theindialog

September 28, 2009

Auctions in Assam — Crony Capitalism

Filed under: Assam,Economics,Small Businesses — loggers @ 8:15 pm

In Assam, business owners and traders have the option to participate in government auctions in order to source raw materials at a relatively low cost. Different government departments (army, railways, power, telecom etc.) hold these auctions to dispose off excess waste/scrap material, and for some, it turns out to be a significant source of revenue. For hazardous materials, the system requires participants to obtain certification from the central government in order to participate; i.e. only a registered lead smelter can bid for waste batteries from the government.

Auction Format

The format is that of an on-the-floor 1st-price auction, where a reserve price, R, is set by the hosting department. The highest bidder wins and pays a price, P, which is equal to his bid, given that the bid exceeds R. Officially, departments determine R by looking at market prices of the goods and set R < market price. However, since this can be tiresome for the government bodies when dealing with hundreds of goods, they often just determine R arbitrarily by gauging demand, using the previously held R as a benchmark. For example, if in the previous auction for the same good, R was INR30 and the good sold for INR50, the department is likely to set the next R > INR30 to take advantage of this demand.

Corruption in the System

While this system is designed to supply all business owners with cheap raw materials and to minimize waste amongst government departments, the local mafia groups (syndicates) are corrupting the system. Syndicates are groups of people with substantial influence in various departments of the government, who prevent the auctions from functioning fairly. These groups forcibly prevent local traders and business owners from participating in various auctions, and therefore, have control over the prices. With extensive experience they are able to estimate the reserve price before the auction is held, and then do not compete with each other during the official auction.

After the syndicate buys the goods, they meet privately to hold an unofficial auction. Here, members of the syndicate compete with each other, and then split the profits evenly after all the goods are exchanged. So technically, a syndicate member who does not actively participate in either auction will make money through this system. Finally, after the unofficial auction, the individual winners proceed to sell the goods in the market at a high price or use them in their independent scrap-dealing businesses.

Getting around the System

Our friend and local host, Rishi Todi, has a lead smelting business in Guwahati, Assam and has experienced this system first hand when trying to participate in an auction for waste batteries held by the railways department. Knowing that it was a complicated and risky process, Rishi visited a Railway official in Assam beforehand for advice on how to participate in such an auction. The official gave him a run-down of the system, and explained that the government is fully aware of the fact that syndicates are controlling the prices at departmental auctions. He then advised Rishi to meet privately with a member of the syndicate before the auction to reach an agreement to procure the batteries. The official even provided Rishi with a contact inside the syndicate. In making deal with a syndicate member before the auction, one would tell the member the maximum price at which he would buy the batteries. Then, the syndicate member would try to win the unofficial auction at a price lower than his buyer’s maximum price in order to sell it to him at a profit.

Rishi at his lead smelting factory

Rishi at his lead smelting factory

Conclusion

Auctions in Assam are a prime example of crony capitalism. They illustrate how intertwined bureaucracy, business and corruption are in India. In this case, both the government and the entrepreneurs are trying to create efficient markets, but independent syndicates are asserting their power over both entities. The tragedy is that either the government officials find themselves helpless in the face of these local gangsters, or that they are enjoying a mutually beneficial relationship with them under the table. In both cases, it is the entrepreneurs who are losing – the only group of people who have the ability to generate the employment and economic activity that the country needs.

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1 Comment »

  1. Glad to read the reports from your journey again. thanks.

    Your description of the relationship between government & syndicates has IMHO direct similarities to the relationships between Washington and Wall Street and their impact on the financial crisis. You can listen to an interesting debate about this issue at the following link: http://www.npr.org/templates/story/story.php?storyId=102312504
    Yash will recognize Nouriel as one of the speakers.

    Comment by Aviad — September 29, 2009 @ 3:01 am | Reply


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