Political parties, politicians, professionals and bureaucrats, in some way or the other, offering/ helping industries companies/firms with scarce land and/or mineral resources, the distribution of permits/grants, vital and policy information and so on, for some personal or political or organisational consideration and interest, are examples of crony capitalism. In simple terms, it is exploiting the economic system for unlawful political or personal or organisational gain. Lack of transparency and loss of revenue are the principal characteristics of such transactions.
As the international subprime bubble and bank collapses of 2007-2009 have demonstrated, corporations can, if left unregulated, grievously harm economic welfare and even drag down the local economies. In all, US and European banks lost more than $1tn on toxic assets, from January 2007 to September 2009 and in Iceland, in 2008-11, the systemic collapse of all three of the country’s major privately-owned commercial banks brought the country to the brink of complete bankruptcy. The indictment of HSBC and Citigroup for helping tax evasion and/or money-laundering and StanChart and BNP Paribas for breaking sanctions is a very recent happening. This and the involvement of many big banks in the LIBOR scandal show how the banking system has become repeatedly involved in corruption.
It was during the licence permit raj – 1950-1980, that crony capitalism first emerged in Independent India. During the socialist era, Indian politicians were known to curry favour with businessmen — licences and permits were farmed out in return for handsome donations for election campaigns. The nexus continued. In the ‘80s, Reliance was very close to the then powers that be and it was then that its meteoric rise occurred.
Coming to current time, election funding has become a very critical issue. The BJP is estimated to have spent at least Rs. 600 crore on print and broadcast advertising in the 2014 election, a large part of which reportedly came from the corporate sector. This is surely not philanthropy and the latter would surely ask for its pound of flesh. It will also be called upon to solve this difficult issue of election funding.
RBI Governor Raghuram Rajan said in mid-2014 in Mumbai “an important issue in the recent election was whether we had substituted the 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 payoffs to venal politicians. By killing transparency and competition, crony capitalism is harmful to free enterprise, and economic growth. And by substituting special interests for the public interest, it is harmful to democratic expression. If the debate during the elections is any pointer, this is a very real concern of the public in India today…the system protects the large borrower and his divine right to stay in control. In cases of defaults, the large borrower can command the finest legal brains or has the influence to obtain stays from local courts. Faced with this asymmetry of power, banks are tempted to cave in and take the unfair deal the borrower offers.” No wonder that the Non-Performing Assets (NPAs) of the banks in the country stood at as high as Rs 3,00,611 crore as on December 2014.
The corporate sector has received FDIs and local bank credits of over Rs.50 lakh crore since 1991. It has absorbed capital that equals almost half the GDP, but has added only 2.8 million jobs in 21 years and by citing the global meltdown, obtained extra tax cuts of over Rs.15 lakh crore from 2009 as stimulus for growth.
When there is a large need for and dependence on FDI, the Reserve Bank data shows that India Inc’s overseas direct investment in September 2014 more than doubled from a year ago to $3.02 billion — about Rs. 1,800 crore. These investment proposals are found worthwhile by GoI on the basis of estimated future benefits from the investments received in India. The time has perhaps come to examine how much has actually been received. Otherwise, it would appear that the investments serve other purposes.
As on April 2012, 259,523 direct tax cases were pending before various appellate authorities. In aggregate, the disputed amount at various levels of the income tax dispute resolution system was estimated at a substantial INR 4,367 billion as on December 31, 2011.The significance of this amount is startling when seen in perspective with the net direct tax collection of the country for FY ’11–’12, estimated at around INR 4,940 billion. Although, tax avoidance can’t be directly related to crony capitalism, both have the same origin — the rot setting in the moral fibre of the nation consequent to this spreading malaise.
Modi and BJP will need strong political will to combat the issue. The main requirement to be introduced for eliminating crony capitalism is competition, transparency and consequent level playing field. Crony capitalism can’t survive in such an atmosphere but enterprises would thrive. GoI would have to do this and while cleaning the system, It must also encourage and build a growth conducive environment for providing a fillip to the latent dynamism of the Indian entrepreneurs by ensuring availability of an ubiquitous low-cost internet connectivity and scaling up entrepreneurship and providing ease of doing business through appropriate “entrepreneurship ecosystem.” It should ideally include service providers in funding and skilling. Government, industry and associates and professional organisations would need to be the initiators and the stakeholders in such a system.
The writer is a commentator on social, political and economic issues.
