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Blame it on Enron.

Feb 11, 2002

The spectacular collapse of Enron has brought to the forefront many issues, such as:

  • an obvious lack of ethics within a well-connected company,

  • greed, that tempts management of companies to break the law, is a universal phenomena and difficult to eliminate,

  • a complete failure of de-regulating a crucial industry, energy, in the world’s largest market,

  • a failure of the accounting companies to stick to the business of accounting and dive into consulting contracts which, due to their high fee generating potential, compromise the basic role of the audit company as a policeman and a cross-check,

  • a failure of the well-paid analysts on Wall Street to sniff that something was fishy with Enron and, like the internet stock fiasco, this may be due to the fact that Enron has been a huge source of revenues for the leading banks and Wall Street and, hence, no one wanted a negative view since that would hurt their chance of getting a part of all the fees that Enron generated,

  • the importance of asking the boringly obvious question: “how trustworthy is the management?” before making any investment decisions in any part of the world.

But there is an unintended consequence of Enron that hurts India. No, it is not the fact that the Dabhol Power Company is an asset for sale with an uncertain future and, hence, with an unknown impact on the balance sheets of ICICI, IDBI, and other lenders. The unintended effect of Enron on India is that our decision-makers are already keeping the Enron example in their top drawer as a defense for any future scandal! The thought process is logical and simple: If it can happen in USA and if the guru of all regulators, the SEC, can be swindled and hoodwinked into a gigantic scandal, then no Indian national or FII or MNC can blame us in India if we have our own little chota and not-so-chota scandals here, there, and everywhere.

When meeting with a few decision-makers recently, I pointed out a few inconsistencies in some of our policies and pat came the reply: Don’t point a finger at us, look at what has happened to Enron.

So, because Enron has happened, many decisions will be made knowing that the American system has been shown to be vulnerable to deceit and manipulation and India now has the license to make its own mistakes. If the King of Capitalism cannot have his own house in order, who is he to ask us to keep our house in order? The pressure for most of our reforms has come from the outside, mostly from America and the MNCs. But now that the emperor is naked and the successive collapse of TMT and Enron suggests that capitalism is no longer assumed to be the only route to economic nirvana, the relevance of the external pressure for our reforms will decline. And our gods will go back to drafting policy that protects, rather than challenges, the rule of the existing elite. Enron may have shown the vulnerability of a free-style capitalist society built on self-interest and greed, but it’s effect on India is likely to be a slowdown in liberalization and a move to preserve the interests of the local chieftains.

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