Fight over spectrum bares India's crony capitalism

The corporate executives arrived at the Indian department of telecommunications to claim a final, critical piece of paperwork. Then the race began. Down the hallway, jostling down stairs, they ran toward an office where a clerk was processing applications. Billions of dollars were at stake, yet telecom officials were conducting business by schoolboy rules: First in line wins.

The businessmen were fighting over air, or, more precisely, airwaves. India is the world’s second-largest mobile phone market, after China, with nearly 700 million subscribers, and the profits of private operators depend on licenses for electromagnetic waves, called spectrum, that carry mobile service. Spectrum might as well be gold or crude oil. Private operators fight for portions. The telecom ministry is putatively the impartial referee.

“The bizarreness of it took us by surprise,” said one executive who witnessed the scramble. “People were pushing and shoving, making sure they were ahead of everybody else.”

The strange spectacle at the telecom ministry, now part of a scandal shaking India’s power structure, is not all that strange in India. With growth again nearing 9 per cent, India is in the midst of an economic transformation that often resembles a gold rush. Here, the most aggressive prospectors are a small group of enormous Indian conglomerates scrambiling for rights to national resources, while the regulator is a creaking, often deeply corrupted Indian government.

Indeed, the telecom scandal, which centres on allegations of bribes, influence peddling and official malfeasance, has exposed the underbelly of India’s economic rise. Corruption is exploding even as wealth is becoming more concentrated among a handful of corporate barons whose companies extend across crucial sectors of the economy.

Scandals are erupting in almost every sector in which corporate interests vie for government licenses or contracts — for mining rights, natural gas, land, coal, infrastructure projects and now, most dramatically, for telecom airwaves.

India has the world’s second-fastest-growing major economy and is considered a likely engine of future global growth, as well as a hot market for foreign investors. And India’s future success depends on turning whole swaths of the economy over to the private sector, whose capital and expertise are critical as the country embarks on huge plans to build roads, bridges, ports, power plants and other building blocks of a first world nation.

But many analysts say that India’s incessant scandals point to deep-rooted problems of crony capitalism and inadequate oversight that threaten the country’s ascent if they are not corrected. The incestuous world revealed in the telecom scandal — one in which ethical lines are blurred between journalists, lobbyists and politicians, and corporate bosses curry favour with the ministers — has 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 privatisation 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 in New York and an adviser to the Indian 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.”

The fallout from the telecom scandal is still unfolding. The crux of the controversy is whether the recently resigned telecom minister rigged the allocation of new spectrum in 2008 to favour certain corporate applicants. The government’s independent auditor found that the allocation may have cost the Indian treasury nearly $40 billion — a finding that has prompted opposition leaders to block normal business in parliament for the past three weeks, demanding that the Congress party-led UPA government set up a joint parliamentary committee to investigate the scandal.

Born of corruption

Telecom in India was essentially born of corruption. Telephones were once a rarity in the country — made rarer by the plodding intransigence of the government service provider, which might take a year, or three, to fulfill a customer’s order for a new line. Then in 1994, three years after India began dismantling the License Raj and embracing market reforms, telecom was opened to the private sector.

Nearly 15 years later, the style of corruption is far different, as is the amount of money in the telecom industry. This year, India’s mobile phone customers are expected to pay $19.8 billion in bills, according to the research company Gartner. Most of this revenue will go to a handful of big players — Reliance Communications, Airtel, Vodafone, Tata Teleservices and Idea Cellular, which together account for almost 80 per cent of the market.

With the exception of Vodafone, a British corporation, these giant telecom players are all subsidiaries of India’s biggest conglomerates and are headed by some of India’s most powerful, tycoons. Reliance Communications is led by Anil Ambani (whose brother, Mukesh Ambani, India’s richest man at $27 billion, has moved in and out of telecom during the past 15 years); Airtel is chaired by Sunil Mittal, and Tata Teleservices by Ratan Tata; and Idea Cellular is run by Kumar Birla.

Among them, only Tata is not a billionaire; combined, their companies reach into steel, automobiles, natural gas, electrical power plants, mining, construction and the news media. The boom in India, discounting a temporary dip in 2008 during the global recession, has fostered a new class of superrich; today, India has 66 resident billionaires whose combined wealth of roughly $244 billion is equivalent to about a fifth of the country’s $1.3, trillion gross domestic product.

This trend, in a country where 800 million people survive on $2 or less a day, is raising serious concerns, especially since many of these fortunes are rooted in industries that are intertwined with government licenses and appear to be rife with corruption. A report sponsored by the Asian Development Bank said that India’s economy could be warped if the country fails to foster a more ‘competitive capitalism.’

In telecom, the fight over spectrum has been politicised from the outset and has fuelled bitter rivalries between the competing billionaires, Following a new  policy in 1999, Airtel, Vodafone (then Hutchison) and a joint venture company that would later become Idea Cellular cornered the mobile market, in addition to a government provider, and profits steadily rose. Soon Ratan Tata (who was an original partner in the joint venture provider) and Mukesh Ambani also wanted in. Ultimately, they managed to get favourable rulings that created the equivalent of a back door: They could market mobile services by using a different technology, known as CDMA. Lawsuits and finger-pointing followed.

Spectrum scandal

“This was the deal of a lifetime,” said Mahesh Uppal, a consultant who advises telecom companies. “Everybody knew that mobile telecom was the business to be in. It was very lucrative. And the key resource was spectrum. The government price for it was much lower than the price in the market.”

Now the scandal is rippling outward. A new interim telecom minister is sorting through the aftermath of the 2008 spectrum allocation. The government’s auditor found irregularities and falsifications in many of the new applications, while the relationship between Raja and some of the established players also is under scrutiny.

Many analysts say that the scandal represents a major test for India’s brand of capitalism — and whether the system can mete out punishment for wrongdoing.
“When the entire government structure sees that people are getting away with taking bribes and no one is getting punished, right down the line everyone starts trying to do it,” said Raghuram G Rajan, a professor of finance at the University of Chicago who has served as an adviser to Prime Minister Manmohan Singh. “Corruption spreads. News of big corruption with little punishment becomes an even worse disease.”