Economy

Lalit Modi is a Small Symptom of the Continuing Malaise of Crony Capitalism

The real essence of cronyism flows from how deeply the link between business and politics is embedded in the larger system, and no individual politician has the power to alter this

IF THE SHOE FITS: Lalit Modi being measured for a pair of bespoke shoes in Italy. From Modi's public Instagram account.

IF THE SHOE FITS: Lalit Modi being measured for a pair of bespoke shoes in Italy. From Modi’s public Instagram account.

There can be no doubt that the NDA government’s image has been badly dented by the new scandal involving Lalit Modi – a man facing serious money laundering charges in India – for whom external affairs minister Sushma Swaraj personally short-circuited the system so that he could procure travel papers on “humanitarian grounds”.

The government’s defensive attitude was visible on Monday as the opposition mounted a serious attack on the BJP, prompting the Enforcement Directorate to issue fresh notices late evening against Lalit Modi. Perhaps this was the government’s way of signalling that its favour to the controversial former IPL cricket commissioner  was limited to helping him travel from London to Portugal to see his ailing wife, and that it did not extend to diluting the serious money laundering charges against him.

However, this alone may not work as pressure will now mount on the government to bring to trial Lalit Modi and many other businesses against whom serious charges are pending. The ED, such as it is, seems to get clear signals from time to time on how to proceed against well known businessmen who formally face money laundering charges.  The pace of investigation varies according to how close these businessmen are to the political establishment.

One just has to look at some of the pending money laundering cases at the ED and the CBI to understand how the nexus between the political class and big business operates.

This happens across the board, whether it is a BJP or Congress-led government.

For instance, there are serious charges of over-invoicing of imports against the Adani Group, running into thousands of crores, which may lie dormant at the Enforcement Directorate for some years as Gautam Adani is seen as very close to the establishment.

Of course, the Prime Minister and other cabinet ministers can easily claim later that they have done no favour to the Adanis as the case will not have been dropped. But then the Adani Group will also not be proceeded against with much vigour either.

In this manner, many cases are kept in suspended animation. The Lalit Modi case is no different. However, one exception to this has been the manner in which a serious money laundering case against Baba Ramdev, who runs a Rs.1000-crore plus business empire, was dropped recently for “want of evidence”. Ramdev was ‘gifted’ an island in Scotland, nothing less, by some NRIs. The Enforcement Directorate had registered a case as prima facie it appeared to be a money laundering exercise. Again, as is its wont, after keeping the case going for some years the agency has closed the case.

The CBI, ED and other investigative arms of the government are looking at money laundering charges pertaining to the 2G scam, Coalgate etc but it is safe to assume that these will remain in limbo for a long time to come. It is surprising that the BJP, which rode to power by campaigning around the 2G scam, has not done anything to speed up the money laundering cases so apparent in many of the complaints filed by the CBI which are under trial. It seems most of these cases will die a natural death, as has been the experience in the past.

The Lalit Modi episode has also badly dented the Prime Minister’s claims that there is no crony capitalism-driven corruption at the top level of the NDA. This claim was so tenuous that it was only a manner of time before it got exposed.

The continuing cronyism was bound to emerge because the systemic, long-term nexus between the political elites and big business will not go away anytime soon, as has been demonstrated by the Lalit Modi case. Will an ordinary citizen ever get access to the kind of bespoke, special treatment that Lalit Modi received?

Actually, when Narendra Modi and Arun Jaitley claim there has been no crony capitalist-driven scam in the NDA government at the top level, they make a very narrow interpretation of cronyism. What they mean is that there is no personal quid pro quo between them individually and the businesses for whom they make policies.

However, this narrow definition of crony capitalism does not capture its real essence. The real essence of cronyism flows from how deeply the link between business and politics is embedded in the larger system, and no individual politician has the power to alter this.

The Indian banking system, for instance, is today saddled with about Rs. 5 lakh crore of what may be described as bad and vulnerable loans. A substantial portion of this is lying in the balance sheets of a dozen family-owned business houses in the country who are politically well-connected and have used their clout to set up businesses ranging from roads, power, telecom and construction largely on borrowed funds from public sector banks. These businesses are regarded as too big to fail and therefore get endless support from banks.

RBI Governor Raghuram Rajan took a dig at such business houses sometime ago, saying they thrive in good times as well as bad times through what he described as “risk free capitalism”.

The real issue is whether Prime Minister Narendra Modi has the power or will to jettison this system. This is the real test of whether the government can remove cronyism. It is not about personal corruption, which is a very narrow way of looking at the phenomenon.

Unfortunately, this system has not been touched because the same family-owned industrialists who have run up massive ‘restructured’ debt – the euphemism used by bankers to describe the extended repayment period they enjoy – with public sector banks, continue to enjoy the respect of the state apparatus.

One telling example will illustrate this point.

At the Modi-Obama reception at Rashtrapati Bhawan, about two dozen industrialists had been invited  and were seen standing in a queue to greet the US President. About 6 to 8 of those present collectively owe close to Rs. 3.5 lakh crore to banks, mostly PSU banks. The banking industry in India has about Rs.5 lakh crore as total capital and nearly 70% of it is exposed to just a half a dozen industrial houses. Technically, if these business houses were to go bust, 70% of India’s banking capital will get wiped out. In short, they are too big to fail. So they have no worries really, as the system sustains them.

This is the real cronyism that plagues India. No less an establishment figure than the RBI Governor has already drawn the attention of the government to it. Do Narendra Modi or Arun Jaitley have the will to alter this arrangement? Lalit Modi is just a small symptom of a much bigger malaise.