Those railing against private corruption ignore losses due to PSU lethargy or the huge leakages in govt subsidies
Govt procurement is about R5 lakh cr a year, subsidies add to R3 lakh cr — the corruption here is probably as much as that of the private sector that bothers us so much. Structural solutions like privatising banks will help fix NPAs — piecemeal AAP-type solutions look heroic but achieve little
Given the huge crowds Delhi chief minister Arvind Kejriwal’s janata darbar drew, and the manner in which roads had to be cordoned off to accommodate them, it’s obvious the capital’s citizenry continues to be very angry. The question is whether the fire will spread to other parts of the country. If credit-rating agency Crisil’s latest projections are anything to go by, and 12 million people will have to go and seek employment in agriculture—as industry and services can’t absorb them—over the next five years, chances are the anger will spread, indeed, it already has.
It’s not as if those who have jobs are less angry and those in Delhi, last Saturday, probably had other problems on their mind as well like the plethora of scams, or excessive electricity and water bills—this columnist has unsuccessfully been battling a R65,000 water bill for a few months now. If the 2G-type scams aren’t bad enough, the R1-1.25 lakh crore annual increase in dodgy assets—NPAs plus restructured—of banks are seen as yet another sign of private skulduggery. Indeed, when columnists describe as anarchic Kejriwal’s decision to waive off dues of those who have not paid their electricity bills since he began his civil disobedience movement—there appears to be some re-think on this by the chief minister—this is seen as hypocrisy; when the Congress waived off R70,000 crore of farm loans, critics justifiably ask, wasn’t that anarchic? In fact, if Kejriwal sticks to his decision, he will pay the dues from the state’s budget while the agriculture dues were written off by PSU banks.
Much of the anger looks justifiable, more so when you look at the way the lal battis, the palatial bungalows and the gun-toting in-your-face security separate the ruled from the rulers, but there is another truth that needs to be kept in mind. Though this risks the likelihood of being seen as condoning corruption, the larger point is that corruption can be tackled only through greater reforms, though it may seem a lot more satisfying, even patriotic, to be slashing away at corruption in the manner Kejriwal is.
Take the airports, a subject in the news since the new T2 terminal in Mumbai has just been inaugurated. When it was inaugurated some years ago, Delhi’s T3, the equivalent of Mumbai’s T2, was in the news for a different reason. Though the GMR Group had promised to pay Airports Authority of India (AAI) 46% of its topline as an annual revenue share, its definition of topline was problematic. Most would define topline as the revenue stream from the airport as well as the non-airport business, but GMR’s view was that the up-front deposits being taken on the non-airport land were not revenues but liabilities, and so could not be shared with AAI. The government view, on the other hand was that if, for instance, R1,000 crore of deposits were taken from hotels, this would mean they would pay R100 crore less of annual rentals for the next 50-60 years, assuming a 10% interest rate, and so represented a huge loss of annual revenues.
While this column was the first, in 2007, to point this out, there is another truth that doesn’t condone what happened, but must not be ignored either. With the Delhi and Mumbai airports contributing over R2,100 crore to AAI in FY13 and accounting for the bulk of its revenues across the country, the question is whether AAI could, on its own, ever have created these airports—and we’re assuming everything is kosher in the way AAI airports are run.
Or let’s take oilfields, where a similar discussion is taking place. While it is difficult to see how the Vijay Kelkar committee comes to the conclusion that there is no incentive for firms to gold-plate the costs of developing oil/gas fields under the current profit-share model of contracting, as petroleum minister Veerappa Moily pointed out at the Express Group’s Idea
Exchange, for every $1 billion of profits oilcos make, around $700 million accrues to the government by way of taxes, royalties and cess. Cairn India, for instance, contributed R14,800 crore to the central exchequer in FY13 and R5,200 crore to Rajasthan. Compare the growth in this with ONGC’s relatively flat production, and there is something to be said about bringing in the private sector. You have to curb the corruption, and there are ways to do this—revenue-sharing instead of the current profit-share method is one such way as revenues are difficult to manipulate while profits aren’t.
The same logic of needing structural solutions applies to NPAs that, most bankers will tell you, include large sums that have simply been siphoned off by industrialists—let's assume, incorrectly, that all NPAs are caused by corporate greed, not the huge economic slowdown. But given that, over the last decade, private sector investment (by incorporated and unincorporated firms) has been triple that of the public sector (government and PSUs), it would be a very brave person that took hasty action against private promoters. Every 1 percentage point hike in GDP growth that an increase in investment causes, results in 9 lakh more jobs being created each year. Getting PSU banks—and we’re assuming, heroically, that there will be no legal complications in doing this—to take over the assets of all defaulters would certainly resolve the issue of corrupt industrialists, but there are easier structural solutions. RBI lowering its exposure norms for lending to industry groups and hiking provisioning norms is one such solution, but the best is to simply reduce the government stake in banks—witness how private bank NPAs are so much lower than those of PSU banks. Remove the possibility of government pressure on banks to lend unwisely, and the likelihood of corruption gets reduced that much.
While trying to fix private sector corruption is very important, let’s not forget the huge corruption that takes place in government each year. Between the centre and the state, government procurement budgets run up to around R5 lakh crore a year, and subsidy expenditures by the centre alone add up to over R3 lakh crore—at a conservative 50% leakage, that’s a whopping R1.5 lakh crore of theft each year from just the subsidies. But when is the last time you heard anyone, in government or outside it, talk about curbing this corruption with the same level of passion as curbing corporate corruption?
None of this is to say corporate corruption should be accepted—the very fact that an AAP has reached where it has, and its regressive policies have such appeal amongst even the educated suggests the consequences of ignoring corporate corruption are serious. But the larger point is that corruption will not go away unless structural reforms of the type discussed in this column are made. That has to be the next prime minister’s agenda.