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Mainstream, Vol XLVII, No 9, February 14, 2009

Satyam Episode and India’s Corporate Image

Thursday 19 February 2009, by P R Dubhashi

The Satyam scandal has shaken not only the corporate world but the entire governmental system at the State and Central levels. The Prime Minister was himself deeply worried. He described the scandal as a blot on the corporate image of India and expressed his determination to go to the root of the scandal. He should have rather realised that the scandal was a scar on the neo-liberal policy which he initiated in 1991 and the time has come to get to the root of the policy and the government and economic system which has come into existence as a consequence of that policy.

Satyam has been India ’s Enron. Satyam was preceded by several other scandals like the securities scandal and the financial adventures of desperados like Harshad Mehta, Ketan Parekh and Sanjay Bhansali who played ducks and drakes with the stock market with the use of bank money. Enron in the US was followed by many other scandals like the world.com and since September last the collapse of one major financial institution after another like the Lehman Brothers, Fannie Mae and Freddie Mac, AIG, Merrill Lynch, Goldman Sachs, Stanley Morgan Investment and Washington Mutual Bank. These are not fortuitous events. There is a clear link between the policy of neo-liberalism, unbridled capitalism and financial scandals. There should be searching analysis and exposure of these scandals and reappraisal of the policy of neo-liberalism, however agonising it may be.

Philosophy of Neo-liberalism

The policy of neo-liberalism is a modern incarnation of the nineteenth century laissez-faire which laid down that “that government is the best which governs the least”. The modern policy of neo-liberalism goes much beyond this and is based on the stipulations that there should be more business in government and less government in business” and indeed “the business of government is business”. This was based on a number of “mythologies” created in the name of sound economics propounded by the Chicago School led by Milton Friedman and zealously adopted by conservative radical leaders like Ronald Reagan in the US and Margaret Thatcher in Britain. The first was that the free market economy (a non-ideological term for unbridled capitalism) alone can lead to economic efficiency-based rational allocation of resources and distribution of income in proportion to “productivity”. Secondly, free market economy is a self-correcting system. If any problem like inflation or unemployment arises, the system would automatically bring into operation its corrective mechanism and cure the problem in due course. Thirdly, any government intervention to solve the problem could only lead to aggravation of the situation. Indeed there should be complete deregulation, minimal government, vacation of traditional state sector in favour of private enterprise, reduced public expenditure and minimum taxation. The government has no business to claim a large chunk of the taxpayer’s money as it could only lead to extravagance and waste at the hands of public agencies. The role of government agencies is only to promote private agencies and enterprise. There is no such thing as “public purpose” which the government has to promote. Public purpose can only be the result of private enterprise governed by the signals of profit and loss in the market.

Nor should the heavy hand of public agencies control and regulate private enterprise. The “command and control economy” known in India as the ”license permit raj” must be dismantled. Laws and rules thereunder, to control private business (like the Industrial Development and Regulation Act, Monopoly and Restricted Practices Act, Export-Import Control Rules, Foreign Exchange Regulation etc.) should best be abolished or at least drastically modified in the direction of liberalisation.

In framing budgets and economic policies it became de rigueur for the government to take advice of the heads of private business. It became obligatory for the head of government to address annual conferences of the Chambers of Commerce and Industry, Confederation of Indian Industries. Members of finance and industries started attending shows of private newspapers and TV channels and started distributing awards and even accepting them. The US set up a tradition of looking at executives of big business corporations and financial world for appointment as the Treasury Secretary. Big business delegations started accompanying heads of government in their visits to important developed countries. Government and business delegations together started attending the World Economic Summit at Davos.

Changing Climate of Public Administration

These transformations of government in favour of big business inevitably influenced the climate in government agencies especially the economic Ministries. The higher civil servants became “business friendly”. Their mindset changed or had to change since instead of being controllers or regulators as in the bad old days of “socialism” they started playing second fiddle to the business magnates. They developed with them bonhomie as members of prestigious social clubs and started attending lavish business parties or even accepting hospitality. A theory was propounded that civil servants should spend sometime of their careers in business to gain useful managerial experience and wash away the obstructive bureaucratic tendencies of the past. Civil servants should, therefore, be given permission to liberally move to private business for a tenure or even on long term appointment to be eventually absorbed permanently. The friendly civil servants could confidently look forward to lucrative assignments in private business on retirement. On the other hand, executives from private business could be invited to hold crucial positions in government agencies on a tenure basis. The “conflict of interest” that may inevitably arise with this free two-way traffic between the government and business was conveniently overlooked.

The corporate world with high earnings became more prestigious than government departments with low salaries. The prestige was calculated on the basis of pecuniary affluence rather than “public service”. The business executives started lecturing the public servants on efficient performance. “Corporate governance” become the role model for governance in government. Construction and management of airports, electricity and water supply projects, highways and metros, was assigned to private agencies, since public agencies were no good. Special economic zones were carved out where there would be no civil agency of the government. They would be managed by the private business contractors and builders to whom they were assigned. They became “foreign territory” where normal rules of taxation, labour etc. would not apply. Lands for the SEZ could be acquired under the emergency clauses of the Land Acquisition Act. Lest the land acquisition should be delayed by the lethargic revenue administrative agencies, the agents of private business started sitting in government offices and directing acquisition proceedings.

Economics of Innocent Fraud

But to what extent were the encomiums showered on the capitalistic economic system and the corporate world justified? Did they correspond with reality? In his Economics of Innocent Fraud, the late Prof Galbraith exposed he reality hiding behind the myths of capitalism and the corporate world. The myth is that the business world caters to the consumer because in the market “consumer sovereignty” prevails. In reality the big corporations and business interests manipulate consumer demand through misleading salesmanship and advertisement on TV channels for which they incur heavy expenditure ultimately borne by the consumer. The myth is that corporations are governed by the decisions of shareholders and representative Board of Directors. The reality is that corporators are managed by a small coterie of promoters and executives who award munificent compensations to themselves at the cost of the shareholders and investors. The myth is that high standards of corporate finance are ensured by professional accountants and auditors. The reality is that they themselves are a party to corporate scandals. The myth is that corporate scandals can be avoided by appropriate regulations. The reality is that corporate influence extends to regulators and public officials in the regulatory agencies can be unduly compliant. The myth is that with the dismantling of government controls over business the scope for corruption by Ministers and high official will be substantially reduced. The reality is that corruption takes a new form—more sophisticated and of greater dimension. Ministers and civil servants join hands with the corporate management in appropriating for themselves huge gains by the loot of public resources.

Satyam Scam

It is in the context of the above analysis of the capitalist economic system and corporate business that the huge Satyam scandal can be understood. The scandal, of the order of more than Rs 7000 crores, would not have come to light but for the confession by the chief promoter, Shri Ramalingam Raju. The scandal was in the form of larger scale defrauding of accounts. False profits and cash resources were exhibited in the financial statements to create an illusion of a highly profitable business which duped gullible small investors. The financial manipulation has been going for seven long years but neither the so-called “independent directors” nor the professional auditors discovered it. The independent directors were acknowledged management experts. They collected huge fees without discharging their duty to safeguard the investors’ interest because they were puppets in the hands of the promoter, Raju. As the accounting firm, Arthur Anderson, did in the Enron case, Pricewaterhouse Cooper Capital, the celebrated audit firm, did in the Satyam case, both failing to uncover the fraud.

This showed how hollow the grandiose concept which goes by the name of “corporate governance” is. Raju was showered award after award for corporate leadership by prestigious award conferring institutions in India and abroad on the “sound advice” of acknowledged experts and consultants. Now they are pleading that they did not know! Another example of “innocent fraud”.

What is disturbing is that for over seven years the businessman who systematically committed fraud was supported by politicians in power in the Andhra Pradesh Government—former Chief Minister Chandrababu Naidu and later his successor Y.R.S. Reddy. His association with the top leaders meant that Raju got huge chunks of prime land at throw-away prices for technology park and other purposes and many other facilities which enabled Satyam to expand and grow rapidly. Banks and financial institutions allowed Raju to open thousands of accounts without questioning. They provided statements about the company’s finance as Raju requested. Raju was allowed inside knowledge of government policies, development plans and projects even before the blue-prints were prepared. This enabled him and his consortium, Maytas Infra, to bid for projects on favourable terms. The whole government system was harnessed to subserve Raju’s interests. Now the bubble has burst and it is obvious how rotten to the core the whole system has become. The new US President, Barack Obama, has vowed to end “greed and irresponsibility” on the Wall Street which led the prestigious financial institutions of the US to collapse, one after another, like nine pins. He has taken to task the greedy business executives who appropriated bonuses of the order of $ 18 billion while the companies they were managing were facing financial ruin. Our government should also take a leaf out of Obama’s book and break the racket of business-government collaboration which has slowly developed since the policy of neo-liberalism was initiated in the year 1991. That should be the main issue of the forthcoming general elections.

Dr P.R. Dubhashi is the former Vice-Chancellor, Goa University, and an erstwhile Secretary, Government of India. He can be contacted at e-mail: dubhashi@giaspn01.vsnl.net.in

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