Corruption

FROM RAJ TO RAFALE 17 : The Twin Curses Of Earth And Sky

Some of the biggest scandals in independent India took place in the cases of illegal mining, stealing oil and gas from neighbouring interconnected reserves, gold-plating of projects, and sale of such precious resources at rock-bottom prices. If one includes telecom spectrum, which too is a limited resource, the circle of corrupt, cruel, violent carnage, cashing-in through human labour, and the twin curses of the earth and sky is complete. CORRUPTION / Plundering / Resources / by Alam Srinivas
Vol. 13 | ISSUE 11 | FEBRUARY 2020

Earth-And-SkyLOOK at some of unsavory global facts. There are possibly two dozen nations in the world that earn more than 50 per cent of their exports from oil and gas. None of them is a democracy. Even if some of these regions are part of the larger democracies, they are wracked by exploitation, corruption, resource-capture by elites, and poverty. This is a classic counter intuitive theory. The more resources you possess, more you sell, the more the people suffer.

What is crucial in this scenario is that huge wealth creation walks hand-in-hand with unbridled corruption, high growth rates coexist with low indicators of human development. Experts dub it as the phenomenon of ‘resource curse’. There are several associated trends: the ‘Dutch Disease’, whereby the higher exports of resources reduce competitiveness in other areas and; higher risks of civil conflicts within regions, and with neighbouring areas.

Now look carefully at the map of India, the entire eastern corridor, central Deccan plateau, and a state on the western border. These are swathes of land, which are rich in coal, minerals, and oil and gas. Sadly, these are among the states that are poor, lack growth and development, are immensely corrupt, and involved in decades of violence between the state and people. While India suffers from the “no-resource curse”, i.e. resources contribute a minor percentage of exports, the ‘resource curse’ still exists.

Some of the biggest scandals in independent India took place in the cases of illegal mining, stealing oil and gas from neighbouring inter-connected reserves, gold-plating of projects, and sale of such precious resources at rock-bottom prices. If one includes telecom spectrum, which too is a limited resource, the circle of corrupt, cruel, violent carnage, cashing-in through human labour, and the twin curses of the earth and sky is complete. The ruling and wealthy classes made hay as the people suffered.

During the colonial days, before coal, oil, and minerals were commercialised, a few agricultural commodities attained the status of natural resources because of their on-street value, and emerged as the areas of manipulations. In some of the earlier parts, we highlighted opi-um smuggling to China, and intense speculation in cotton that led to a crash of stock market, banks, and real estate in 1865. But there were two other products that aided the process of corruption and exploitation during the British Raj. These were indigo and tea, both of which were in huge demand in Britain.

CorruptionAccording to the Concise Oxford History of Indian Business, “The period between 1819 and 1825 witnessed an almost uninterrupted boom in indigo trade….” It earned huge profits for the firms in Calcutta until 1846, with intermittent crises. Speculation, malpractices, and exploitation of the farmers by planters, who owned land later, and middlemen, led to huge crashes in 1833 and 1846. According to Tirthankar Roy, these two episodes “finished many of these hybrid firms”, which overlapped between indigo and banking.

MANY Calcutta firms financed the indigo operations, and marketed the goods. Hence, as Roy puts it, they were largely trading firms with banking arms to repatriate profits and engage in lending-deposits activities. Any steep fluctuation in indigo prices, which is normal and common for any natural resource, led to huge bad debts. When conditions turned unfavourable in 1825, it bankrupted several firms. “Palmer & Co, the ‘Indigo King of Bengal’, held its own for some time” during this period, says the Oxford history.

But when an abundant crop led to a huge fall in prices in 1829, Palmer & Co was “unable to meet the claims against it, and closed its doors for good”. This failure of the largest firm engulfed others over the next few years. “The 1829-33 crash ended the career of a generation of mainly European managing agencies”. However, just a decade-and-a-half later, indigo turned out to be the villain again. And this time, it took down a serious and innovative business experiment in Indian-British partnership.

Subsequent to the crash, and despite the failure of leading firms in 1829-1833, business in Calcutta revived. New players came into being and diversified from indigo to coal, opium, tea, sugar, and silk. According to Roy, “The most prominent firm of the time, Carr, Tagore, also started a bank, Union Bank. Dwarkanath Tagore (grandfather of Rabindranath Tagore) led the firm. However, Union Bank became deeply involved with the indigo trade, i.e. with firms in India and Great Britain that financed it.

workA continuous decline in indigo prices, coupled with “deep commercial crisis” in Britain led to the failure of dozens of mercantile houses there. “A large number of them had business connections with the Calcutta firms that were indebted to (Tagore’s) Union Bank,” explains the Oxford history. More firms closed in Calcutta in 1846; in one week, 16 houses collapsed. The bank lost heavily, aided by cases of “misappropriation, mismanagement, and misuse of a public institution for private gain”. Carr, Tagore never recovered.

In 1861, another 15 years later, the colonial empire allowed the acquisition of wastelands in East India “on very liberal terms and held in perpetuity”. The aim was to encourage cotton cultivation, but it gave impetus to tea. But not before another scam hit investors and people. Companies acquired huge chunks of waste properties in hilly areas, which were suited for tea plantations. However, it paved the way for easy entry of dishonest entrepreneurs, speculators, and middlemen.

“The modus operandi (of the scam) was simple. Someone with money… would purchase a piece of wasteland for a pittance, quickly clear it up, plant it with a few tea shrubs, advertise the property as a well-established garden, and then sell it at a price many times over to speculators, who would already have formed a tea company ostensibly for commercial exploitation of the property. The shares of the company would then be sold in Calcutta and London.

The entire eastern corridor, central Deccan plateau, and a state on the western border… are swathes of land, which are rich in coal, minerals, and oil and gas. Sadly, these are among the states that are poor, lack growth and development, are immensely corrupt, and involved in decades of violence between the state and people

As the lands in question were far away from the actual places of transaction… the buyers of land, the promoters of companies, as well as ordinary investors were very often taken for a ride,” explains the Oxford history. By 1866, the structure of fraudulent schemes fell down like a house of cards. Investors scrambled to sell their shares at whatever prices they would fetch. Promoters and firms disappeared. The tea plantations continued to remain as wastelands. It was years before the tea industry recovered from this setback, and emerged as major resource-driven segment. In more modern times, such methodologies were adopted by companies that sold wealthy dreams about profits to be made from teak and eucalyptus plantations.

DigboiONLY when the real natural resources were exploited, after India’s freedom at midnight, the phenomenon of ‘resource curse’ become visible. The scams were larger, money involved was phenomenal, and exploitation of communities immense. There were five issues involved: nexus between policy makers and Big Business, allocations at paltry prices with accusations of bribes and payoffs, ability of a politician to side-step the logic of collective consensus within the government, illegal operations, and gold-plating.

Ever since mobile operations were introduced in the early 1990s, there were allegations of crony capitalism. Right from the first tender, certain companies were favoured by the government, obviously at others’ expense. Rules were twisted and manipulated, the courts gave differing interpretations, and the open tendering process was opaquely dismantled. Post-tender machinations became the rule, rather than the norm. Those who were ejected for different reasons at the beginning won the bids in the end.

In telecom, apprehensive about the huge, unviable bids to grab the scarce spectrum, the government opted for revenue share in 1999. Two decades later, this turned into a huge controversy when the Supreme Court ruled that the telecom firms had grossly underpaid, and had to cough up a massive Rs. 130,000 crore. It upheld that the percentage payments were applicable on entire revenues without any exceptions. Even non-operation incomes like dividends and interest had to be considered a part of overall revenue.

A revenue-share formula in oil and gas sector was also turned on its head. In the 1990s, when the government leased out oilfields to the private sector, including foreign investors, the philosophy was profit-share, i.e. a fair share between the company and the owner after various costs were deducted. The logic was that since oil exploration was a high-risk business, and could lead to huge losses, the explorer had to recover its capital and other costs, and then share the resultant profits with the government.

Clearly, this encouraged the private players to gold-plate their costs, i.e. show higher expenditure on paper compared to what they had incurred. The situation reached such laughable proportions that in many cases, the costs were so large that the government did not earn a single rupee until the last stages, when the fields were almost exhausted. The owner of reserves, who leased it out got crumbs and that too after 15-20 years. Only in recent times was the formula changed to real revenue-share.

Natural-ResourcesWhat was ironical is that during this long period when the private explorer recovered its costs, and the government earned nothing, the former used the reserves as valuation measure to sell a part of its stake to a willing buyer at a huge premium. This happened in several cases, and promoters earned billions of dollars, even as the government kept waiting. It prompted the likes of Arvind Kejriwal, Delhi’s Chief Minister, and Prashant Bhushan, a lawyer, to compare it to a situation between owner of a car, and her driver.

At a press conference, they commented that this was akin to a situation where one hired a driver for a car, and the latter walked away with the vehicle. In oil and gas terminology, the government leased out the fields to a private party, which sold it. To be fair to the oil majors, a fairer comparison is to a house that’s purchased on a long 99-year lease. Although the owner is a lessee, she can still sell the house at the market rate. No one can complain as long as the new buyer realises that the property is on lease.

IN the case of coal blocks, as also telecom spectrum, the natural resources were sold or leased out for a song. This was especially the case when coal blocks were allotted for captive consumption – for use in allied steel and thermal plants – during this century. CAG and others alleged that this was done in a non-transparent manner. For example, the government did not introduce the concept of competitive bid-ding, which was also true of telecom spectrum in the first decade of this century.

In addition, politicians and ministers actively lobbied on behalf of some private coal players. The CAG maintained that some companies got acreages that had reserves much higher than captive requirements. Many companies sold coal in the open market, although the rider was for only captive purposes. In some cases, companies “squatted” on the coal blocks for years. They did not use them because they had no allied plants to consume. According to CAG, the notional loss for 194 blocks was Rs. 186,000 crore.

Allocation of spectrum in the 2000s witnessed other twists and turns, based as it was on “first-come, first-served” basis. One of the tele-com ministers during the period, A. Raja, single-handedly rode roughshod over other ministers, including Prime Minister Manmohan Singh. He negated the views and opinions of the ministries of finance, law, and PMO, and gave the spectrum in 2008 at inexpensive 2001 prices. According to CAG, the paper loss in this case, when compared to quotations from potential foreign investors, was a whopping Rs. 176,000 crore.

Only when the real natural resources were exploited, after India’s freedom at midnight, the phenomenon of ‘resource curse’ become visible. The scams were larger, money involved was phenomenal, and exploitation of communities immense

Illegal mining is a bane for the country’s society and economy for decades. A 2017 NITI Aayog study found that in large swathes of areas, 99% of the respondents agreed that there was rampant illegal mining. The reasons too seemed obvious – ineffectiveness of the administration, corruption, and political pressures that encouraged illegality. Investigations in eastern states like Odisha found that some of the largest business houses were involved in illegal mining over large normal mining and forests areas.

The NITI Aayog study was done after the government introduced new laws to check illegal mining, and encourage legal activities. The use of technology to monitor the former has helped, but not curbed it. Even today, it is rampant and blatant, and the administration seems unable to check it. The procedure to mine and sell ill-gotten minerals is well established. There are subtle ways to show legal invoices to sell the illegal goods. The activities go up whenever China emerges as a major buyer, and global prices shoot up.

But although the policy makers were lax, business community eager to earn the huge profits from corrupt practices, and the communities helpless, the role of judiciary was crucial. For example, in the case of the oil and gas sector, the Supreme Court gave an overriding judgment which said that the natural resources belonged to the people. Hence, the government, which is their representative, has the right to decide at what price they will be sold, to whom and in what quantities, and for what purposes.
mobile
However, this is contrary to the situations in telecom, coal, and other minerals. In coal, the state-owned Coal India sells at notified prices, which is decided by an internal committee, “working with the central government”. However, a buyer can buy the resource in auctions and through imports, the prices of which are linked with global prices. In telecom, the firms are free to price their services for both voice and data. The price regulations in cases of several minerals, especially iron ore, do not exist.

THE situation becomes more perplexing since, over the past few years, the Supreme Court has said that natural resources need to be transparently auctioned so that the government and, hence, the citizens, can maximise profits. If the resources are sold or leased freely according to demand and supply, how can the government regulate the market prices? If there are auctions to lease oilfields, why shall the government decide the prices of crude oil, and to whom it should be sold?

In some ways, the ‘resource curse’ is inherent within specific societies and their main institutions. The latter work at cross-purposes, with little clarity, and create confusion and chaos. This leaves wide, open spaces for the politicians, civil servants, and businesses to exploit these gaps and enrich themselves in illegal ways. The courts react at the last minute, when the scams become public, and give knee-jerk orders. This was evident from the manner in which the apex court cancelled the licences in telecom and coal.gfiles end logo

CORRUPTION / Plundering / Resources / by Alam Srinivas

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VOL.13 | ISSUE 11 | FEB 2020
CORRUPTION
FROM RAJ TO RAFALE 17: The Twin Curses Of Earth and Sky
GOVERNANCE
Surviving a financial storm
GOVERNANCE
RANA SUGARS How they duped the investors
STATE SCAN
Land mafia runs for cover
GOVERNANCE
Miscued effort
GOVERNANCE
Governance is an overarching concept with many dimensions
BOOK EXCERPT
There’s Seven for You, Three for Me
Bric-a-brac
Goyal is in a hurry
Bric-a-brac
New CVC and CIC
Bric-a-brac
Struggling to make a mark
Bric-a-brac
Scindia hurt and angry
By the way
Running with lateral entry!
By the way
Local body politics
BY THE WAY
Importance of sons-in-law
BY THE WAY
Yogi lords over bureaucracy