India Telecom Scandal Highlights Systemic Problems

22 February 2011.

With the arrest earlier this month of Andimuthu Raja, former telecommunications minister in India’s current Congress-led coalition government,

the deeper problems afflicting its unusual combination of a dynamic economy

with a weak and corrupt political system have been glaringly exposed to public view.

Raja was a small-town lawyer from a regional political party in a southern Indian state.

22 February 2011.

With the arrest earlier this month of Andimuthu Raja, former telecommunications minister in India’s current Congress-led coalition government,

the deeper problems afflicting its unusual combination of a dynamic economy

with a weak and corrupt political system have been glaringly exposed to public view.

Raja was a small-town lawyer from a regional political party in a southern Indian state.

By almost any measure, he seemed an unlikely candidate to be the government minister presiding over the fastest-growing cellphone market in the world —

not least because he had no background in either telecommunications in particular or business in general.

But he had the only qualification that mattered:

the ironclad backing of the political chieftain of his party, a crucial ally of the governing Congress Party.

Without his party’s 16 members of the lower house of Parliament, the government cobbled together from squabbling allies would collapse.

His decisions may have cost the Indian treasury as much as $40 billion,

according to a government investigative report released last November.

The ever-widening scandal, coming on the heels of two major political scandals involving senior Congress Party officials, has eroded faith in India’s government.

India’s prime minister, Manmohan Singh, widely regarded as a figure of unimpeachable integrity, was rapped by the Supreme Court for failing to investigate quickly.

The scandal also threatens to undermine one of the most dynamic sectors in India’s rapidly growing, technology-driven economy.

The story of how Raja rose from small-time regional politician to telecommunications minister is emblematic of how politics in India, the world’s largest democracy, really work.

Small, regional parties, often formed along family or caste lines, hold outsize sway here,

taking command of crucial and potentially lucrative parts of the government to fill their pockets and party coffers.

Since 1989, when Rajiv Gandhi’s government went down in defeat in the wake of a corruption scandal involving military contracts,

no party has won an outright majority in Parliament.

As a result, forming a government has required complicated and often messy coalitions with smaller regional parties.

These parties often have no national agenda and see power in the center as little more than an opportunity to loot.

The Congress Party has had no shortage of corruption scandals of its own.

But it currently controls the most crucial government functions — internal security, foreign policy, defense and finance —

and has entrusted them to seasoned leaders with unassailable credentials.

The realities of coalition politics, though, in which crucial allies must be given important posts,

have left some large ministries in the hands of smaller parties,

which have in turn put questionable politicians in important jobs.

This has led to embarrassing scandals and mismanagement in the past.

In 2006, the coal minister, Shibu Soren, a politician from the eastern state of Jharkhand and an important ally of the Congress Party,

was forced to resign after he was convicted on murder charges.

India’s railways, the country’s largest employer, are in the hands of Mamata Banerjee,

a populist leader whose sole aim appears to be defeating the Communist Party of India in West Bengal,

and putting her party, the Trinamool Congress, in power.

Raja’s party, the Tamil Nadu-based Dravida Munnetra Kazhagam, or D.M.K., was once a liberation movement built on Tamil nationalism.

But the party has largely jettisoned ideology.

An octogenarian, wheelchair-dependent patriarch named M. Karunanidhi and his plentiful and perpetually feuding progeny run it,

and it more closely resembles a sprawling family business empire than a political party.

When the Congress Party returned to power in 2004, it won narrow advantage over the center-right Bharatiya Janata Party,

whose former ally, the D.M.K., linked up instead with Congress.

The D.M.K.’s reward was the telecommunications ministry and several other posts.

Karunanidhi sent his grandnephew, a local media tycoon named Dyanidhi Maran, to Delhi to become telecommunications minister.

But Maran fell afoul of Karunanidhi’s eldest son.

In an effort to quiet the burgeoning family feud, Karunanidhi replaced Maran, a powerful political player in Tamil Nadu, with Raja,

who was much less well known but who had a close relationship with Karunanidhi’s daughter Kanimozhi, also a powerful party figure.

Raja had a history of party activism dating to his college days.

He had been a minister in a previous government.

He was the most important politician in the state from the Dalit, or formerly untouchable, community,

and giving him a big job would secure Dalit votes.

“He was loyal and he was not a threat,”

said Vaasanthi, an analyst who has written extensively about Tamil Nadu politics and who, like many Tamils, goes by one name.

“That was his qualification for the job.”

Even Prime Minister Singh, widely seen as one of the most upstanding politicians in India, has been tarred in the scandal.

While no one has suggested he was involved in corruption, India’s Supreme Court has criticized him

for failing to respond to a call for an investigation into Raja’s handling of the spectrum sale.

Singh has pledged to punish anyone found guilty in the scandal, but questions linger about why he did not act sooner to remove Raja,

leading some to conclude the Congress Party will sacrifice almost any principle to hold on to its governing coalition, according to the New York Times.

Indeed, the telecom debacle is now considered India’s equivalent to America’s oil-ridden Teapot Dome scandal of the 1920s.

Apart from Raja’s arrest, it has produced almost daily revelations about bribery, abuse of power, privatization of public wealth,

and has plunged the governing Congress Party into its worst political crisis in years.

The amounts involved, and subsequent revelations of how some of India’s richest men sought to exercise influence over political appointments and regulatory decisions,

have surprised even a nation seemingly inured to reports of corruption in politics.

The political fallout seems to grow each day.

The scandal has energized a once-moribund opposition, led by the Bharatiya Janata Party, which has blocked normal business in Parliament.

Beyond the political infighting, the scandal has broad implications for India, the world’s second-fastest-growing major economy.

Growth depends increasingly on turning whole swaths of the state-directed economy over to the private sector,

whose capital and expertise are critical as India embarks on plans to build roads, bridges, ports and power plants.

But many analysts say the telecom scandal is just one indicator of crony capitalism and inadequate oversight

that fuel public skepticism about capitalism and slow down reforms.

The scandal also has revealed an incestuous world of journalists, corporate lobbyists and politicians

and reinforced the perception of an Indian economy dominated by a small, tightly connected elite.

“Even as the government cedes control over large parts of the economy,

its graft-ridden approach to privatization could leave long-lasting scars that hold India back from reaching its potential,”

said Eswar S. Prasad, a professor of trade policy at Cornell University and an adviser to India’s Finance Ministry.

“Open corruption and rising stark disparities in wealth are a volatile mix that could affect social stability if the benefits of growth don’t filter down.”

To many analysts, the telecom scandal is emblematic of what many consider India’s gilded age,

as a small group of powerful conglomerates scramble to fight for resources or projects,

whether mining rights, land, infrastructure projects or the electromagnetic waves known as spectrum that carry cellphone service.

India is the world’s second-largest cellphone market, with nearly 700 million subscribers,

and the profits of private operators depend on licenses for spectrum.

In a hearing last year, India’s Supreme Court expressed astonishment

over the irregular practices of India’s Department of Telecommunications in dividing up the spectrum in 2008.

On the final day of the allocation, telecom officials issued an unexpected notice informing applicants of a rule change.

Spectrum would effectively be awarded by schoolboy rules;

the first companies to reach the counter with completed paperwork and a license fee of $355 million would qualify.

Businessmen sprinted down the hallway, jostling down stairs, as they rushed toward the office where a clerk was processing applications.

Investigators are now looking into whether certain companies were tipped in advance to the rules change.

“The bizarreness of it took us by surprise,” one executive who witnessed the scramble said in an interview.

“People were pushing and shoving, making sure they were ahead of everybody else.”

Less than two years ago, India was horrified over a scandal at Satyam, an Internet technology company whose founder and chairman admitted to fraudulent accounting.

That now seems quaint, as scandals of far greater magnitude multiply in illegal iron ore mining, banking, the staging of last year’s Commonwealth Games and more.

The telecom industry in India was essentially born in the mud pit of corruption.

Telephones were once a rarity in India —

made rarer by the plodding intransigence of the government service provider,

which might take one year, or three, to fulfill a customer’s order for a new line.

Then in 1994, three years after India began embracing market reforms, telecom was opened to the private sector.

The move unleashed nothing short of a revolution, eventually providing hundreds of millions with their first telephone service.

But corruption also soon surfaced: in 1996, the minister overseeing the telecom field was charged with accepting bribes.

Investigators searching his home discovered more than 24 million rupees, or roughly $550,000, stuffed inside trunks, pillowcases and toilet tanks.

Nearly 15 years later, the style of corruption is far different, as is the money.

In 2010, India’s cellphone customers were expected to pay nearly $20 billion in bills, according to the technology research company Gartner.

Most of this revenue went to a handful of big players — Reliance Communications, Airtel, Vodafone, Tata Teleservices and Idea Cellular —

which together account for almost 80 percent of the market.

With the exception of Vodafone, a British corporation,

these giant telecom companies are all subsidiaries of India’s biggest conglomerates,

headed by some of the nation’s most powerful tycoons.

Their companies reach into steel, autos, natural gas, power plants, mining, construction and media.

Today, India has 66 resident billionaires, whose combined wealth of roughly $244 billion

is equivalent to more than a fifth of the country’s $1.1 trillion gross domestic product.

This trend of the richest getting even richer, in a country where 800 million people survive on $2 or less a day, is raising concerns,

especially since so many fortunes are rooted in industries intertwined with government licenses and rife with corruption.

“There is a risk that India will evolve toward a condition of oligarchic capitalism,

in which the market and political power of major corporations will become a drag on long-term growth and a source of distortion in policy,”

a report sponsored by the Asian Development Bank has warned.

Now many analysts say that the scandal represents a major test for Indian governance and capitalism —

and whether the system can mete out punishment for wrongdoing, according to the New York Times.

And there is no indication Raja’s arrest will be anywhere near the end of it.

 

David Caploe PhD

Chief Political Economist

EconomyWatch.com