Arvind Kejriwal talks of Crony Capitalism - Here is an example

Arvind Kejriwal talks of Crony Capitalism - Here is an example

Doing Big Business In Modi's Gujarat, By Megha Bahree

This story appears in the March 24, 2014 issue of Forbes Asia.

When his son was married in the coastal state of Goa last year, Indian billionaire Gautam Adani’s guest list included the richest man in the country and many a chief executive and top banker and bureaucrat. Most, however, just stopped by the night before to bless the happy couple and skipped the actual wedding. But one prominent friend stayed through all the ceremonies over a couple of days, genial and relaxed like a favorite uncle. It was Narendra Modi, chief minister of Adani’s home state of Gujarat.

Ranked No. 609 in the world with an estimated worth of $2.8 billion, Adani runs India’s largest port, a power company and a commodities trading business. A large chunk of his business is located in Gujarat, and the government under Modi, who has been running the state since 2001 and now is the favored prime ministerial candidate in the national elections this spring, has been more generous to Adani than to any other industrialist there.

Adani has, over the years, leased 7,350 hectares–much of which he got from 2005 onward–from the government in an area called Mundra in the Gulf of Kutch in Gujarat. FORBES ASIA has copies of the agreements that show he got the 30-year, renewable leases for as little as one U.S. cent a square meter (the rate maxed out at 45 cents a square meter). He in turn has sublet this land to other companies, including state-owned Indian Oil Co., for as much as $11 a square meter. Between 2005 and 2007 at least 1,200 hectares of grazing land was taken away from villagers. Under Indian law land meant for grazing cattle can be used for something else only if it’s in excess. There’s a formula applied to calculate. Even then the village chief has to give permission to take the land. Villagers in Adani’s SEZ say their grazing land was signed away by earlier village chiefs without their knowledge. They have filed multiple cases in the Gujarat High Court to contest the government’s actions, going back to 2005 and even earlier. Several cases are still pending.

On that cheap land Adani has built his cash cow–the country’s largest private port by volume–as well as a 4,620-megawatt coal-fired power plant.

Anand Yagnik, a lawyer representing some of the Mundra villagers, says, “The basic philosophy of a liberal economy is to allow market forces to play its role. Then why do you have to allocate scarce resources to industrial houses at throwaway prices when they have sufficient capital to pay market rates?”

Modi, it should be noted, is posed as the candidate of Indian economic revival in the national race on the basis of his Gujarat record. In February he gave a speech touting the benefits of more open business competition in India.

On the surface the busy Adani port exemplifies such commerce. On an earlier February day two tugboats were guiding a loaded ship toward the jetty even as another ship was being loaded with containers. In one section of docks, new Maruti Suzuki cars were being cleaned for shipment. In another, commodities excavated from the region–bauxite, bentonite, iron ore–lay in individual piles, waiting to be loaded for export.

In the most recent available data, Gujarat’s GDP shows a compounded average growth of 13.4% during Modi’s tenure, outstripping the national rate of 7.8% for the period. Thanks to Modi’s policies it has attracted investment in sectors like auto manufacturing and solar power. It has made advances in rainwater harvesting and irrigation, and offers a near 24-hour electricity supply statewide. (In contrast, the country has averaged a power deficit of up to 9% for the past three years, though that has improved much of late.)

Miles of smooth roads, occasionally lined with pink, orange and white bougainvillea and kept clean by sweeping machines, let you zip around the massive city within a city that is Adani’s special economic zone. The idea is to have export-focused companies set up their factories in the SEZ, close to the Adani port. As additional incentives the billionaire has built a 40-mile railway line, linking the port to the national railway network, as well as a 1.1-mile-long private airstrip that SEZ tenants can use for their chartered flights. So far 23 companies have signed up. Thus Gujarat has gained some output and employment, but Adani has captured the rents.

The Adani Group was established in 1988 and became publicly traded in 1994. But its real rise happened under Modi’s reign in Gujarat. From 2002 to last March the group’s revenue rose from $765 million to $8.8 billion while net profits climbed even faster. During this period it constructed its SEZ, bought mines in Indonesia and Australia to ensure it had a steady supply of coal for its thermal power plants in India and launched Asia’s largest coal import terminal in Mundra. In 2011 it further expanded in Australia, buying for $2 billion Abbot Point, a coal terminal in Queensland. It also tacked on a hefty amount of debt–$13 billion–more than doubling since 2011.

While none of the other companies in Kutch, or the rest of Gujarat for that matter, have received the kind of largesse on land rates as Adani, they, too, have benefitted from the Modi government’s bent. It is one that, whatever Modi may now be saying on the campaign trail against crony capitalism and on behalf of the downtrodden, is even less mindful of environmental damage and villager prerogatives than are Indian land-use practices in general.

At a political rally in distant Lucknow in early March, Modi said farmers were his friends and he would stand by them. He also said he would “not allow anyone to loot the exchequer.”

But spend time around the villages of Kutch and a vastly different picture appears. This region was famous for its crops of sapodilla, a brown, fleshy fruit slightly smaller than a tennis ball, as well as dates, coconuts and castor. Area farmers say that that’s no longer the case. (Official stats seem to end in 2006.) Fly ash and saline water from Adani Power and a nearby Tata Power Co. Ltd. plant are spoiling the crops and making the soil less fertile, they say. For miles at a stretch the chimneys of the two power plants are visible against the horizon. Gajendra Sinh Jadeja, the 28-year-old head of Navinal village, says the Gujarat government took some 930,770 square meters of his village’s grazing land for Adani’s SEZ. Adani got it for 19 cents a square meter.

Traversing a couple of nearby barren fields, Jadeja says he had been growing alternately cotton, millet and castor there. Now patches of white salt are easily visible across stretches of the fields and have become a common sight across farms. “The saline water ruined the soil, and the poor production now is just not worth it,” he says.

On another field there is a scraggly growth of castor, no comparison to the tall, lush green field that he remembers.

The village of Zarapara with its 15,000 residents is one of the largest in the area. When the government gave away some of its grazing land to the Adani SEZ, at roughly 19 cents a square meter, the villagers filed a case in the Gujarat High Court, one of several similar cases filed by residents of other villages. The court in the summer of 2011 ordered the government and Adani to replace that land for the villagers but nothing has happened so far.

Zarapara was once famous for its sapodillas. “In season five trucks filled with [sapodillas] would go every day to the market from this village,” says Zarapara resident Naran Ghadavi, whose farm is 3 miles from the Adani power plant. “Now we only produce enough to fill one small van.”

Ghadavi, 30, blames the decrease in output on the saline water and the fly ash from the Adani power plant that has polluted the groundwater tables and broken the pollination process. Pointing to his white shirt, the small, wiry man says, “Earlier our clothes used to turn yellow [from the pollen]. Now when the morning dew drips from the tree leaves, the ground turns black from the fly ash.”

The villagers’ lawyer Yagnik argues that Modi, by giving away land so cheaply, is depriving the state treasury of funds. “This kind of subsidization of scarce resources eats away at the public exchequer, and that has a direct impact on distributive justice because then the state doesn’t have enough resources to deal with this inequality,” he says.

After years of receiving complaints of environmental abuse, the federal environment ministry finally, in 2012, named a panel–known as the Sunita Narain Committee after the woman chairing the process–to look into them.

In a report last April Narain’s group confirmed the villagers’ complaints–and fears. It said the Adani SEZ had violated multiple green rules at different points of its mammoth project–destroying mangroves, filling creeks and causing land and water degradation by dumping fly ash.

At the power plant thousands of gallons of water sucked in from the sea through one channel are let out through a pipeline. Once sucked in it’s kept in a reservoir from where it’s pumped into the turbines to generate electricity and eventually is pumped back out.

The panel found that the reservoir didn’t have any lining to protect the groundwater. “The examination by the committee shows that the soil in the area is permeable and without safeguards it will lead to contamination. This is a clear violation of the environmental clearance condition,” its report said. The committee recommended that Adani create a fund that was either 1% of the entire project cost or $37 million, whichever was higher. It also said the company should reconstruct both the channels that are used to take in and send back the water, as well as repair or construct anew the reservoir with impervious lining at the bottom and sides.

But almost a year after the recommendations were made the company appears to have done nothing. Meantime, it has plans to expand its 7,350-hectare SEZ to 18,000 hectares.

In an e-mailed response to questions, a spokeswoman for Adani Group said it had been allotted government land after following all established processes and used valuations applicable at the time, ahead of subsequent improvements. “It will be completely misleading if we compare the price of the land before development and after development as an entrepreneur takes risk of investing a large amount to develop this land, and if the commercial venture fails, the consequences are only to the developer,” the company said.

Adani Group said salinity ingress was a local phenomenon and that its power plant used technology to ensure that there was no stray fly ash. It also refuted the observations of the Sunita Narain committee and said while any large development would affect the environment, it was certain that its net impact was positive. Also, all government requirements were followed in setting up its various projects.

The Modi administration did not reply to repeated interview requests.

In today’s India and elsewhere, it is not unusual for governments to offer benefits to powerful private interests, especially to attract investment in remote areas. And as noted, Adani is not the sole beneficiary of Modi’s blessings.

“But what is unusual–and where the problem arises–is when you set something up on this scale without competitive bidding,” says Aakar Patel, a columnist at Indian newspaper Mint and a longtime Gujarat observer.

The social dynamics are much the same at the 4,000-megawatt power plant of Tata’s wholly owned subsidiary Coastal Gujarat Power, a few miles down the coastline from the Adani plant. It opened in March 2012 under a different arrangement, this one a federal initiative to spur big energy plants. Several of them have been announced, but this one from Tata is the first to go live. Under the deals, the federal government provides the operators with the land and all clearances. However, land is a state subject, so it is the state government–Modi’s in this case–that had identified and allocated the land.

In Kutch fishermen and their families set up camp on the beach. Tagadi fishing village is one such camp on the banks of what is now the Tata plant’s outflow channel. Dawood Umar Jaam, 43, has been fishing in the area for the past five years. He has seen a 60% drop in his catch in the last few months and blames it on the plant. As the plant takes in seawater, it also sucks up fish that are still small, killing them instantly, says a fishermen’s trade union known as MASS, active in the area. The plant releases hot water back into the sea, raising temperatures in the immediate vicinity, killing more fish and changing migratory patterns.

Jaam, who has a family of six in Tagadi, takes a loan of maybe $2,000 prior to the fishing season to repair his nets and otherwise get ready. He would earn enough to pay off the loan and save up to about $750 each year, he says. Not anymore. He doubts he’ll be able to repay more than $350. Just before he sets off to fish, he points to the boundary fence of his makeshift house, constructed on three sides using bamboo sticks. Those sticks used to be covered with fish put out to dry. Now, only a quarter of the sticks are covered.

The Tata unit says the outfall channel is specially lined with stones to extend the surface while the water is being discharged so it can cool. “The outfall channel, which is [4.5 miles] long, ensures that the temperature of hot water at the discharge point meets the environmental stipulations,” the company said in an e-mailed statement.

In addition, it says, it’s teaching Tagadi fishermen better practices and is distributing nets to enhance the catch and providing clean drinking water.

Back in his adjoining SEZ, things have gotten legally dicier for Adani of late. Residents of Navinal Village, including the head Jadeja, filed in 2011 a petition in the Gujarat High Court after they lost their grazing land to the SEZ. In January the court declared the SEZ illegal and ordered the companies that had set up factories in there to stop all work. Reason: The SEZ had been built without getting an environmental clearance. Under Indian law a project the size of the SEZ would need one from the federal environment ministry before it can lay a brick. (This judgment is pertinent only to the SEZ and not to the port or the Adani Power plant. The company had applied for–and received–separate environmental clearances for those, and that lets them operate legally.)

The Supreme Court, India’s highest, has refused to stay the lower court’s decision, although it said existing tenants in its SEZ could keep operating. With hundreds of millions of dollars already invested–albeit in a project now in legal limbo–the question now is if Adani’s effort has become too big to shut down. The Gujarat High Court passed the ball on that decision to the federal government, asking if the project could be granted a belated environmental clearance. New Delhi in turn asked for a couple of months to ponder that decision.

Now that India’s election has been set to begin Apr. 7, the federal government is effectively blocked from taking this decision. As a result the fate of this project will likely be decided by whoever comes into power next, and that could easily be a government led by Modi.