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Follow the Money
Santosh Hegde blows the lid on another mega-scandal

The latest malefaction to explode in India’s seemingly unending season of scandals concerns the illegal mining and export of iron-ore deposits in the southwestern state of Karnataka.  According to an extensive report – some 25,000 pages in length, with the summary running almost 500 – released last week by N. Santosh Hegde, a retired Supreme Court justice who led an official inquiry, the scandal’s proportions are breathtakingly brazen, even for a country where graft has long been part of the political fabric.

The plunder allegedly entails scores of mining companies, some of them run by the country’s wealthiest businessmen, acting in cahoots with hundreds of government officials, including B.S. Yeddyurappa, the state’s chief minister, who is reported to have received $7 million in bribes.  Under mounting political pressure, Yeddyurappa resigned last week, though he vociferously maintains his innocence.  Hegde’s investigation also implicates six members of Yeddyurappa’s cabinet, including two brothers of the powerful Reddy family, who are accused of running Karnataka’s ore-rich Bellary district as a personal fiefdom.  All told, the scandal is estimated to have cost the state’s treasury some $3.5 billion in lost royalties, permit fees and tax payments in just the March 2009-May 2010 period.

The episode resounds with political repercussions.  Karnataka’s capital is the world-famous technology hub of Bangalore, the icon of New York Times columnist Thomas Friedman’s “The World is Flat” thesis.  Many believe the modernizing, entrepreneurial impulses radiating from the city will propel India into the first rank of global powers.  Yet the supposed gateway to the dawning Indian Century has now been revealed as the latest residence of the old-school corruption that persistently continues to degrade the country’s rise. 

The Bharatiya Janata Party (BJP), the main opposition party in New Delhi, sought to make political hay out of the cascade of scandals that have deluged the ruling Congress Party and paralyzed Prime Minister Manmohan Singh’s government.  Foremost among these are allegations of impropriety in the telecommunications ministry’s licensing of second-generation (2G) spectrum, a scandal that has landed Andimuthu Raja, Singh’s telecommunications minister, in jail and forced the resignation of Dayanidhi Maran, another Cabinet member who previously headed the ministry.  The government auditor reckons that the scandal, which also casts a shadow over Ratan Tata and Anil Ambani, two of the country’s most prominent business leaders, has cost the national exchequer nearly $40 billion in foregone revenue.

But the knife the BJP has been wielding is now dulled, since Yeddyurappa was a BJP rising star and the Reddy brothers bankrolled the party’s operations in Karnataka.  Moreover, the brothers’ political patron is none other than Sushma Swaraj, the BJP leader in the Indian parliament.

The mining scandal will give new impetus to the unprecedented levels of public anger against corruption and shoddy governance, as well as reinforce widespread questions about whether the relationship between the state and the corporate sector is far too cozy and whether, as a result, oligarchic capitalism is taking root in India.  An immediate focus of this discontent is the controversial legislation that would establish a powerful watchdog agency (called “Lokpal or “Ombudsman”) to investigate government malfeasance.

The bill’s current form is opposed by Gandhian social activist Anna Hazare, the leader of a popular anti-corruption movement.  Last April Mr. Hazare staged a well-publicized hunger strike, a traditional Indian form of protest, to force Singh’s government to draft a Lokpal bill.  But Hazare and the government have been unable to reach agreement on the bill’s provisions and he is now mounting a new protest in New Delhi on August 16 (complete with threatened hunger strike) in order to press his demands.

Good governance is an obvious prerequisite for the country’s continued economic development.  India placed 87th out of 178 countries in Transparency International’s 2010 Corruption Perceptions Index and this notoriety is deterring much needed foreign investment. The establishment of a robust Lokpal agency would certainly help in this regard, though it should be noted that the country does not lack for anti-corruption institutions, ranging from the Central Vigilance Commission to the Central Bureau of Investigation.  The Indian Supreme Court is now keenly focused on governance issues (see here and here) and government innovations like the Unique Identification Authority (which will issue national identity cards) should make a real dent in reducing rampant corruption in social welfare programs.  And over the last decade, civil society’s capacity to demand accountability of the government has grown with the Right to Information Act, crusading investigative journals like Tehelka, and citizen initiatives like 5th Pillar and (whose data points to Bangalore as India’s most corruption-ridden city by far).

All the same, India’s deep-rooted corruption problems go far beyond what any watchdog institution, however sharp-eyed and aggressive, could hope to tackle.  As The Economist observes, the country’s “regulations are not, by and large, deterrents to corruption, but a source of it.”  It is no coincidence that the mining and telecommunications scandals – not to mention a disturbingly large concentration of wealth – arose from sectors where state control is the heaviest.  A recent Asian Development Bank report estimates that about 80 percent of India’s total billionaire wealth in 2008 was derived from natural resources, land and sectors dependent upon government allocation decisions.  Nor is it an accident that the most dynamic, competitive sectors – like software and pharmaceuticals – are those in which the government is much less intrusive and the opportunities for political rent-seeking far less prevalent.

 Even after the much-touted economic liberalizations introduced two decades ago, the Indian state continues to wield excessive control over wide swathes of the national economy.  India ranks 124th among the 183 countries surveyed in the Heritage Foundation’s frequently cited Index of Economic Freedom, right between Cote d’Ivoire and Moldava and not far from China’s 140th showing.  Even Prime Minister Singh, the architect of the 1991 economic reforms, has taken to warning about the creeping return of the notorious “License Raj.”

Mr. Singh is undoubtedly a man of honor and high principle, but his reputation for personal integrity is being abraded by charges that he was obtuse – or worse yet, turned a blind eye – to the egregious malfeasance of his own ministers.  In response to swelling public anger, his government has undertaken a series of useful reforms, such as curbing the discretionary powers of Cabinet members and ratifying the United Nations Convention Against Corruption.  Worrisome, however, are reports that the recommendations mooted by a high-level panel for reforming the licensing process of key natural resources have been diluted by Cabinet officers.   

If Singh wishes to refurbish his legacy – not to mention revitalize the Congress Party’s electoral prospects – he will need to complete the work he set out to do 20 years ago by dismantling the remnants of the “License Raj” that breed opportunities for corruption and depress the country’s economic trajectory.



David J. Karl

David J. Karl is president of the Asia Strategy Initiative, an analysis and advisory firm that has a particular focus on South Asia. He serves on the board of counselors of Young Professionals in Foreign Policy and previously on the Executive Committee of the Southern California chapter of TiE (formerly The Indus Entrepreneurs), the world's largest not-for-profit organization dedicated to promoting entrepreneurship.

David previously served as director of studies at the Pacific Council on International Policy, in charge of the Council’s think tank focused on foreign policy issues of special resonance to the U.S West Coast, and was project director of the Bi-national Task Force on Enhancing India-U.S. Cooperation in the Global Innovation Economy that was jointly organized by the Pacific Council and the Federation of Indian Chambers & Industry. He received his doctorate in international relations at the University of Southern California, writing his dissertation on the India-Pakistan strategic rivalry, and took his masters degree in international relations from the Johns Hopkins University School of Advanced International Studies.