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The Big Picture – Threat of crony capitalism: Can it be curbed?


The public discourse in this country in the last few years has seen repeated mention of crony capitalism and its ill effects. The discourse has also centred around how a few rich and influential have cornered most of the natural resources, licences and contracts. Crony capitalism also implies lack of level playing field in curbing competition. The reserve bank governor in the past had raised concerns over the issue and had said that it is affecting business and growth of the country. The previous government was highly criticised for encouraging crony capitalism. Crony capitalsim describes an economy in which success in business depends on close relationships between business people and government officials.

The issue of crony capitalism has been active in the country for a very long time. During the licence raj regime corruption, along with the crony capitalism, was growing. The problem is huge today. A report released recently says that 50% of the GDP is black economy. Crony capitalism is not encouraged in a market economy like India. Yet it finds its way in to the economy where there are distortions in the economy. Necessary steps should be taken to handle it. The license raj consisted of stifling controls imposed on prices, production, capacity, investment, imports and exports, capital markets, banking and finance, land, labour. This provided ample opportunities for collusion between a corrupt government, initially used to generate money to run parties and fight elections, but gradually became a means of generating personal income and wealth.

Corruption is successor to crony socialism. Today both crony socialism and crony capitalism exist together. Lack of transparency in the system encourages crony capitalism and poses a big danger to the system. Common man will be the most affected in such system. Politics has become most lucrative and the best investment place in the country. Political funding demands money to be raised from the corporates. And this has created a nexus between politicians and the business people. Only 20 per cent of the source of funding to any political party is known. With acceleration in the growth of demand for natural resources, generated by the faster growth of the economy, rents inhering in these natural resources have risen, providing greater incentive for corruption. This is particularly true of tradable natural resources in which global prices have shot up (oil, coal, iron ore) and non-tradables (urban land, electricity, transport networks) in which the gap between domestic demand and supply has widened. Rising growth rates have similarly raised the rents implicit in public monopolies and the returns to those who control these monopolies.

The real problem is the unprecedented and unique system of government controls built under the Indian version of socialism. This has resulted in pervasive and deep-rooted corruption. We need policy reforms that reduce the incentive for corruption and institutional reforms that catch, try and punish the corrupt.