Ridding India of cronyism

Ridding India of cronyism

The A. Raja and 2G spectrum allocation scandal holds many lessons for managing scarce natural resources in India. Pricing these resources in an efficient and transparent manner is important for continued growth.

This is important for otherwise the danger of Indian economy freezing to a halt is very real. Fifteen years ago, the South-east Asian “tigers" were the cynosure of the world. And in many respects India’s economy is not different from that of Indonesia, Malaysia and Thailand. Yet today, these tigers are merely chugging along. Their economic roar of the 1990s is a mere memory.

One way to take care of the problem would be to simply end any discretionary powers in the hands of the government: All land, spectrum, mines, minerals and other exhaustible resources should simply be auctioned to the highest bidder. The government should simply have no role in fixing prices of these resources. In fact even fixing the principles of price discovery should be taken away from government ministers and handed over to independent regulators. It’s easy to keep a check over independent regulators—imposition of stiff jail sentences by special tribunals with vastly simplified procedural standards of evidence is enough to instil honesty even among the unrepentant.

If this is not done, the danger is that any pricing mechanism will lead to rents accruing to unscrupulous players. For example, as has been seen in the case of many telecom licensees and holders of spectrum, it is easy to make money by first purchasing these resources at throwaway prices and then make a killing by selling them to a third party at the actual economic cost of the resource. This is rent-seeking pure and simple. There is simply no way for the government to estimate the correct prices in an honest way: Our system is simply too corrupt to do that.

Doing this is not easy.Politicians will resist any such move tooth and nail. After all who would want to give away income garnered by corrupt means. But consider the alternative: A few years of 9% plus growth followed by a return to a low-growth equilibrium in the face of a growing working-age population. This is a perfect recipe for social unrest, if not anarchy.

At the moment, the country is moving in the opposite direction—ministerial interventions in pricing decisions are on the rise in the name of social justice and other objectives. Taxing profits or making companies share profits with locals (in the mining sector, for example) runs counter to this desirable non-interventionist trend.

Ministerial discretion in allocation and pricing: more a problem and less a solution? Tell us at views@livemint.com