A recent cover story of the The Economist titled The New Age of Crony Capitalism has created a wave among economists worldwide. While many have criticised it for its limitations and shortcomings, there are some who have accepted and applauded it as a good effort in defining an otherwise undefined and incalculable system.
The magazine has formulated an index named as “Crony-capitalist index (CCI)” to measure the extent of cronyism in a country. It calculates the percentage increase in the wealth of some billionaires enjoying monopolistic powers particularly in “rent-seeking” sectors over a period of time with respect to the Gross Domestic Product (GDP) of the country based on Forbes data.
The index was calculated for 23 countries comprising five very large developed nations, 10 large developing and eight small countries. They were thereafter ranked in the descending order of the index. The higher the rank of a country the more likely it is said to be affected by crony capitalism. The report was certainly not flawless but it provides an outline of the nexus between the government and some business houses.
As regards India, the report has shown an improvement in CCI—from sixth position in 2007 to ninth (2014). Does it mean India was able to restrict the phenomenon? No, this has nothing to do with government action against corrupt elements in politics and business. The ranking improved amid a slow growth rate, which had affected the fortunes of some politically connected businessmen rooted in “rent-seeking” sectors.
Over the past decade, the term “crony capitalism” has gained currency in media reports and political discourse. While the media report cases of large-scale scams as part of their moral and social responsibility, political leaders spin the issue to gain electoral advantage by pushing the ruling party into the dock.
The issue of cronyism dates back to the 1950s when the government exercised stringent control on prices, production, capacity, etc. through the licence-permit-quota raj. Even capital markets, banking and finance, land and labour were regulated, providing ample ground for collusion of corrupt government officials and traders longing for permits and licences. The restrictions were slowly lifted in some areas reducing the scope of corruption following the announcement of the liberalisation policy. The government, however, retained its control over land, minerals, energy and infrastructure. The economy made a paradigm shift. “Crony socialism” ended but it paved the way for a more erosive “crony capitalism”.
Instances of the government announcing doles to a favoured few are not new. The 2G spectrum, the Coalgate and the CWG scam are examples of crony capitalism. The huge money involved in such scams could have been used in infrastructure, education and health. Initially, the money involved in such transactions was used for running political parties and funding poll campaigns. Gradually, it became a source of generating personal assets and accumulating wealth. The favours to business houses included tax reduction or announcement of tax-free zones, cheap credit through state-owned banks, allocation of land at throwaway prices, grant of licences, etc.
The higher the value of asset involved, the higher is the amount of money in such transactions for extorting unreasonable favours. The situation worsens when the government entitles one or two favoured business groups with an official or quasi-official monopoly, allowing them to earn rent in the form of higher prices for products than what would have been possible in a competitive market. Hence, some sectors like telecom, power, defence and natural resources over which government enjoys significant control are also called “rent-seeking sectors”.
Besides monetary interests, there is another side to the story. The government, always faced with a problem of increasing growth rate, seeks a solution in crony capitalism. Unless the government finds a way out, asset holders shall never invest which means no growth, no revenue and no survival. As long as the asset-holders are assured of their rights being protected, they will continue to invest and stimulate growth.
Contrary to this view, crony capitalism is not a solution but a problem in itself. One, it discourages young entrepreneurs who are otherwise equipped with skills and assets but do not have political protection. Two, as governments change, the special favours and political backing vanish. In view of this, the cronies are likely to demand a high rate of return even for small projects which stifle long-term investment. Three, the possibility of getting a favour also induces businessmen to shy away from entrepreneurial activity. Four, crony capitalism increases the income disparity as the inflow of money takes place in the higher echelons and those in the low-income groups are left to shell out a higher amount to make both ends meet. The rich get richer and the poor get poorer. The rich also tilt the taxation system to their advantage. Small wonder that as the latest IMF report says, the net worth of billionaires in India has increased about 12 times during the last 15 years. Inequality in income has doubled during the last two decades.
A government, which is strong enough to provide rights, is equally strong to abrogate them. India is facing a huge commitment crisis. The government is not only slow in enacting legislation but has also failed in their effective implementation. The Competition Act 2002 was enacted to replace the erstwhile Monopolies and Restrictive Trade Practices Act with an objective to promote fair competition in the market.
It took seven more years to actually enforce the Act. Both BJP and the Congress had vested interests in delaying its implementation, as none wanted to antagonise big corporate houses. According to a recent report by the Association for Democratic Reforms, 75 per cent of funds political parties get is in black money.
The Competition Act has many loopholes that can be easily exploited by lawyers who are paid hefty amounts by their clients for protecting their interests. The government has also failed in building and implementing an independent professional regulatory and vigilant mechanism.
The new government will have an uphill task in providing a level playing field to businessmen. A free price system is not what economists call a zero sum game, in which wealth simply changes hands. On the contrary, it continually creates new wealth and everybody potentially benefits. A crony capitalist system, by contrast, is a negative sum game; it destroys existing wealth without creating much new wealth to replenish it.
The author is a company secretary and can be reached at jassi.rai@gmail.com