Corporate espionage isn't real issue: Crony capitalism's roots lie elsewhere

Few actions of the Narendra Modi government have invested it with greater credibility than the one to stop corporate espionage and bar the entry of middlemen in ministries. While the latter happened almost as soon as the government was formed, a powerful message was sent last week when several government employees, journalists and corporate officials were arrested for allegedly stealing sensitive documents from various ministries.

These actions emphasise the importance Modi attaches to making a distinction between being pro-business, which he is, and pro-cronyism – which he has been accused of, but which he is now decisively hoping to debunk. Cronyism has been the bane of Indian policy-making for as long as one can remember, with the UPA administration hitting a nadir on this front. From spectrum to coal to gas, the UPA managed to make a mess of every critical decision involving the alienation of scarce resources. Cronies made hay.

However, the arrests of a few alleged document-stealers points to exactly what is wrong with policy-making; it merely deals with the symptoms, not the disease. Moreover, even if no one steals any documents, it will not prove that policies are made in the national interest, and not to favour this crony or that. Big business can influence policy even without having to steal documents.

Clearly, Modi must do more to send cronyism to the dung-heap of history. The only way to ensure that cronies get no opportunity to sip at the feeding trough of government largesse is to make things simpler, clearer, transparent and free from conflicts of interest. Here are 10 areas where action must begin.

First, the government must eliminate any element of discretion in the allocation of natural resources. The biggest source of corruption and cronyism relates to resources in relative short supply. These include spectrum, energy and land. Any misallocation or underpricing of these resources means huge profits for businessmen. Any decision relating to these resources must thus be done largely by auction; if they are not to be sold through auction, then the policy itself must be transparent and its execution open to detailed scrutiny by regulators and outside auditors before being implemented. For example, if A Raja wanted to give spectrum free, the policy paper on it should have calculations showing how free spectrum may bring larger benefits than the revenues lost. But since this often cannot be more than conjecture, auctions are still the best way.

Second, the next area of cronyism relates to the public sector. While the government can, by policy, decide to keep some critical companies and banks in the public sector, ministries have to be kept totally away from influencing their functioning. For example, the finance ministry should have no say in how public sector banks are run; the telecom ministry should not be the boss of BSNL and MTNL; the energy ministry should not decide how Coal India or NTPC should be run or what tariffs they should charge; the aviation ministry should not run Air India.

The government’s job is policy-making for the whole sector, not run public sector units. Clearly, public sector shareholdings should be hived off into a professionally-run holding company which can negotiate with the managements to deliver specific results - or get out. When ministers micromanage public sector companies, we know what can happen: Air India, BSNL and MTNL are all loss-makers not because they did not know how to compete, but because they were not allowed to.

Third, critical sectors need effective and impartial regulation. This means the government must appoint people with unimpeachable credibility and with knowledge of the sector they are going to regulate. Regulatory jobs cannot be left to retiring bureaucrats, or even retiring judges. They are not meant to be sinecures for past services rendered. Without effective and honest regulation driven by specialists, cronyism will breed in the regulatory segment as well.

Fourth, all policy-making must happen largely in the open. One of the reasons why so much corporate effort is devoted to stealing government documents is that businesses cannot afford to be caught unawares on policy thinking. If an environment regulation is going to change suddenly or telecom spectrum is suddenly to be made a tradable commodity, these decisions have a huge impact on business. The policy-making process and the final decisions have to be a continuum, and this can happen only if consultation and discussion is a regular process between business and policy-makers. Nobody will steal documents if they know what exactly the minister is thinking and why.

Fifth, openness in budget-making should also become the norm. One way to do it is to avoid year-to-year changes in duties in various sectors. Once the big changes are done (GST, direct taxes code, GAAR, etc), budgets should effectively bring no changes of a material kind every year. Changes in taxes and regulations should be the exception rather than the rule. The ideal budget is one which talks about macroeconomic challenges, and not the future of specific industries or set of taxpayers. If budget-making is more open, there is no need for anyone to steal budget documents either.

Sixth, as a matter of policy, to reduce conflicts of interest, the government must commit itself to privatisation, unless a sector is fully reserved for the public sector for some reason. The minute government has to make policy for both public and private sectors, conflicts of interest arise.

Seventh, banks, in particular, need to be freed from government control. After natural resource allocation, banking is the biggest potential area for cronyism, since banks have the power to lend and write off loans. As long as banks are accountable to government, pressure to lend to favoured parties can never be ruled out. For example, one worry in the recent coal auctions, where some coal blocks saw high bids, is that banks would have lent them money. This means a government which gets high bids for coal (or spectrum) auctions has also to worry about whether the bank that lent money will also be in trouble. The moral hazard of foolishly high bids will not end as long as bidders can assume that the government will not want public sector loans to go bad, and will thus bail them out. This is the unstated moral hazard even in auctions.

Eighth, along with steady privatisation of banks, government must also put in place an effective bankruptcy law that is like the USA’s Chapter 11. Any company should be able to file for bankruptcy and emerge from it after its lenders and stakeholders agree to a “haircut” when things go sour. Terminally ill companies should be allowed to go bust quickly so that resources are not wasted in endlessly trying to rescue it, or throwing more good money after bad. Banks, in particular, must be allowed to temporarily take control of a chronically defaulting company, change its management, or put it up for auction or sale of assets.

Ninth, all discretionary powers of ministers and bureaucrats must be ended. Manmohan Singh tried to ask his ministers to give up discretionary powers , but few did. Rahul Gandhi called for this in an address to Ficci in 2013, and in January 2014, a Group of Ministers headed by then defence minister AK Antony recommended the ending of discretionary powers . Nothing came of it.

Tenth, state funding of elections is an absolute must. Currently, politicians seek discretionary powers to raise slush funds for poll expenses. But once they have this power, they use it not just for elections, but to accumulate illegal wealth for themselves. To reduce the incentive to seek bribes and raise money for elections, clearly the state must fund serious candidates. And contributions to political parties must be tax-exempt and transparent. No donation should ever be accepted in cash by any political party.

Cronyism is the natural outgrowth of discretionary power and the need for huge funds for elections. This link needs to be cut off at the root.