India is said to grow at night while its government sleeps. The quip, beloved of Indian businessmen, is often invoked to rubbish a corrupt and incompetent state and to praise a supposedly heroic entrepreneurial class. But there is something wrong with this picture. In many sectors, Indian entrepreneurs make money not in spite of government interference, but precisely through colluding with a state that provides the land, licences and rent-seeking opportunities on which they thrive.

That is one lesson of 2G-Gate, the corruption scandal stinking up New Delhi in which second-generation spectrum licences were awarded “first-come, first-served”. Manmohan Singh’s administration has rightly taken a beating over a fiasco said to have cost the exchequer $40bn in forgone fees. Andimuthu Raja, the telecoms minister who presided over the auction, has been arrested, due to “irregularities in the allocation” of licences. He has always denied wrongdoing.

Gurcharan Das, a former businessman and writer who dreamt up the idea that India grows at night, called Mr Singh “an honest prime minister who seems to be presiding over one of the most corrupt governments in Indian history”. Ramachandra Guha, a historian, fondly recalls a prelapsarian age when most politicians were “not on the take” and when a burglar at the home of one prominent politician turned up only 800 rupees and a gold sovereign.

All the opprobrium being heaped on the politicians is right and proper. But much of Indian business is also culpable. After all, for every bribe-taker there is a bribe-giver. For every underpriced mining or telecoms licence there is an entrepreneur only too happy to cash in. That may seem obvious. But it undermines the idea that India’s businessmen are radically different from the crony capitalists of south-east Asia or the apparatchiks who run China’s state-owned behemoths.

Of course, there are some world-class Indian entrepreneurs, particularly in areas where the state has withdrawn or – as in information technology and outsourcing – it had never established a bureaucratic foothold. But for every Narayana Murthy, who founded Infosys with just $250, there are dozens of rent-seekers whose main business skill is to work the political system.

Dhirubhai Ambani, the legendary entrepreneur who built the Reliance empire now split between his sons, was notoriously good at “managing the environment”, in the euphemistic words of one commentator. So pervasive is alleged influence-peddling that even Ratan Tata, chairman of the Tata Group and considered an Indian businessman above reproach, has not been able to keep clear of controversy. In a tape of a 2009 conversation between Mr Tata and Niira Radia, a powerful corporate lobbyist, Ms Radia is heard explaining her efforts to persuade the then telecoms minister not to allocate spectrum to Anil Ambani’s Reliance Communications before dishing out some to Tata’s Teleservices. Mr Tata, who is trying to get the tapes suppressed by the Supreme Court, says the leaks are a character assassination.

Ashutosh Varshney, who co-authored an article for the Financial Times comparing a subset of Indian businessmen to 19th-century American robber-barons, says most businesses in the IT, biotech, pharma and consumer goods sectors are clean, an accounting scandal at Satyam, an outsourcing group, notwithstanding. But any enterprise that involves land or mining rights cannot be free from suspicion, he says, pointing to the almost instant billionaires that these industries have created.

His co-author, Jayant Sinha, managing director of Omidyar Network India Advisors, laments the dominance of a few business dynasties. The combined wealth of roughly 70 Indian billionaires is more than a fifth of national gross domestic product, a concentration of wealth far greater than almost anywhere apart from Russia. That is partly because there is no estate tax, which allows families that built their wealth during the pre-1991 reform years of the “Licence Raj” to pass on their fortunes intact to the next generation. These younger scions can then use the capital and connections to break into the next lucrative field.

One should not stretch this too far. The telecoms sector, for example, is crowded with competitors and in the midst of a price war. That, says Yasheng Huang of the Massachusetts Institute of Technology, is not consistent with classic rent-seeking. India, he insists, has far more path-breaking entrepreneurs than China.

Mr Das says the scandal has forced Indian business to do “a lot of soul-searching”. But he argues that the government must take a bigger share of the blame because it holds up the hoops of corruption through which entrepreneurs are obliged to jump.

That is true, up to a point. But the answer cannot be – as some would have it – for the government simply to withdraw. In areas such as mining and forestry, or the auction of land or telecom spectrum, India badly needs a state that can set clear rules and enforce them. The sorry truth is that if by some miracle it achieves this, some of the businessmen lauded today as entrepreneurial giants will not look quite so clever.

david.pilling@ft.com

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