Crony Capitalism in India – Issues and Way Ahead

pro-crony vs pro-business upsc essay notes mindmap

The Economic Survey of 2019-20 argued for the need to eliminate crony capitalism in order to ensure public welfare. It suggested the promotion of pro-business policies that does not let companies and businesses form monopolies and survive even in the absence of efficiency and growth. The elimination of cronyism with strong political will is vital now more than ever as there is a high possibility of large businesses making use of their economic muscles to influence political decisions amid the coronavirus-led economic crisis.

pro-crony vs pro-business mindmap

What is crony capitalism?

  • Crony capitalism is the term used to refer to a capitalist society that is based on the close relationships between business people and the government.
  • In this form of capitalism, both the government the business people collude to rig the competitive rules or laws of the market economy to favour the colluding private entities, often in exchange for money or other such considerations.

For example, the government allocating land at concessional rate to established business houses or giving tax holidays to certain industries in the name of stimulating investments attributes to crony capitalism.

  • Normally, in a capitalist society, the success of a business is through the free market and rule of law.
  • In crony capitalism, the success is dependent on the preferential treatment shown by the government in the form of tax breaks, government grants and other incentives.
  • In reality, cronyism is the most dominant form of capitalism
  • Experts deem crony capitalism to a mild form of oligarchic capitalism, which is Russia and Latin America, where a small group of individuals and families holds the bulk of power and wealth.
  • Crony capitalism is often criticised for an array of social and economic woes faced by both socialist and capitalist countries.
  • In fact, Raghuram Rajan and Luigi Zingales, in “Saving Capitalism from Capitalists”, argue that it is cronyism that held back free-market system and not the economic deficiencies.

How prevalent is cronyism in India?

Pre-liberalisation:

  • The roots of crony capitalism in independent India can be traced back to the pre-1991 era of the license, permit and quota raj.
  • During this period, the government tightly controlled most of the economic activities within the country.
  • This has led to increased instances of collusions between the government and a few business entities.
  • While the former gained monetary benefits during the election times, the latter were able to expand their markets and narrow down competitions.

Post-liberalisation:

  • The post-1991 liberalisation of Indian economy witnessed fast-paced poverty alleviation and other social gains.
  • After the 1991 market reforms, Sensex has grown at an accelerated pace.
  • This is attributed to the changes that reduced many of state’s control on pricing, investment, production and international trade.
  • The post-1991 era saw the coming of many regulators like the Securities and Exchange Board of India (SEBI), Competition Commission of India and the recently formed Insolvency and Bankruptcy Board of India.
  • The new laws like the Competition Act and Foreign Exchange Management Act (FEMA) were enacted in the place of the old draconian Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA) respectively.
  • The democratisation of the Indian market was achieved to a certain extent with the creation of an ecosystem where new entrants have amassed wealth or have become professionally successful without being born in established business families or without any government support.
  • The Information Technology (IT) industry’s successful fast-paced growth and the rise of Dalit entrepreneurs are some of the excellent examples of this.
  • Regardless of these reforms and achievements, several crucial governances, administrative and institutional transformations have not taken place to remove cronyism.
  • The failure to regulate electoral funding, with corporate donations constituting the major source, is a case in point. Political funding has become a prominent source of crony capitalism.
  • Moreover, the liberalisation of the Indian economy has failed to reduce the state’s excessive control over numerous aspects like land, finance and banking, minerals and other resources.
  • This has resulted in the prevalence of unholy alliance between the government and businesses, which is manifested in the form of various corruption scandals.
  • Some of these include the corruption in the allocation of telecom and spectrum licenses, coal blocks, acquisition of land for industrial projects etc.
  • Thus, it is not surprising that India was ranked ninth position in global crony capitalism index in 2016, with crony sector wealth accounting for a whopping 3.4% of the GDP.

Most probable and repeated topics of upsc prelims

What is the take of Economic Survey 2019-20 on Pro-crony businesses?

  • The Economic Survey 2019-20 laid down the government’s strategy to promote the public welfare by shunning crony capitalism or as the survey puts it “pro-crony” policies.
  • According to the Survey, the “pro-crony” policies could lead to:
  1. Some incumbent firms receiving preferential treatment
  2. Inefficient resource allocation
  3. Citizens’ welfare minimisation
  • The Survey noted that, despite enabling competitive markets, pro-crony policies have destroyed the value of the economy, as these policies erode the wealth of the economy by hindering the process of creative destruction.
  • Creative destruction is the term coined by the Austrian economist Joseph Schumpeter in 1942 to describe the dismantling of long-standing practices to pave way for innovation and productivity.
  • The Survey came down heavily on the allegedly massive scams that took place during the recent years like 2G spectrum allocations and coal block allocations.
  • It pointed out that such pro-crony policies can promote narrow business interests while also hurting social welfare.
  • It also argued that crony businesses might lobby with the government to limit competition in their sectors.
  • Thus, it called for the need to wean away from such policies to realise India’s aspiration to become a $5 trillion economy.
  • Some of the instances to cronyism in the Indian economy as pointed out by the survey are as follows:

Bidding for rural roads under PMGSY:

  1. A study examined the bidding data on more than 88,000 rural roads built under Pradhan Mantri Gram Sadak Yojana (PMGSY) in comparison with the election results.
  2. On using a large sample of more than 800 candidates in more than 4,000 elections spanning from 2001 to 2013, the study revealed that after close election victories, contractors affiliated with the winning politicians are more likely to be awarded road projects.
  3. The study also revealed that 26% of roads that were recorded as completed in the PMGSY monitoring data were missing from the 2011 Census.
  4. This suggests that these roads were never built or completed.
  5. This data, in short, reveals that preferential allocation of roads increases the likelihood of “missing” roads by as much as 86%.
  6. The benefit for private entities arising from this scenario is the increased income at the cost of undermined markets and reduced aggregate welfare.

Wilful Defaults:

  1. A firm is termed as a wilful defaulter by the RBI if it defaulted in meeting its repayment obligations despite having the capacity to honour these obligations.
  2. A firm could also be branded as a wilful defaulter if it uses the funds for the purposes other than what is sanctioned by the lender, siphons the money out to related parties or removes the assets used to secure the loan.
  3. Every rupee lent to a wilful defaulter constitutes an erosion of wealth, which is in contrast to the money lent to a genuine business to create an asset, profit and employment.
  4. According to the economic survey, as of 2018, wilful defaulters owned their respective lenders nearly 1.4 lakh crores.
  5. These defaulters are spread across various sectors, with manufacturing firms constituting the largest share.
  6. To understand the impact of these losses, the Survey compares the money owed by the wilful defaulters in 2018 with the Union Budget allocation towards citizens’ welfare in the same year.
  7. If the money lent to the wilful defaulters had stayed in the economy, the government would have been able to double the allocation towards health, education and social protection, double the allocation towards rural development or triple the allocation towards MGNREGA.
  8. The survey pointed out that it was crony lending that led to wilful default, wherein promoters have collectively siphoned off wealth from banks, leading to losses that limited the subsidies directed towards the rural development.

What are pro-business policies?

  • Pro-business policies aim at the fostering of competitive markets with a level playing field for all.
  • Through these policies, the government maintains equidistance from all businesses, creating level playing field, establishing rules of the game including an effective and independent legal framework, providing the right physical infrastructure and business environment.
  • Examples for pro-business policies include Insolvency and Bankruptcy Code and other policies involved in the promotion of ease of doing business.
  • The Economic Survey, while criticising “pro-crony” norms, called for the promotion of pro-business policies in order for India to become a $5 trillion economy.

What are the advantages of pro-business policies?

  • The pro-business policies would enable the level playing field while ensuring efficient allocation of resources and maximised welfare for citizens.
  • They can unleash the power of invisible hands of the market to generate wealth.
  • They do not let companies and businesses to form monopolies and survive beyond the sell-by date.
  • This means that, within the free and competitive market, even the well-established and well-known businesses are required to prove their competence repeatedly in order to survive amongst the newly emerging businesses.
  • This ensures that no one takes their success for granted or rest on past laurels.
  • This in turn assures better products, improved services, greater innovation and improved overall economic efficiency.
  • This in turn discourages the need to build political relationships and prevents the undermining of the economy’s capacity to create wealth.
  • These policies can also ensure fair competition, correction of market failures, promotion of ease of doing business and enforcement of business accountability.
  • These policies ensure the prevention of rent-seeking by connected companies, which can’t otherwise survive in the market.
  • Generally, rents sought by crony businesses are paid by genuine businesses and citizens who are not receiving any preferential treatments.
  • Transfer of wealth to crony firms could only exacerbate the income inequality in the economy, without leaving room for wealth expansion and economic growth.
  • Pro-business policies can address these issues.
  • They can also ensure the smooth operation of creative destruction within the economy.

Way forward

  • Amid the current economic crisis, there is a high possibility of few trying to gain from high-level contacts.
  • This is because, for businesses, the potential gains from capitalist profits and government rent-seeking are ever-increasing, especially during crisis times.
  • Thus, it takes a political will of the government, which is governed by political parties whose electoral funding came from one or more of these businesses, to implement impartial pro-business policies.
  • The government must work towards the promotion of capitalism based on fair competition and equal opportunity for all – the core values that are written in the preamble of the Indian Constitution.
  • Free-market capitalism would inevitably lead to unequal outcomes.
  • However, these unequal outcomes must not be unfair based on preferential treatment for few with connections.
  • To ensure fair competition, the invisible hands of the market along with the hand of trust must be strengthened.
  • For this, India needs to stand on four pillars:
  1. A strong government: The administration must be efficient and fair. It must provide access to quality social welfare programmes like quality and affordable healthcare and education.
  2. Rule of law: Establishment of independent institutions and laws that impose limits on the state’s exercise of public power.
  3. Democratic accountability: Strict laws against those manipulating the system
  4. Free markets: Ensuring equal opportunities for the economic empowerment of all citizens based on skill and hard work and not patronage.

Conclusion:

Crony capitalism is an anathema to the basic constitutional values of fairness, equality and the rule of law. Doing away with it not a utopian dream, but a realistic aspiration that depends on strong political will and visionary leadership at all levels.

Practice question for mains:

The free market system is held back, not by its own economic deficiencies, but by its reliance on political goodwill. Comment. (250 words)

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