Prime Minister Manmohan Singh had asked a rhetorical question in a speech he made in May 2007: “Are we encouraging crony capitalism?”
It’s an issue worth revisiting after the hullabaloo over the PM’s meeting with Mukesh Ambani this week. The timing of the meeting was bound to attract criticism, what with the Samajwadi Party making demands linked to the fratricidal battle between the Ambanis.
Illustration: Jayachandran / Mint.
The Communist Party of India (Marxist) has said in a statement that the PM is trying to mediate in the war between the Ambani brothers. This is an accusation of crony capitalism, a noxious marriage of political and business power. Even the PM’s worst critics know that he is a man of honesty and integrity. He is unlikely to take decisions to wilfully assist one business house against the other.
There are larger issues here. This newspaper has often been critical of the PM’s failure to stand up to either the demands from his party to push through half-baked schemes such as the farm loan waiver or the Left’s obdurate refusal to allow further economic reforms. But we have never had any reason to doubt his intentions.
This is not an unrelated point. Crony capitalism takes root in oligopolistic industries (such as oil, telecom, power and real estate) that are either tightly managed by governments or based on the control of natural resources. The Ambanis — and most other large Indian business houses — are heavily invested in precisely such industries, which is why family battles spills over into politics. This has also been the pattern in many other developing countries, such as Indonesia under Suharto and Russia under Boris Yelstin.
Nobel economist Douglass North has divided human societies into two categories. First, “limited access orders” which create order by using the political system to limit economic participation, a process that creates excess profits (or what economists call rents). These rents are used to impose political stability and limit violence. Second, “open access orders” which maintain order by competition rather than rent seeking.
Manmohan Singh would have done well to liberalize the economy further and make India more of an open access order. A competitive and transparent economy is the best bet against the disease of crony capitalism. Then there would have been no doubt that all the PM and Mukesh Ambani discussed were broad national issues.
Should the Prime Minister have met Mukesh Ambani this week? Write to us at email@example.com