No less a person than Prime Minister Manmohan Singh asked this question in a speech he gave on Tuesday. We wholeheartedly share his concerns. India is not usually equated with the disease of crony capitalism—a system where profits are generated through political patronage rather than by competing in an open market. Such a rotten economic system is usually found in semi-authoritarian countries such as Indonesia under Suharto or Russia under Boris Yeltsin, when select generals and oligarchs have built fortunes under the protection of the state.
India by no stretch of imagination is in the same class. But we could be having a milder version of the disease. “I was struck recently by a comment in the media that most of the billionaires among India’s top business leaders operate in oligopolistic markets and when the government has conferred special privileges on a few. This sounds like crony capitalism,” the Prime Minister reportedly said in his speech.
We had commented in an editorial on 12 March that the new listing by Forbes magazine of the world’s richest people showed a stark difference in the nature of wealth creation in the rich countries and in countries such as India. While the biggest fortunes in the West have been based on pure creations of the human mind, such as consumer brands and software, natural resources and entitlements become more important in the developing countries. “The billionaires from these countries tend to be in industries that depend on natural wealth—where supply constraints are common. It could be land (which they stopped making a few million years ago), mining and metals (where fortunes are often built on government concessions) and telecom (where bandwidth is a slave to the laws of physics),” we had said.
Nobel economist Douglass North and his colleagues have put forth what they call a conceptual framework for interpreting recorded human history. North and his colleagues say that human societies initially emerge as “limited access orders.” These societies create order by the use of 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.
And then there are “open access orders.” Here, order is maintained by competition rather than rent-seeking. There are fewer barriers to economic and political participation. Only a few countries have managed to make the transition to “open access orders,” says North.
While India is nowhere close to becoming an open access order, it is moving towards being one. The issue is how the transition is to be managed—and that is precisely the problem that the Prime Minister could be alluding to in his speech on crony capitalism. Manmohan Singh was instrumental in dismantling huge parts of the rent-seeking structure of controls that came to be called the licence raj. There is no doubt that the economy has benefited from this creative destruction.
We are yet at a half-way house. The challenge in a transition economy such as ours is to prevent collusion between special interest groups and the state—or else there could be a backlash against liberal reforms. This is what has happened in Russia under Vladimir Putin, where the state has tried to reimpose its will on society in the name of order—thus pushing Russia back towards a limited access order.
India will not have inclusive growth if either political or economic access is restricted —be it through trade barriers, lack of financial inclusion, inadequate infrastructure to link producers to markets, or even decrepit schools and hospitals that restrict capabilities.
India today needs liberal capitalism, not a corporatist variety riddled with cronyism.
Does India have elements of crony capitalism? Write to us at email@example.com