Raju’s “Mithyam” and the implications for India’s business-politics nexus

(first published on 22nd January 2009 in the now-defunct website, India Banao!)

Capitalism’s weakest link the world over is the point at which business intersects with politics. Opacity invariably characterizes those interactions, leavened in some countries by a web of laws aimed at dignifying and constraining the process. When real estate is added to the mix, the brew turns decidedly more turgid.

Caught up in that deadly nexus of politics, business and land, Ramalinga Raju succumbed to temptation – committing fraud on a massive scale to ensure that his company’s earnings would continue to meet the market’s elevated expectations. Although his family owned less than 9% of his company’s stock, he appears to have treated the listed company as a cash cow to bankroll his family’s ventures into real-estate, while also evidently spreading his largesse to political parties of various hues.

Lionized in Hyderabad for creating from scratch a software powerhouse, Satyam Computers, which epitomized that city’s response to the fabled twosome from Bangalore (Infosys and Wipro), Raju made the fatal error that has undone so many Indian entrepreneurs: unrelated diversification. In order to finance that diversification he created a “Mithyam” (edifice of lies) about his company’s margins and cash balances. At a minimum, this was aimed at keeping his stock artificially high -- and enabling his family to use the inflated valuation to borrow heavily for investments in land and politics. At worst, he may have simply stolen the listed company’s cash.

The story of India’s economic rise over the past 17 years is best encapsulated in the idea that reform has unleashed the long-suppressed entrepreneurial energy of its private sector, the dynamism of which helps obscure the failures of India’s permanently dysfunctional government. The author and business consultant Gurcharan Das has a nifty phrase to describe this: “India’s economy grows at night, while the government sleeps”. This has been literally true about the fast-growing business-process outsourcing sector, which operates mostly at night for customers on the other side of the planet.

Foreign institutional investors are attracted to India’s stock-market (despite the poor quality of political governance, epitomized in crumbling physical infrastructure) particularly because of the quality of India’s corporate governance (ranked by one influential survey as third in Asia behind Hong Kong and Singapore, and far ahead of Korea, China and the rest of Asia). Satyam’s sorry saga puts much of that faith on test: suddenly investors can no longer trust India’s corporate governance, or even the integrity of audited financial data from its companies.

The poor quality of political governance is finally beginning to catch up with the dynamism of private business. The funding of political parties remains a closely guarded secret even as the Right to Information Act forces transparency on the government. A recent annual report from the Swiss Bankers’ Association states that Indians are the single largest partakers of super-secret Swiss bank accounts – totaling US$1.45tn (more than India’s annual GDP).
If any good is to come from Raju’s “Mithyam”, it must begin by compelling reform of the opaque nexus between politics and business that is now beginning to threaten the Indian economic miracle.

Opacity was introduced into political funding by Indira Gandhi in 1970, when she banned corporate political donations by cheque in order to starve the former Syndicate – which had gone to the Congress-O after Indira split the party in 1969 -- of its system of funding. The result was that “black money”, opaque real-estate deals and kickbacks from defense contracts became the primary means of political funding in India. By its very nature, most political funding in India encourages immoral, unethical practices – and this lies at the heart of what is wrong with our politics today.

As long as India’s “new economy” – software and business-process outsourcing, mobile telephony, pharmaceuticals, auto-components, R&D outsourcing and other knowledge-based industries – were able to grow without much interference from the government, there was little scope for the cancer of political funding to infect its dynamism. The Rajus’ attempt to diversify from the new economy into the murkiest parts of the rent-seeking economy – real-estate and infrastructure development – exposed their crown jewel to the worst of the muck that infests our political-funding system. Fortunately, very few of the other genuine leaders of new-economy companies are likely to have succumbed to the old-economy-politics temptation – although one (Ranbaxy) has seen its promoter-family cash out at the top to plunge openly into real-estate.

But if we are to secure the future of the Indian economic miracle, we as a nation need to quickly confront the cancer of amoral “black-money” financing that our political parties are obliged to indulge in. When major decisions like the auction of 3G spectrum are held hostage to the imperatives of electoral fund-raising, the future of the Indian economy is beginning to be threatened. As citizens, we need to begin seeking the answers to the tough questions of how our parties are funded, who is stashing away trillions in Swiss banks, and why there is no momentum whatsoever in electoral-funding reform in India.