation, the telecom scam has tainted the prime minister’s office as well.

The Cost of Corruption

The telecommunications infrastructure of an economy is the equivalent of the nervous system of a body. Without a robust, affordable, efficient and reliable telecommunications system no economy can prosper in what is called the “information age.” Corruption in the licensing of spectrum can be expected to damage the roll-out and use of the telecommunications infrastructure. Telecommunications have significant backward and forwards links with all other sectors of the economy. The economic cost to India could well be in the hundreds of billions of dollars.

Corruption has unfortunately become an all-encompassing feature of India. Indians are all too familiar with it. For citizens dealing with all levels of government, routine abuse of power has lost its ability to shock or even to evoke comment. Most people accept corruption as a fact of life. What should truly disturb us is corruption in the public sector. The telecom scam is a terrible example of public sector corruption which Transparency International (TI) defines as “the abuse of entrusted power for private gain.”

The magnitude of the telecom scam is massive, but it is hardly unique. In resource-rich states, scams involve mining rights; in major cities, they often deal with real estate. The details vary but the underlying story is the same.

Just in the last few months, the Commonwealth Games in New Delhi were marred by allegations of massive financial corruption amounting to billions of dollars. Another case of high corruption that recently came to light — called the Adarsh Housing Society scam — involved politicians, builders, and defence top brass. These financial misappropriations are nothing new. The Washington, D.C. based Global Financial Integrity report, The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, released this month estimates that the present value of India’s total illicit financial flows is at least US$462 billion, an amount that is twice India’s current external debt of US$230 billion.

True Stories

To explain how deeply corruption has penetrated Indian society, let me narrate a few stories I have heard from friends and business associates. It is only when one hears these true stories that one realizes how flawed our system is.

  • A large company won a contract for a waste management project in a global tender. Soon, it got a call from a political party demanding money. The company paid up for fear that its work would be disrupted. Then a second political party demanded even more money. Again it paid up. When a senior leader from a third political party called up, the company had had enough and refused to give in. Then it received a letter from a government ministry stating that the project was on hold. The CEO went to meet the senior leader and was abused and told that unless the company paid, the project would not go through.
  • Real estate prices in all major metropolitan areas in India have gone through the roof. Rates as high as Rs. 100,000 (US$2,200) per square foot in South Mumbai are not uncommon. These reflect the well-known fact that real estate is one of the major avenues for politicians to generate funds. About a third of the cost of land and construction is attributed to bribes paid to the political system — starting from the municipal corporation officials, all the way up to the highest offices of the government.
  • The other day, a friend who is in the construction industry told me about the cost and time escalation in his business. At every stage he had to pay off people who had the power to delay and disrupt operations. Among the scores of officials with whom he had the misfortune to interact for a hotel project he completed, he found only one who was honest. Even now, my friend has to keep cash ready at hand to pay off ‘inspectors’. Projects typically take twice as much time and money than would be reasonably expected.

The trouble with corruption is that it erodes trust. It limits welfare-improving trades that are so central to the economic efficiency of any system, capitalist or socialist. It also leads to inefficiency of resource allocation. The telecom spectrum sale scam is a stark example of that. As it happens, some of the corporations that obtained the licenses cheaply turned a good profit by re-selling the spectrum. By mispricing the spectrum, value that should have accrued to the public treasury, and which could have been used for public projects, instead ended up as super-normal profits for corporations. The Indian economy lost not just in terms of direct revenues from the licensing of spectrum but also because of the effects of high telecom service costs (a consequence of the final buyer of the spectrum paying a higher price). Corruption is in effect an illegitimate tax that enriches private parties and acts as a brake on economic growth.

It is instructive to inquire into the causes of corruption at such astounding scales. The reasons are most certainly structural. When the government wields too much discretionary control over resource allocation, it is tempting for bureaucrats and politicians to gain from the concomitants of power. The minister for telecommunications had significant discretionary power over who acquired spectrum, as well as when and for how much. He apparently exercised that power to the detriment of the country.

Criminals in Power

The opportunity to amass phenomenal wealth that political power affords is the main driver for people with neither aptitude nor desire for governing to go to enormous lengths to enter politics. Over time, this leads to the erosion of public morality and ethics. The results of the recent assembly elections in Bihar illustrate this reality. In the 243-member Bihar legislative assembly, 141 of the newly elected members have pending criminal cases against them. The charges include murder, kidnapping and theft. [See http://ibnlive.in.com/news/141-bihar-mlas-have-pending-criminal-charges/135850-3.html?from=trhs ]

It should be shocking that people who are entrusted with making laws are themselves most likely the ones who have broken them. There has been a definite lowering of standards of what is acceptable behavior. That voters actually elect criminals to legislative bodies must be the most shameful aspect of Indian democracy. The trend is not at all positive, for it appears that now even the press is involved in the murky deals that were once limited to some politicians and corporations. It also appears that the cancer of corruption may have spread to the judiciary.

In the final analysis, the prevalent level of public probity and integrity is a function of society’s demand for them. In a democracy, the people ultimately decide who gets to govern. The solution to the problem of corruption of public officials lies absolutely with the public. The kind of leaders and policy makers that people demand ultimately determine who gets to make the rules by which society functions.

India is a democracy. In the words of Abraham Lincoln, the country has a “government of the people, for the people, and by the people.” But Indians have to understand that most of India’s maladies are a consequence of their abdication of the responsibility that necessarily accompanies the rights Indians have in a democratic system. Democracy is not just about voting but rather informed voting. Citizens have to act collectively against those who have brought ignominy and shame to the country. They have the responsibility to clean up the corruption. This they can do most effectively by refusing to vote for criminals.

The news is not all bad. Citizen groups are springing up that seek to address the problem of corruption. It is a collective problem that can only be solved through the mobilization of informed voters. Among many others, one such nascent group, called “United Voters of India,” is an association of people who agree to vote only for candidates who are capable and clean.

Our problems have to be solved within the system through the democratic process. The good news is that advances in information and telecommunications technologies have shifted the balance of power from the government to the people. People now have the means to inform themselves and collectively organize to force reform on the system. The telecom scam should serve as a wake-up call to all Indians that it is time to take action. If it does that, perhaps the scam will have served a positive purpose after all.