Hindustan times, August 28, 2014

By Pradeep S Mehta

While Prime Minister Narendra Modi in his Independence Day speech inter alia highlighted petty corruption, it was RBI governor Raghuram Rajan who made a frontal attack on crony capitalism ie big-bang corruption in another speech. Both cancers have to be attacked. Hopefully this phenomenon will subside if the government is as serious as it claims to be.

What is crony capitalism? It happens when business colludes with the polity and bureaucracy to gain unfair advantages, like the 2G spectrum scam or the Coalgate affair when a handful of oligarchs got favours without any competition or proper procedures. Just these two scams cost the nation in excess of Rs. 300,000 crore, according to CAG estimates. The loss to the nation will be much higher if the entire spillover cost is assessed. Thanks to our Supreme Court, the CBI and media, the scams were revealed. This unfortunately led to a policy paralysis during the last government, causing further problems.

Crony capitalism survives on a licence raj, so that when businesses apply for favours they have to grease the palms of the powers that be. Thus, it ends up in unjust enrichment of all players at a cost to public welfare. The licence raj shrank after we adopted economic reforms in 1991, and that reduced the rent-seeking avenues. Where would the polity get their spoils to fight elections? So the harvesting area was natural resources and we now turned to a resource raj.

Alarmed at the dismal situation, in January 2011, the government set up the Committee on Allocation of Natural Resources, headed by former finance secretary and incumbent head of the Competition Commission, Ashok Chawla. The committee delivered the report (http://tinyurl.com/op38mdb) in record time to the government in May 2012. It attacked the very fabric of crony capitalism and recommended a transparent and competitive process of allocations in various sectors: Spectrum, coal, oil, land, etc. However, the report has not been made public because of pressure from business lobbies, particularly in the hydrocarbon sector.

According to news reports, some 69 recommendations of the 91 made have been adopted. Opacity about a major reform report is worrisome. While hearing the 2G case, the report featured in the apex court. Here the government was caught between a rock and a hard place, as the court observed that auctions were the best way forward. The government felt that auctions were not the only way to allocate natural resources but other market-based methods should also be adopted.

The first-come-first-served policy to allocate spectrum adopted by the NDA in 2002 was per se not wrong as many countries have used the same method successfully, but the UPA government did it with mala fide intentions. Some countries have adopted the reverse auction process to increase the prices, ie after opening the bids, they re-invite fresh bids to a higher level. Even though it may appear to be extortionary it is done transparently, which results in higher treasury gains. The main trick here is to see that there are no entry barriers and that consumer prices remain low.

In the hydrocarbon sector, the country is already witnessing an ongoing debate on allocation of offshore blocks and natural gas prices. To begin with, the regulations were drafted with businessmen’s interest, which has led to a standstill in many exploration ventures, and litigation. Thus, neither oil nor gas is being harvested according to its potential. Consequently, the power and fertiliser sectors are underperforming and our current account deficit is going up due to imports.

Will the Modi government bite the bullet? Perhaps it will.

Pradeep S Mehta is secretary general, CUTS International.The views expressed by the author are personal

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