There are perhaps only two countries in the world which give me sleepless
nights. I have long ago stopped losing any worry beads on the future of
countries that I like but have long since given up the ghost on the issue of
staying globally relevant (Japan, most of Europe). Similarly, I worry but am
not all that concerned about countries that have substantial structural issues
but which are likely to be resolved by their mature governments (China,
Australia fall into this category).
Then there are those countries which have significant issues but also a
thoroughly optimistic view of their future; essentially a self-resolving morass
of concerns (much of Latin America falls into
this category). The last group of countries I lose no sleep on are the ones
where the populace have their collective heads up their own backsides (the
Middle East and the Stans).
All of which leaves me with two countries both of which I like a lot, but which
appear to be headed in exactly the wrong directions with a great deal of
momentum. One of these two is the United States, which has been a frequent
subject of my articles for the past five years. The other country is India,
which has interestingly (for me) gone from being a sure shot at future relevant
giant to being something altogether more fuzzy and volatile.
In the days of yore, Americans earned for themselves the title of being the
world's boors for their habits while traveling and doing business abroad. As
the generic description of the origins of the term 'Ugly American' in Wikipedia
puts it:
The term originated as the title of a 1958 book by authors
William Lederer and Eugene Burdick. In 1963 the book was made into a movie
directed by George Englund and starring Marlon Brando. The best-selling,
loosely fictional account provided contrasting characters with different
approaches to opposing communist influence in Southeast Asia, and the use of
foreign aid in particular.
The majority of the Americans exhibit a range of blundering, corrupt and
incompetent behaviors, often concentrating on impractical projects that will
serve more to benefit American contractors than the local population. A
minority are effective because they employ knowledge of the local language and
culture, but most of these are marginalized and some even considered suspect.
As a result, their influence is more limited than it should be.
In effect, the term for Americans had much to do with their correct if not
noble intentions that were waylaid by the practical aspects of managing and
achieving certain outcomes. In effect, this is the opposite of where Indians
appear to be going with their social image - from a position of weakness and
general empathy from the world that is typically reserved for people with
significant poverty and key developmental issues plaguing them, Indians have
managed to concoct an image of arrogance, superciliousness and now
increasingly, being crooked.
Corruption in India has become an all-encompassing feature of daily life; one
that is impossible to avoid and much less something to pick a fight with. When
I wrote about the issue (see
The wages of corruption Asia Times Online, August 19, 2006) in Asia
about five years ago, I noted:
In India, corruption is under the table.
In China, it is over the table. In Indonesia though, it includes the table.
Now though, corruption in India is all three - under, over and including the
table. Last year, in an article about the game-changing cricket Indian Premier
League (IPL) (see IPL
- or India's predictable larcenies Asia Times Online, April 24, 2010),
I wrote:
In the case of India, despite a freewheeling democracy and
ostensibly free media, there has been an escalation of corruption in the past
few years by all accounts. A growth rate of over 8% in the official economy
(perhaps 10% if the unofficial economy is included) over each of the past five
years has meant a range of new opportunities for investors and businessmen even
as it keeps the vast number of the country's dispossessed away from outright
revolt (with the notable exception of the Maoist movement that infests central
India and may well morph into the country's greatest threat in the next few
years). Despite the heady growth, the country's fiscal deficit has remained
virtually untouched over the period due mainly to rising government spending on
social welfare programs that also bear the hallmarks of endemic corruption.
Meanwhile, government revenues have increased, but not quite to the extent that
8% economic growth should have provided. The difference is of course due to
revenue-side corruption, that is, the government not pursuing tax collections
in order to keep certain businessmen happy.
Politics and
business
Readers of this column know the author's generally low opinion of India's
ruling classes and in particular the Indian National Congress (or Congress)
party, which is at the center of a coalition government presiding over one of
the world's fastest-growing economies. Rather than contributing to the
country's growth though, the ruling government appears to have focused its
energies on skimming as much cream as physically possible.
Three scandals that have come to light in recent months are particularly
galling for Indians as well as anyone who invests in India:
1. The scandal around the failed Commonwealth Games (CWG) staged in the
capital, New Delhi.
2. The "military housing" scandal in India's commercial capital, Mumbai.
3. The "2G Telecom" scandal, which apparently affected licenses granted across
the entire country.
Each of these scandals represents a different facet of corruption in India;
collectively they represent the future of the country and possibly the reasons
that could account for its relative underperformance against Asian peers for
the better part of the next 50 years.
CWG were supposedly India's "Beijing 2008" moment, to do what what hosting the
Summer Olympic Games did for China's global reputation. Instead, there was a
sorry spectacle of corruption, incompetence, safety violations and other
general failures. As the Financial Times reported in November, 2010:
India
suffered public humiliation in the run-up to last month's games over
accusations of delays, cost overruns and corruption. Mr Kalmadi, who denies any
wrongdoing, came under severe criticism and was booed by crowds at both the
Commonwealth Games opening and closing ceremonies. Within 24 hours of the
closing ceremony, Manmohan Singh, the prime minister, launched a high-level
investigation into the allegations of corruption and mismanagement that marred
the run-up to the tournament. A collapsing footbridge, delayed building
projects and an athletes' village that was "unfit to live in" instigated
widespread criticism of the organizing committee and its chief. The 71-team
competition, which was hailed as a success in spite of all the controversy, was
the costliest Commonwealth Games in history. According to government records,
estimated games-related costs rose to more than $15bn, 114 times the original
calculation made in 2002 ... It was the CVC that released an internal report in
July that put the total misappropriation between $1.1bn and $1.8bn.
This particular scandal was a simple victory for opaque processes and
bureaucratic difficulties that make it impossible for Indians to find out about
the costs of various projects and possible leakages until matters are revealed
as truly incompetent and outrageous. Cue the liberal media attacks on all and
sundry; and after a sufficiently small time in the headlines the matter is
buried and forgotten about.
The second scandal is all about the quintessential corruption of India's elite
against its society. The Times of India reported in February 2011:
Initial
reports said that there was a reference to (former chief minister [CM]) in the
report filed by the Central Bureau of Investigation ... it was revealed that
Chavan was among the 13 main accused in the scam involving high-ranking
military officials, bureaucrats and leading politicians.
Chavan has been charged with forgery, cheating, corruption and gross misuse of
power. A senior official said the main charge against Chavan was that as CM he
had directed the housing society to enroll civilians as members though the
entire plot was reserved for the Kargil war heroes. Secondly, as urban
development minister, Chavan had granted permission for de-reservation of part
of an adjoining plot. In lieu, four relatives, including his mother-in-law,
were granted society membership.
The reference to Kargil
should be noted - it was the last war fought by the Indian army, in 1999,
against an incursion into Kashmir by Pakistani army soldiers masquerading as
terrorists; one of the "genius" moves attributed to General Pervez Musharraf in
his last active role for the armed forces in Pakistan; events that ironically
led to the removal of the civilian prime minister Nawaz Sharif and the
installation of Musharraf as president.
Caught flat-footed in the wake of the incursion, the Indian government threw a
number of its army divisions at the problem leading to significant casualties.
The housing development in an expensive part of Mumbai was meant to partially
represent compensation for Indian heroes at Kargil.
Instead, the project was hijacked by political interests with the proceeds
going directly to politicians without the usual lackey capitalist to even serve
as an in-between. This facet of corruption showed the kind of chutzpah that
India had been proud of its politicians never daring to show over the past few
decades: and suddenly there it was staring at everyone like the Indian sun at
noon.
Many years ago, when I discussed matters of crony capitalism with Indian
officials, I was assured that "such things cannot happen here" - while no one
denied the existence of corruption in the country, the general attitude was
that limits would always be observed in India, unlike say in the case of China,
Russia or the Middle Eastern countries.
The explanations proved grounds for mirth when the $39bn 2G telecom scandal was
revealed. There are virtually books to be written on the subject of how 2G
scandal evolved, but this article will suffice, as reported by the Wall Street
Journal on April 4:
The Central Bureau of Investigation on Saturday
filed formal charges against nine individuals, including the former telecom
minister Andimuthu Raja, an aide and a former senior telecom bureaucrat, all of
whom plan to contest the charges. The agency also brought charges against six
telecom firm executives, including three top officials at Reliance Telecom Ltd,
which is a unit of the Anil Dhirubhai Ambani-headed telecom heavyweight
Reliance Communications Ltd, the director of Unitech Wireless Ltd and two
directors at Etisalat DB Telecom Pvt Ltd. The executives were charged for
crimes ranging from cheating and forgery to abetment to a crime, and all of
them have denied any wrongdoing.
Unitech Wireless is a joint venture between Indian real estate firm Unitech
Ltd. and Norway's Telenor AS. Etisalat DB Telecom is a venture between Indian
real estate firm DB Realty Ltd. and UAE [United Arab Emirates]-based Emirates
Telecommunications Corp.
With more than 770 million wireless subscribers, India is the fastest-growing
telecom market in the world, as well as being the second-largest market after
China. But the telecom scandal and regulatory uncertainties have been weighing
on the industry, leading investors to dump telecom stocks for cleaner and
transparent ones like technology and banking. Reliance Communications has lost
nearly 47% of its market value in the last 10 months.
By now,
the average reader would be weary - okay so Indian politicians are corrupt, so
exactly why is that news given what happens in the rest of Asia? Well, for one
thing it appears that whatever is happening in Indian public life is also
beginning to take hold of its professional class of people - the very people
who were once considered above the fray and as such, the beacons of hope for
India.
Take the 2G Telecom scandal - the range of those accused of paying bribes goes
from the Anil Ambani group to the venerated Tata Group, with a whole range of
smaller companies in between. The inclusion of the Tata Group in the scandal
proved a game-changer for even professional investors with longstanding ties to
India; as the group was widely perceived as having always been above the fray
in the country. This was, evidently, not the case as growth and revenue
opportunities simply proved too compelling to pass by.
Enter the Indian professional
Even if one were to look past the developments in Indian politics and business
circles, it would be difficult to completely ignore events surrounding the
behavior of Indian professionals as evidenced by the Galleon case in the US.
Among the list of accused along with Raj Rajaratnam - a Sri Lankan national of
Tamil origin - are some bright luminaries who are generally counted among those
representing the ascent of the Indian professional in global business: Rajat
Gupta and Anil Kumar.
While Gupta has not been formally indicted [1], he stands accused by the
Securities Exchange Commission of passing on inside information to Rajaratnam.
The former head of consulting firm McKinsey is famous in Indian business
circles for starting a new management school - the Indian School of Business
(ISB) - and for being a board member of Goldman Sachs and other top companies
around the world. Kumar, also formerly at McKinsey, was seen as a key part of
the information chain that fed Rajaratnam and admitted as much [2].
Coming two years after the scandal around India's outsourcing giant Satyam, the
damage done to the professional image of Indian companies from revelations such
as in the Galleon case cannot be underestimated at this stage. Dealing with
crooked businessmen is one thing, but when people you employ to take care of
your technology and accounting systems - not to mention the consultants who are
employed to guide your organization - prove to have ethical values more akin to
pirates than professionals, cost advantages become laughably insufficient to
guide any business.
Anger at the state of Indian politics and business has certainly changed the
country's mood. As the victory of an anti-corruption group over the weekend
showed, there is still cause for some hope. A veteran Gandhian (follower of the
principles of Mahatma Gandhi) by the name of Anna Hazare undertook an
indefinite fast to force the government to adopt measures aimed at improving
oversight and transparency. As the Times of India reported last week:
Government
on Friday night blinked in the battle of attrition with Anna Hazare by agreeing
to issue a formal order to set up a joint committee for drafting an effective
Lokpal Bill and the Gandhian will end his indefinite fast on Saturday. The
announcement of an agreement came from both sides late in the night on the
fourth day of Hazare's last-unto-death that triggered a nationwide support for
his anti-corruption campaign.
Thousands of Indians are reported
to have joined the campaign; in what could only be counted as a rather late
reaction to the vast number of cases of corruption around the country. That
said, the key issue will be whether momentum can be maintained. After all,
Indian politics and business have endured multiple scandals over the past
twenty five years with less than a handful of such cases being pursued to
prosecution and ultimately, jail sentences for those accused. In all other
cases, politicians and businessmen appear to have used a gamut of
extra-governmental, legal and other machinations to destroy prosecution.
A failure to secure justice at the current juncture will likely mark a decisive
turn in India's development. As the Financial Times cautioned in March this
year:
Fantastic wealth creation amid weak governance is deepening
anxieties about long-term economic success. Regulation that can be trampled
over, alongside a widening gap between the rich and a largely poor population,
invite unflattering global comparisons. Also, says Manmohan Singh, prime
minister, the developments have dangerously sapped Indians' confidence in
themselves. International investor sentiment has picked up on the mood and
turned sharply for the worse. Foreign capital flows have fallen. "Nine out of
10 clients are not positive on India in the near future," says Suresh
Mahadevan, head of research at UBS Securities in Mumbai. "Most of the bad news
is already in the [market] price." "We met with about 50 investors in Singapore
and Hong Kong last week," says Rohini Malkani, economist at Citigroup in
Mumbai. "About 70 per cent remain bearish on India, with investments,
inflation, and politics topping the list of worries."
If
foreign direct investment were to decline from here, access to capital would
once again become the prerogative of the business elite thereby leaving smaller
businesses and entrepreneurs without the means to change the country's future
in what would be a tragic repeat of the situation in Russia and Japan over the
past 20 years.
Notes
1. The Securities and Exchange Commission filed a civil administrative action
against Mr Gupta for allegedly sharing inside information with Mr Rajaratnam
when Mr Gupta was a member of the boards of Goldman Sachs and Proctor &
Gamble.
2. Mr Kumar, a former senior partner at McKinsey & Co and cooperating
witness, pleaded guilty to criminal charges, saying he was paid $2 million to
provide tips on McKinsey clients such as AMD to Mr Rajaratnam. He also agreed
to pay $2.8 million to settle a civil lawsuit by the SEC.
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