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How pervasive is crony capitalism?

How pervasive is crony capitalism?
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First Published: Fri, Jan 14 2011. 10 02 PM IST
Updated: Fri, Jan 14 2011. 10 02 PM IST
Shady land deals, dodgy telecom auctions and political support for illegal mining—who in India does not know of the cosy links between politicians and businessmen? It’s called crony capitalism. It leadsto the enrichment of a few companies that enjoy state patronage, blocks competition, discourages innovation and ultimately hurts growth. But, while the state-business nexus in India can hardly be denied, the question is: how pervasive is it? To try and answer that question, Ashoka Mody, Anusha Nath and Michael Walton analyse the profits of companies listed on the Bombay Stock Exchange to find out whether there is evidence of market power and whether the benefits of growth have accrued to a few favoured firms. The period covered is the 1990s and the 2000s, the decades after economic liberalization that saw a marked change for the better in the Indian economy.
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One way to gauge dynamism is the entry of new firms. The paper finds that while there was substantial new entry across virtually all industries in the early 1990s, this stopped in the late 1990s and did not pick up in the 2000s despite a recovery in profits. Large business houses and publicly owned companies remained dominant during the period and firms linked to business houses slightly increased their share of total sales in the sample from 41% in 1989 to 42% in 2008.
The point the authors make, though, is that the increase in concentration in the market in the 2000s did not have an impact on profitability. For instance, firms in less concentrated sectors have higher profit rates. They also find that “firms in re-concentrating sectors have similar overall profit dynamics as other firms, again supporting the view that the exercise of market power is not a general phenomenon for this group”. In fact, the authors say that it is the dynamic firms that do well and thus gain market share. The paper does find persistence in profits from year to year, but it also notes that this persistence declines when profits are averaged over longer periods, thus pointing to “super-normal” profits being whittled away over time. Also, while they agree that market power may have a hand in the persistence of profits, they find that a part of the persistence reflects greater efficiency. The profitability of business houses behaves in a similar fashion to free-standing firms, with no evidence of greater capacity to use market power to get more profits.
Not surprisingly, the authors say their findings present “a picture of a corporate sector that, in this period of major change, was characterized to extensive competitive pressures, inducing dynamism, as opposed to being typified by market power and entrenchment”.
Nevertheless, the authors also point out that their analysis does not take into account state-corporate links that may erect policy barriers to entry, thus having an impact on profits. But there is little doubt that for the vast majority of companies, including many large ones, cut-throat competition is the norm. That should be good news for the economy
Write to simplyeconomics@livemint.com
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First Published: Fri, Jan 14 2011. 10 02 PM IST