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How crony capitalism is killing the Indian economy

August 15, 2014 10:19 IST

One way to end cronyism in the allocation of natural resources is to move to transparent auctions, like it has happened in spectrum.

In his 2012 book, Breakout Nations, Ruchir Sharma said that any country that produces too many billionaires, relative to its size, is in all likelihood off balance.

"If the average billionaire of a country has amassed too much wealth, not just billions but tens of billions, the lack of balance can lead to stagnation," said he.

At that time, he had said that "many of India's super rich still inspire national pride, not resentment, and they can travel the country with no fear for their safety", but this "genial state of affairs could change quickly". That point may well have been reached.

Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday came down heavily on crony capitalism - the nexus between "corrupt businessmen" and "venal" and "corrupt politicians" - which, he said, is "killing transparency and competition" and is "harmful to free enterprise, opportunity and economic growth".

The issue of cronyism had played out in full during the recent general elections. "If the debate during the elections is any pointer, this is a very real concern of the public in India today," Mr Rajan added.

Some argue that the charges of cronyism hurled at Narendra Modi during the election campaign, especially his closeness to Mukesh Ambani and Gautam Adani, did not stick; otherwise, how would his party, the Bharatiya Janata Party, have gained a majority in the Lok Sabha?

In this narrative, the fear of cronyism is exaggerated. It would be wrong to infer from Mr Modi's victory that public resentment at cronyism is dormant.

On the contrary, it has never been stronger. And the prime minister, by all indications, is aware of it. In early July, I met several businessmen and lobbyists to find out which way the Budget would lean.

Mr Modi, it came across, did not want to be seen as favouring any one business group.

That's why the Budget did not contain any decision that could go in favour of one business house or a small coterie. "We are close to nobody," a businessman was told bluntly by a finance ministry bureaucrat after he had reminisced about his one-time closeness with Finance Minister Arun Jaitley.

That's probably the reason why Messrs Modi and Jaitley refrained from scrapping the retrospective tax amendment altogether in the Budget - it would have been seen as a favour to one company, Vodafone.

Mr Modi, it is learnt, wasn't happy after reports broke out that Nitin Gadkari, as the minister of surface transport, was batting for e-rickshaws even as his brother-in-law was one of the manufacturers.

As a result, most industry associations and lobbyists admitted that their task had become really difficult this time.

One school of thought says that Japan and South Korea progressed rapidly because a handful of their companies were singled out for special treatment by the government, and they delivered the results.

Most of them have become global conglomerates. That may be true but the Indian experience inspires no confidence.

What did telecom companies do when the government gave them inexpensive spectrum? Some of them sold stakes to foreigners at a huge premium. It was only after the Comptroller and Auditor General quantified the loss - it could be up to Rs 1.76 lakh crore (Rs 1.76 trillion) it said - that the people got to know of the extent of the scam.

Similarly, the special economic zones became an opportunity for land grabbing.

And coal blocks were bagged to lay hands on an undervalued natural resource. These instances shouldn't surprise anybody because cronyism has been an integral part of Indian business.

In the pre-liberalisation age, many business houses got industrial licences and just sat on them in order to create a scarcity that would keep prices high.

Most worked behind the scenes to ensure that rivals were denied licences. "An important issue in the recent election was whether we had substituted crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for pay-offs to venal politicians," RBI Governor Rajan said.

Cronyism acts as a significant entry barrier into regulated businesses. It is not easy to take on entrenched players who have decision makers in their pockets.

If they can cause ministers to be shunted out, imagine the damage they can inflict on newcomers.

That's why most young entrepreneurs these days are happy to confine themselves to unregulated sectors such as information technology.

One way to end cronyism in the allocation of natural resources is to move to transparent auctions, like it has happened in spectrum.

So far, it seems to have worked well. There is no reason why it can't be replicated in other sectors. The government needs to put in place safeguards that will ensure that there is no collusion between bidders.

So strong is popular resentment at cronyism and private-sector corruption (two businessmen and a bank chief find themselves behind bars on graft charges) that nobody has dared to name a businessman for the Bharat Ratna this year.

The last such demand was made almost 12 years ago when then telecom minister Pramod Mahajan said Dhirubhai Ambani should be given the award.

When Bharat Ratna could be given to nachnewale and ganewale (dancers and singers), why not the businessman, he asked?

Soon, Atal Bihari Vajpayee, then prime minister, dropped Mahajan from the Cabinet and asked him to work for the party as a general secretary.

Bhupesh Bhandari
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