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The Terrorist Economy in India’s Northeast*
Preliminary Explorations
Ajai Sahni¨

If entrepreneurship is the imaginative pursuit of position with limited concern about the means used to achieve the purpose, then we can expect changes in the structure of rewards to modify the nature of the entrepreneur’s activities, sometimes drastically. The rules of the game can then be a critical influence helping to determine whether entrepreneurship will be allocated predominantly to activities that are productive or unproductive and even destructive.1

Our ideas, Wittgenstein remarked, are our spectacles. They are the windows through which we see the world. The mould into which we cast our conceptions defines our experiences and the reactions they elicit in us, and this is as true for our responses to political violence and terrorism as it is for our subjective reaction to reality. Terrorism, in the preponderance of specialised literature, has been conceived, alternately, as an amoral and utterly inhuman insurrection against all order and civilisation itself, or as a desperate, sometimes noble, struggle against oppression and injustice. The response to terrorism, consequently, is ordinarily and neatly divided into two broad categories – the military2 and the developmental. A brief look at each of these perspectives is illuminating.

Those who subscribe to the first viewpoint insist that terrorism is essentially a law and order problem, and that the state must apply all necessary force to suppress its manifestations and to ‘restore normalcy’. The record of success of military operations in extinguishing terrorist movements in India, however, has been poor. It is not within the scope of this paper to examine this record in any great detail. However, the reasons for the imperfect success of the military response to terrorism can broadly be identified as comprehending the following:

  1. The major terrorist movements in India have normally enjoyed some foreign support and refuge in safe-havens outside the country. Remnants of militant organisations are also able to find shelter in the more inaccessible terrain within the country, or to return, temporarily, to normal life among the civilian population at times when the state’s operational successes are high. Military operations, consequently, can almost never entirely eliminate terrorist forces;
  2. The intervention of the military and paramilitary forces, purportedly to ‘aid the civilian authority’, in fact, seriously undermines the latter at the State level. Such intervention has tended to transfer the entire initiative to the Central Government, and has deepened trends to administrative decline in the affected States. Consequently, when a temporary ‘normalcy’ has been restored by the use of force, and the Centre’s interventions cease, the institutional collapse within the State creates the conditions for the revival of the terrorist movement.
  3. The military option does not, and indeed cannot, address the web of collusive arrangements and the ambivalent character of the affected State’s politics. These, consequently, also resurface the moment military operations cease;
  4. Armed counter-terrorist operations, even when they are conducted with extraordinary sensitivity and respect for human rights, frequently create conditions for the further alienation of local populations, or at least for the projection of the Forces operating in terrorism affected areas as an oppressive occupying force. This results in the persistence and deepening of prevailing disaffection; and
  5. All these factors combine in the crucial consideration that the military option does not address the fundamental dynamics of terrorism – and this is not, as is argued later, the same as the ‘root causes’ referred to by those who subscribe to the ‘developmental approach’. As a result, they only lead to a temporary alleviation of the symptoms, which inevitably resurface the moment the palliative is withdrawn.

The second viewpoint asserts that, unless the ‘root causes’ of poverty, inequality, exploitation and injustice are addressed, no resolution is possible. Consequently, all use of force is counter-productive and represents ‘state repression’ or even ‘state terrorism’. What is required is massive developmental investment that will eliminate the sources of popular discontent and return the ‘noble revolutionaries’ to the ambit of democracy and of lawful political activity. This assertion is, by and large, an article of faith, and in the profusion of literature reflecting this perspective, there is little evidence of a case study that would suggest that this strategy has actually been successfully implemented in any part of the world. Moreover, no empirical studies demonstrating any causal linkages between specific and consistent parameters of underdevelopment, exploitation or injustice, on the one hand, and the emergence and persistence specifically of terrorism on the other, are available. Nevertheless, this perspective finds its justification in the much larger body of literature that links deprivation, inequalities and perceived oppression with violence, and simply infers that the ‘solution’ must lie in the elimination of these ‘root causes’. This point of view has wide support, not only among the well intentioned, but also among an influential section of corrupt bureaucrats and politicians who have been the primary beneficiaries of the massive developmental and relief expenditure provided to terrorism affected States in India.

It may, of course, be argued in support of this point of view, that the strategy has never really been given a fair chance, and that it is precisely its debasement by the nexus of corruption that has led to failure. The thrust of the present paper, however, is not that this strategy has failed in the past, but that it is doomed, by its very character and by the limited conception of economic and developmental activities that its projections are based on, to failure. The general considerations that force this conclusion include the following:

  1. The regime of corruption in India, even under normal circumstances, severely limits the actual impact of developmental expenditure on target groups. In 1989, during his tenure as Prime Minister, Rajiv Gandhi had "suggested that out of every rupee allotted for rural development only fifteen paisa reached the field."3 In situations of widespread breakdown of law and order, and of institutional collapse, there is a complete absence of even the limited accountability that exists in governments under normalcy. Thus, "the weaker the democracy gets the more the black economy flourishes".4 ‘Leakages’, consequently, account for virtually the entire pool of developmental resources and relief supplies allocated to States afflicted by terror;
  2. The State government’s capacity to execute developmental projects is entirely diminished in militancy-affected areas, as the risks confronted by local officials of various developmental agencies are unacceptable. Consequently, even in cases where projects could have significant benefits – despite ‘leakages’ – implementation is virtually impossible;
  3. All serious developmental interventions will, moreover, attract specific terrorist action, as their success would be perceived as tending to weaken the terrorist cause. This would be the case of initiatives through both the governmental5 and non-governmental6 sectors;
  4. A large proportion – and in cases of extreme terrorist violence, a preponderant proportion – of developmental resources flow directly or indirectly to the militants themselves through a regime of collusion, extortion and intimidation, thus strengthening the very edifice they set out to dismantle;
  5. A corollary to the preceding point is that only a small proportion of the benefits or incomes that may actually be generated among target populations through various developmental programmes, eventually remain with these segments, as terrorist groupings tend to appropriate the surpluses through extortion and ‘taxation’; and
  6. The limited successes of the developmental effort, moreover, are more than offset by the flight of private capital – and even public sector investment – in situations of extended political uncertainty, and under a regime of widespread criminal extortion and political and administrative corruption.

Neither of the preceding lists is exhaustive, nor are they intended to suggest that initiatives based on the military or developmental perspectives are futile or should be abandoned. Rather, since these are founded on a partial perspective and one that is, at least in some measure, an inaccurate representation of the dynamics that are set in motion by a widespread terrorist movement, they need to be coordinated with a larger and more comprehensive effort that addresses these dynamics. To the extent that they fail to do so, they limit available policy options, make projections that are unrealistic or unrealizable, and often aggravate distortions in the prevailing political and economic structure. As K.P.S. Gill has observed, in the context of the similarities between terrorism and organised crime, both these have certain common characteristics that do not make them amenable to partial or selective resolution:

…piecemeal and local solutions have no impact. The essence of both these scourges of the modern world is that, irrespective of the motives that inspire them – millennial ideologies of ‘liberation’, political ambition, or criminal greed – they have a deep and corrosive impact on the institutions of democracy, an ability to subvert and eventually destroy the law itself. Those who study this process of subversion both in situations of terrorism and of widespread and organised criminal violence will discover the same patterns of induced paralysis; the creation of endemic terror through the use of lethal violence unconstrained by any rules even of combat or convention; the systematic intimidation and elimination of witnesses and of opponents; the subversion of the executive and judicial machinery by a variety of means, including coercion, corruption and violence; and a parallel process that exploits the very institutions of democracy in order to subvert them.7

Contemporary approaches to counter-terrorism policy tend to neglect these complexities, preferring to deal with constructs that are more manageable, even though they do not conform to the reality on the ground. Planning processes have persisted, despite decades of terrorism in certain regions, to define policies in terms of macroeconomic variables and statistical projections that are the same as those that are applied to situations and regions of peace and order, and have tended to accept and to continue their dependence on the data and information that is generated through routine statistical exercises. There has been no attempt to probe any further, or to verify the impact of past projects before resorting to settled patterns and schemes of ‘poverty alleviation’ and development in areas of strife.

Among the critical elements that planners fail to accommodate in their plans and projections, thus, is the unique character, and the sheer volume and complexity of the underground economy of terrorism, and its ability to subvert all governmental interventions for the economic development of affected regions, or for the restoration of civil governance. This is not to suggest that they are unaware of the existence of this vast and illegal sector – indeed, activities in this sector are frequently and operationally targeted by enforcement agencies – but rather that, since it has not been sufficiently quantified and studied, it cannot be accurately factored into their calculations. There are, moreover, fundamental conceptual biases, including the "widespread impression that individual behaviours in those areas cannot really be understood using the economic model of rational choice. Hence, the conclusion that individual behaviours in illegal activities – not being rational in the economic sense, are to be left to a sociological analysis of pathologies and deviations."8

Terrorism as Organised Crime

Terrorism not only has a great deal in common with organised crime, it can be usefully studied as such.9 There is, of course, a great deal of resistance to any identification of these two – no doubt distinct – phenomena, a resistance that has been condensed into the observation that:

The fundamental difference between them remains: terrorist groups are ideologically motivated and their goal is to achieve particular ‘power outcomes’, while organised crime groups are profit motivated. One of the more obvious corollaries of this is that terrorist groups seek to overturn or destabilise governments while organised crime groups seek to work within a given governmental system in order to continue operating…. There is, however, ample evidence to show that participants in the new wars engage in the same strategies and tactics in which terrorist and organised crime groups generally engage, namely, terror-violence and the quest for economic gain. However, the means alone are not sufficient to alter the fundamental nature of a given group. The purposes of a given group remain the dominant, though not the exclusive, defining characteristic.10

There is, in this, an implicit and overwhelming presumption that terrorist activities and groups have a consistent and enduring ideology and political purpose, and that any economic activity that they engage in are secondary and subsidiary to these motives. This presumption is unfounded in a large number of cases. Indeed, the experience in India tends to the contrary. Of course, in their preliminary ‘ideological’ stage, most terrorist movements are impelled by political motives, and any non-political criminal activities that they may engage in, are usually intended to secure the resources that are needed to support or achieve clear political ends. Nevertheless, once militancies cross this preliminary stage and enter into settled patterns of continuous conflict, acquiring a certain measure of control or influence over significant geographical areas and populations, this characteristic is systematically eroded. One of the factors that contributes to this erosion is what Robert Michels defined at the turn of the century11 – in the context of bureaucracies, professional unions and socialist organisations – as the ‘iron law of oligarchy’: sooner or later, all organisations form their oligarchy that seizes power and that is then consolidated in perpetuity. Thus, while the original intent may be idealistic or even democratic, such organisations eventually come to be dominated by a small, self-serving group of people who achieve and retain all positions of power. Michels argued that the people in this group would be seduced by their ‘elite’ status, and would be increasingly inclined to make decisions that protect their power rather than represent the ideologies or the will of the groups they are supposed to serve. There are, moreover, other organisational factors that reinforce such a tendency, the most significant of which are the internal dynamics of illegal markets, the impact of increasing financial flows and the management of funds, the progressive diversification of the activities of the terrorist group, and the creeping ascendance of the profit motive among increasing numbers of participants in these activities. All these create a multiplicity of organisational layers between any surviving ‘hard-core’ ideological element within the terrorist organisation and its expanding rank and file. Studies of organised crime and gangs in the West indicate that most gang members are only peripherally involved in drug dealing, violence and crime and that only a small percentage of gang members account for most of the harm done by their gang.12 This hypothesis is endorsed by an analysis of arrest records and offender interviews that showed that the worst 10 per cent of criminals commit approximately 55 per cent of all crimes.13 While no specific studies of this nature have been carried out on terrorist groupings in India, it is fairly well documented that the ‘hard-core’ within terrorist groups is a fraction of their total strength, and the motives even among these elements range across the spectrum – from the ideological, through the criminal to the purely pathological. Thus, the presumption of strong, unitary and enduring ideological motives among all – or even any – members of entrenched terrorist organisations and movements, is somewhat tenuous. This is not to imply that such motives do not exist, but rather that there is a continuous spectrum, both over time, and within organisations, of motives that range from the purely ideological to the purely criminal, with an inexorable natural tendency towards the latter in the long term. There will be exceptions to this tendency, and a variety of local factors may neutralise it. For instance, in Jammu and Kashmir (J&K), comprehensive support and funding of militancy by Pakistan eliminates the necessity of extended criminal and extortionary operations – though these may persist on the margin – and hence obstructs the development of the relationships, linkages and dynamics that may otherwise have come into being had such non-political criminal activities been mandated by the operational necessities of sustaining a large terrorist movement over time.

Nevertheless, to the extent that such a tendency prevails, the presumption of a clear opposition of interests between terrorist groupings and established governments is untenable. Indeed, terrorist organisations, like organised crime syndicates, may develop a vested interest ‘to work within a given governmental system,’ subverting and exploiting existing institutions for financial gain, rather than seeking to dismantle or destroy these. This is more the case in India, where a persistent and manifest ambivalence characterises the politics of terrorism-affected States, constantly blurring the lines between the overground political elite and the underground leadership.

The cumulative thrust of the preceding arguments is that it may be fruitful to temporarily suspend judgement on the ideological and political motives or pretensions of terrorist organisations, on the validity and pertinence of the ‘root causes’ of their movements, and on the purely operational and tactical aspects of counter-terrorism, and to focus on the processes, structures and management of the illegal economy that terrorist organisations preside over. In this, it will be necessary to suspend our prejudices, and to regard these organisations and its members as rational – albeit criminal – economic agents or entrepreneurs who continuously respond and adapt to market and policy incentives and disincentives with a view to the maximisation of individual and group profits, and to analyse their activities as such.

The dimensions of this exercise can be estimated through a preliminary exploration of what is known of the underground economy of terrorism in India’s Northeast. Such an analysis would reveal that, as with organised crime, shifts in economic policies, market changes, and the transformation of production relationships can have critical, often unforeseen, consequences on the activities of terrorist organisations. With appropriate data and tools of analysis, moreover, these consequences can not only be predicted, but also used to formulate policies that help induce desired changes, adding a new dimension to the range of possible counter-terrorism initiatives. Needless to say, however, the power of such policies and tools would vary directly with the volume and accuracy of the data and information on which they are based. Significantly, moreover, the processes of documenting this underground economy and its linkages would itself create disincentives to participation in its activities – and this factor can, consequently, also be expected to elicit a great deal of resistance to any such exercise.

Contours of the Terrorist Economy in India’s Northeast

The enveloping circumstance or context of the operation of the terrorist economy in the Northeast is the breakdown of the institutions of civil governance. As with other areas of mass terrorism, all major governmental institutions – and this, critically, includes criminal justice administration – in this region suffer a collapse in degrees that vary directly with the scale and influence of the terrorist movements in particular States. Major decisions, policies and activities relating to terrorism are, consequently, progressively undertaken by the Central Government and its agencies, and these tend to focus primarily on counter-terrorist operations by the Army and Central paramilitary forces, direct negotiations with the leadership of terrorist organisations to secure a negotiated settlement, and largely unsuccessful macroeconomic interventions – particularly the massive injection of developmental funds – in an attempt to address what are regarded as the ‘basic grievances’ of the larger population. The content of these various policies and decisions is thus ordinarily defined by bureaucrats located at Delhi, at a distance of roughly two thousand kilometers from the confusion and turmoil of the areas afflicted by terrorism. Crucially, while the role and relevance of the State governments tends to shrink in these circumstances, there has been no trend to a decrease in their size or expenditures, and, in fact, massive increases in unproductive expenditure have been the norm.14 By and large, this has conventionally been interpreted in terms of the activities of a corrupt elite, and the dramatic erosion of accountability in situations of large-scale institutional breakdown, but this is an insufficient explanation. It is in this context that the presumption of a direct and self-evident conflict of interests between the government and its various agencies, on the one hand, and the terrorist groupings, on the other, needs to be re-examined. A complex collusive arrangement between various legitimate power elites and terrorist groupings exists in every single theatre of terrorist strife, not only in the Northeast, but in other parts of the country as well, and this arrangement facilitates a continuous transfer of resources into the underground economy. This is not only the result of direct extortion – to which most government departments succumb, as do private enterprises and citizens – but also of a web of voluntary and mutually beneficial arrangements that evolve over time, and on occasion, predate the emergence of militancy itself. As with organised criminal syndicates, terrorist groupings also demonstrate:

…their preference towards ‘systemic’ corruption designed to ensure the preservation of a congenial low-risk home base or a comfortable environment in host countries. Such a method of operation may be characterised by widespread use of bribery and favours to ensure the malleability of key positions and agencies; political funding to ensure that politicians elected to office will be indebted to the criminal organisations; carefully targeted ‘payoffs’ to law enforcement personnel to provide intelligence; and the provision of financial incentives to members of the judiciary to ensure that the penalties for criminal activities are either not imposed or are modest.15

The situation, in fact, realises the worst-case scenario, where "the political establishment and the mafia reach a collusive agreement in order to share the rents from the monopolistic provision of public services."16 The result is that the vast official machinery uses its authority to appropriate a large segment of the States’ revenues, and distributes it within a nexus of politicians, administrators and banned militant organisations, often with the mediation of a variety of contractors and commercial front organisations of the terrorists themselves. Thus, in contrast to the common perception of terrorist activity as violent confrontation with the government, we discover a more insidious subversion of the established order through a consensual regime based on "linkages between the underworld and the ‘upper world’".17

No objective measure of the scale of these operations is available, but a few illustrative cases can help comprehend the enormity of public resources that are transferred to the underground economy. The subversion of the Public Distribution System (PDS)18 in Assam provides an interesting example. Sources indicate that a bulk of these commodities are simply diverted to the open market, generating illegal revenues amounting to an estimated Rs. 600 million per month (in 1998), a large proportion of which accrues to the banned terrorist outfit, the United Liberation Front of Asom (ULFA). How this happens is exemplified by the diversion of the State’s allocation of some 40,000 tonnes of rice and wheat under the PDS. The difference between open market prices and the PDS price in 1998 was Rs. 4.00 per kilogram. Virtually the entire quantity of this rice is sold in the open market, and the ‘premium’ shared. Whole wheat is also distributed to consumers at an official rate of Rs. 5.00 to Rs. 5.50. Assam’s monthly allotment of wheat till early 1998 was 30,000 tonnes, most of which was simply allocated to flour mills, many of which were directly owned by ULFA and Surrendered ULFA (SULFA) surrogates. The flour was then sold in the black market at a hundred per cent premium, generating illegal incomes estimated at about Rs. 100 million per month. Similarly, the PDS price of salt was Re. 1.00 per kilogram; a bulk of the monthly allocation of 15,000 tonnes of salt is sold in villages at prices exceeding Rs. 3.00 per kilogram, generating illegal incomes estimated at Rs. 300 million. Villagers in Assam also pay up to four times the ‘control price’ for each litre of PDS kerosene oil.

‘Rural development’ is another lucrative sector, and it is estimated that as much as 70 per cent of all funds available to the State government in Assam under this head is systematically siphoned off under a well organised network of ULFA and SULFA cadres, contractors, civil servants and members of the political executive. Sources estimate that, of the total of Rs. 11.65 billion made available under this head during the period 1992-93 to February 1998, less than Rs. 4 billion went into legitimate schemes. There is little evidence of projects executed on the ground that supports the claim even of this fraction of ‘legitimate’ expenditure. This, in fact, is the case with virtually all government contracts in terrorism affected areas in the Northeast, with the whole business completely monopolised by contractors who front for, or work under the ‘protection’ of, extremist groups.

These revenues are compounded manifold by the massive network of extortion and ‘taxation’ and illicit enterprises that the terrorist groupings administer in their areas of influence. Virtually every vehicle on all major routes in the terrorism affected States of the Northeast pays a ‘toll tax’ at several points marking the several transitions from one insurgent group’s area of influence to the next. The sheer complexity and penetration of these activities is astonishing. In Nagaland, the National Socialist Council of Nagaland – Isak-Muivah (NSCN-IM) reportedly imposes a ‘house tax’ on every dwelling unit, with an incidence of ‘voluntary compliance’ that would be the envy of the most successful government department. Terrorist groupings control virtually all illicit trade – including the lucrative drug and arms trade – in the region. Extortion by the terrorists leaves no buisness – large or small – untouched. More significantly, there is little resistance, and virtually no faith in the ability of the institutions of governance to protect private citizens and enterprises from this predatory regime. The sway of the militants is unchallenged.

The businessman who paid out whopping sums as protection money was not prepared to complain out of fear. The government officer who was threatened with exposure and ridicule and forced to pass on large amounts of illicit black money, sourced to years of corruption and bribery, was silent. The tea plantation executives were afraid to call in the government, because it was seen as an extension of ULFA, and lose their managers to bullets. They paid quietly out of their large profit chests.19

This is not, as stated earlier, a coercive regime that depends overwhelmingly on violence – though periodic violence may be necessary not only to establish territoriality, but also in order not to entirely undermine the credibility of collusive governments. Indeed, a great deal of the violence both by terrorists and by the state is only a legitimising charade. The elimination of terrorism is not a serious objective for most State regimes. Such an achievement would not be ‘electorally productive’ – because the State government would not receive credit for any such accomplishment from the general public, because local populations are ambivalent in their attitudes to the terrorist cause; and because actions leading to such an outcome can easily be exploited by political rivals to incite sentiments against an incumbent regime. On the other hand, regular demonstrations by the state’s agencies that they are capable of responding successfully to the terrorists – by way of encounters, arrests and seizures – are electorally productive, and offer an inexhaustible source of political capital as long as the main force of the militants is not entirely decimated. Where such an eventuality comes close to being realised, however, Security Forces’ operations are often subverted by state agencies themselves, by leakage of information and elaborate political manipulation, particularly of the ‘human rights’ issue.

The depth of political collusion within this system needs to be reiterated again and again. What is arrived at is, in fact, a series of extra-constitutional symbiotic relationships that result in the sharing of political power, activities and jurisdictions between the legitimate agencies of the state, on the one hand, and underground affiliates of the political leadership, on the other. These relations are often formalised through firm – albeit secret – agreements between these power-sharing cabals. Precisely such an ‘arrangement’ was reportedly arrived at between the Arunachal Pradesh Chief Minister, Mukut Mithi, and the National Socialist Council of Nagaland – Khaplang (NSCN-K). This Naga militant organisation dominates the Changlang and Tirap districts in that State. In order to dislodge the 19-year old Gegong Apang Government, sources disclosed that Mukut Mithi and his supporters entered into an agreement with the NSCN-K, according to which the latter guaranteed that no candidate would contest any election against Mithi’s Arunachal Congress for six years in the Changlang and Tirap districts; in return the Members of Legislative Assembly and Ministers thus elected unopposed would co-operate with the NSCN-K and follow their directions during this period. It was also clarified by the NSCN-K that the movement initiated for the demand of Union Territory status for the Changlang, Tirap, Lohit and Dibang Valley districts was ‘only for eye wash to the public’ (sic).20 It is significant that the NSCN-K administers a massive network of extortion and ‘taxation’ in these districts, and has been responsible for a series of abductions.

Such arrangements may go deeper, even extending to a shared ideology and frequently overlapping membership. In Assam both the ruling party, the Asom Gana Parishad (AGP) and the main militant organisation, the ULFA, trace their roots, motivation, ideology and leadership back to the same students’ movement in the late Seventies. While the distance between the AGP Government and the ULFA has progressively grown over the years, linkages at a personal level between most Ministers and various militant leaders and factions persist, and these play a very significant role in the State’s politics. Where they prove inadequate to serve the short-term ends of the militant organisation, coercive settlements are arrived at. Thus, in June 1997, the Nagaon unit of the AGP signed an agreement with the convenor of ULFA’s Kalangiri council, making it possible for a public meeting to be held without an attempt on the Chief Minister’s life. The document signed by the AGP included the following clauses:

  • ULFA, AGP and AASU (All-Assam Students’ Union) will fight jointly against the Unified Command Structure in the State and the withdrawal of black (anti-terrorism) laws.
  • The struggle for self-determination of Assam will be delivered on. And this will also have to be done jointly.21

Interestingly, in the Legislative Assembly elections of 1996, the AGP’s electoral victory had been facilitated by ULFA’s support, and the AGP’s manifesto had included the demand for the ‘right to self determination’, exactly what the ULFA was asking for.22

Similarly, in Tripura there is growing evidence of a deepening nexus between the major political parties and extremist groups. The National Liberation Front of Tripura (NLFT) is alleged to have close links with the Congress (I), while the All Tripura Tiger Force (ATTF) is reportedly aligned with the ruling Left Front.23 It is now increasingly clear that the militancy in the State is substantially supported and sustained by the political patronage received by these groups. In fact, this has been the case with every terrorist movement in all parts of the country, and the Northeast is far from an exception.

A Union Ministry of Home Affairs (MHA) report has also confirmed an alleged nexus between terrorist outfits and politicians, including at least five Ministers of the State government. The outfits with which the Ministers are alleged to have links include the NSCN-K, the Peoples Liberation Army (PLA), the United National Liberation Front (UNLF), Kanglei Yawol Kunna Lup (KYKL-O) and Zomi Revolutionary Army (ZRA). A few Ministers are alleged to have provided financial support, apart from the use of their official cars and bungalows, to the terrorists. Consequent to a raid by SF personnel on November 28, 2000, at the official residence of the Transport Minister, Haokholet Kipgen, and the arrest of two Kuki National Front (KNF) terrorists there, the Central government announced an investigation into the clandestine alliance between the politicians and terrorist groups in the State. MHA reports have also indicated the subversion of civilian administration in Manipur. Senior administrative officials functioning in an insecure environment, with extortion by terrorists posing a serious problem, have adopted the path of least resistance. Official reports indicate that even senior State officials and politicians are paying extortion money demanded by the terrorists, and openly negotiate the levels at which the extortion amounts from various departments are to be ‘fixed’. Terrorist groups have made inroads into the functioning of government departments, including interference in government contracts, development projects, supply and bill clearances. Terrorists of the PLA and the UNLF reportedly have unhindered access to government files and offices. Commercial contracts are allegedly allotted to nominees or members of various terrorist groups, who siphon off the money for their own ends. Terrorist outfits also allegedly offload rice, sugar, wheat and other essential commodities from the Public Distribution System and distribute these among locals at lower prices in order to gain 'legitimacy' and increase their 'base' in the State. Sources indicated that the Centre is also contemplating suspension of all funds to Non-Governmental Organisations (NGOs) based in Manipur, as various NGOs are allegedly siphoning off large sums of money to the terrorists.24

What we see emerging here, consequently, is virtually an alternative – and not necessarily competitive – structure of governance in areas characterised by a high level of disorder or by conditions tending towards anarchy. Indeed, it is possible to look upon the state and the terrorist groupings as ‘rival kleptocrats’, bent upon maximising their monopolistic ‘rent incomes’ from the ‘taxpayer’.25 Unsurprisingly, the subterranean or illegal sector of this structure requires an increasingly elaborate and hierarchical system of management, both of the burgeoning financial and other resources, and of the manpower it employs. This system of management, and the sheer volume of these resources, sets into motion a gradual process of inevitable diversification in which the terrorist group "enters into informal alliances with legitimate businesses or uses its own legitimate firms to provide cover for its illicit operations."26 These processes and linkages progressively force the group to act as a rational economic agent – albeit at a level of rationality that is socially and politically unacceptable and unconscionable – and to succumb to motives that are primarily profit driven, or that include purely economic imperatives, and thus tend to distance it from any ‘original’ revolutionary intent. This has been a critical factor in undermining several terrorist organisations and movements, and the processes of this degeneration come into being almost automatically once the terrorist groups have consolidated their influence over given territories, though their intensity varies from case to case.

These arguments must not be taken to suggest that these organisations would tend, in the long-run, to voluntarily abandon their violent political activities under the lure of profit, and to transform themselves into ‘respectable’ corporate enterprises. Nor must it suggest that these terrorist conglomerates eventually serve or promote constructive economic objectives, in that they ‘generate’ vast economic resources and ‘create’ employment opportunities. Indeed, the terrorist group cannot abandon its coercive apparatus, because its financial powers are built out of it. Moreover, to the extent that their economic activities are primarily – if not exclusively – appropriative, they do not improve the productive capabilities and potential of the larger community and, in fact, deeply damage these (a point to which we return in some detail below).

What they do suggest, however, is that the ‘terrorist entrepreneur’ makes critical allocative choices between competing activities and investments – both in the legal and illegal sector – and that these decisions are susceptible to suitable manipulation through a range of policy incentives and deterrent mechanisms that inhibit the profitability of these investments and the scale of illegal and quasi-legal transactions. The characteristics of these inducements and restraints cannot be appropriately defined at our present stage of understanding, since the available data and information is little more than rudimentary. It is important to point out here that these options would be highly situation specific, and generalised ‘solutions’ would often prove counter-productive.

It is, consequently, not possible at this point, to evolve specific prescriptions. Nevertheless it is useful to take a closer look at some of the broad features of the economic activities of the terrorist enterprise that would be susceptible to manipulation.

  1. The underground economy is a highly complex enterprise, and is not vulnerable to conventional attack against individual agents and cannot easily be dismantled. It is, to use an analogy from another context, like a "plate of spaghetti. Every piece seems to touch every other, but you are never sure where it all leads. Once in a while we arrest someone we are sure is important. Well, he may have been up to that moment, but once we get him, he suddenly becomes no more than a tiny cog. Someone else pops up in his place."27 Thus, while action against those who participate in or collude with this enterprise must continue, its impact will tend to be negligible unless systemic solutions undermine the profitability and basic dynamics of the enterprise;
  2. The underground economy is highly destructive of the developmental potential of the larger community, and kills off all incentives for productive economic activity and investment. This is because the basis of the underground economy is coercive, and those who participate in productive activities would ordinarily succeed in retaining only small shares of the incomes and assets they generate under the regime of terrorist extortion. Over time, the appropriative activities of the terrorist entrepreneur would cause a progressive decline in the share of productive activities in overall resources, and would consequently result in a fall in the cumulative productive capacity of the community. This is the reason why, even where developmental investments reach their target groups, the benefits to them remain elusive, and, instead, usually accrue to the ‘terrorist economy’. This observation, if validated by empirical studies on the ground, would have critical implications for the devolution of resources for development in terrorism affected areas;
  3. As the ‘terrorist economy’ expands and diversifies, it becomes necessary for its managers to install an effective monitoring mechanism that prevents ‘leakages’ and opportunistic behaviour on the part of its employees and affiliates. The costs of this monitoring mechanism increase "more than proportionally with the number of their members, and therefore represent a rather stringent limit to the efficient operating scale of such organisations."28 These costs can, moreover, become prohibitive, if enforcement agencies intervene suitably to undermine or disrupt the reliability of the monitoring mechanism, and to encourage ‘leakages’. Moreover, the large ‘overground’ resources and affiliates of the terrorist economy can also be targeted by the enforcement agencies, increasing the ‘carrying cost’ of transactions. Indeed, this is probably the most promising course of intervention, in that a large number of low-cost (and non-violent) interventions on the part of the state can inflict severe disruptions and losses on the underground economic network;
  4. Dominant terrorist organisations provide critical ‘services’ in areas where strong governmental authority is lacking. These include the regulation of economic activities – legal and illegal – the containment of distributive conflicts and of the ‘supply of violence’, protection, the resolution of disputes, and consequently, a stable context for transactions within the illegal market. The profitability and ‘legitimacy’ (in the eyes of their ‘consumers’) of these organisations, are directly linked to their efficiency and credibility in providing these goods and services. All interventions that undermine such credibility, consequently, strike at the roots of terrorism.
  5. There is a danger here. Unplanned interventions in this direction may result in an escalation of conflict with rival terrorist groupings who try to establish their dominance in the vacuum that may be created by the partial withdrawal or impairment of any one organisation, and this may result in what has euphemistically been referred to as an ‘oversupply of violence’29; and

  6. There are certain general factors that encourage the growth of all underground economies, and these need to be urgently rationalised in terrorism affected areas. These include the fact that, the larger the spectrum of transactions that are outside the purview of the law, the greater would be the stranglehold of criminal organisations. This is particularly relevant to the Northeast, where a wide variety of economic activities that were integral to the lives of the people of this region – including cross-border trade, the use of a variety of forest products, some collective rights over land use, etc. – have, since Independence, suddenly (and from the point of view of the local populations, arbitrarily) been ‘criminalised’, forcing the otherwise law-abiding citizens into a collusive relationship with militants.

Within this context, it may also be useful to study and explore the potential of certain unorthodox interventions in the existing illegal markets. To take an example of the drug trade, an evaluation could be made to determine whether legalising the trade in soft drugs, such as marijuana – as is the case in some States, such as Uttar Pradesh and Bihar – would have a dampening effect on the total volume of traffic in hard drugs and its control by terrorist groups. This is not a prescription, but only a possible avenue of exploration and, on the face of it, one that would probably prove infructuous, particularly in view of the experience that, when illegal activities are legalised, the agencies that monopolised the illegal trade tend to retain their monopolies. It is mentioned here only to emphasise that the entire gamut of illegal economic activities on which the empire of terror is built, would need to be documented and quantified in great detail in order to identify possible areas of intervention.

These are only very general observations, and even a preliminary effort at quantifying the underground economy of terrorism in the Northeast would produce or uncover many additional features. At the present stage of our empirical understanding, however, it is not possible to undertake programmes to effectively tackle the underground economy of terrorism, since the requisite numbers for rational decision-making do not exist. The objective of this paper, however, is only to emphasise the general principle that terrorist movements and organisations are vulnerable to cumulative disruptions that undermine their profitability, and that this fact alone opens out a wide range of possible policy interventions for the state. Such interventions, however, would need to be preceded by an enormous exercise in mapping the contours of the underground economy of terrorism in unprecedented detail.


This paper was originally presented at a seminar on "Terrorism" organised by the Indian Council for Social Science Research at the India International Centre, New Delhi, on March 2-3, 2000.
Dr. Ajai Sahni is Executive Director, Institute for Conflict Management and the South Asia Terrorism Portal (; and Executive Editor, Faultlines: Writings on Conflict & Resolution.
  1. W. J. Baumol, "Entrepreneurship: Productive, Unproductive, and Destructive’, Journal of Political Economy, Chicago: The Chicago University Press, vol. 98, no. 5, p. 897.
  2. The expression ‘military’ is, in this context, used loosely in the sense of the use of armed force by the state against militants, whether this involves formations from the Army, the paramilitary forces or the armed police.
  3. Amar Kumar, The Black Economy in India, Delhi: Penguin Books, 1999, p. 5.
  4. Ibid, p. 188.
  5. A case in point is the killing by militants of the Chief Engineer of the National Hydroelectric Power Corporation’s project in Manipur. See Vinay Pandey, "Militancy casts shadow on N-E hydel plans", The Times of India, Delhi, January 22, 2000.
  6. The kidnapping and subsequent murder of Sanjoy Ghose of the Non Governmental Organisation, Association of Voluntary Agencies in Rural Development- Northeast (AVARD-NE), who had done pioneering work on the Majuli river island in Assam, was a chilling warning to social activists who sought to disturb the prevailing equations in the State. See "Crime: Sanjoy Ghose Killing – A Sinister Design", India Today, September 22, 1997.
  7. "Policing the free Indian State", The Pioneer, Delhi, August 23, 1997.
  8. Gianluca Fiorentini and Sam Peltzman, "Introduction", in Fiorentini and Peltzman, eds., The Economics of Organised Crime, Cambridge: Cambridge University Press, 1997, p. 2.
  9. The point of departure of the arguments that follow is an exercise in which some alternatives were explored to the existing perspectives on planning for development and security in India’s Northeast. See Ajai Sahni and J. George, "Security & Development in India’s Northeast: An Alternative Perspective", Faultlines: Writings on Conflict & Resolution, New Delhi, Volume 4, 2000, pp. 43-67.
  10. Cherif Bassiouni, "Organsied crime and new wars," in Mary Kaldor and Basker Vashee, eds., New Wars, Pinter: Herndon, Va, 1997, pp. 38-9.
  11. In his seminal work Political Parties:A Sociological Study of the Oligarchical Tendencies of Modern Democracy, published in 1911.
  12. Bureau of Justice Assistance, USA, Monograph: Addressing Community Gang Problems: A Model for Problem Solving,; See also
  13. A. Blumstein, J. Cohen, J.A Roth, and C.A Visher, Criminal Careers and ‘Career Criminals’, Washington D.C.: National Academy Press, vol. 1, 1986, cited in Ibid.
  14. Sahni and George, pp. 49-51.
  15. Report of the Secretary-General on the Implementation of the Naples Political Declaration and Global Action Plan Against Organised Transnational Crime, E/CN.15/1996/2, April 4, 1996, United Nations Economic and Social Council, Commission on Crime Prevention and Criminal Justice, Fifth Session at Vienna, May 21-31, 1996, Section F, Para 18.
  16. Fiorentini and Peltzman, p. 15.
  17. Report of the Secretary-General on the Implementation of the Naples Political Declaration and Global Action Plan Against Organised Transnational Crime, Section F, Para 17.
  18. The PDS is intended to provide relief to the poorer sections of the population through the supply of essential commodities at subsidised rates.
  19. Sanjoy Hazarika, Strangers of the Mist, Delhi: Penguin Books (India), 1994, p. 191.
  20. While this account is based on sources who prefer anonymity, Gegong Apang confirmed the substance of these allegations in a Press Release, the contents of which appeared in The Sentinel, Guwahati, on July 29, 1999. These allegations were, however, subsequently refuted in a Press Release signed by 10 Ministers and the Deputy Speaker of the State Legislative Assembly.
  21. Avirook Sen, "Mahanta uses the Tata Tea issue to obscure his party’s links with the ULFA and his ministry’s dismal showing," India Today, Delhi, October 20, 1997.
  22. Ibid.
  23. See for instance, Where ‘peacekeepers’ have declared war, National Campaign Committee Against Militarisation and Repeal of Armed Forces (Special Powers) Act, Delhi, April 1997, p. 70.
  24. South Asia Terrorism Portal, Manipur: Assessment 2001,
  25. Herschel I Grossman., "Organised Crime and State Intervention in the Economy", in Fiorentini and Peltzman, pp. 143-60.
  26. Report of the Secretary-General on the Implementation of the Naples Political Declaration and Global Action Plan Against Organised Transnational Crime, Section F, Para 17.
  27. Timothy Green, The Smugglers, New York: Walker, 1969, p. 9.
  28. Fiorentini and Peltzman, p. 12.
  29. Ibid., p. 6.





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