Crony capitalism or plain corruption?

MURKY POLITICS: In 1981, the Maharashtra Chief Minister A.R. Antulay had to resign following a media expose alleging that he extorted millions of dollars from businesses independent on state resources and put in a private trust named after Indira Gandhi. Photo: The Hindu Archives

George Santayana said: “Those who cannot remember the past are condemned to repeat it.” Having forgotten the license-permit-quota-raj that enveloped us from 1950 to 1980 and its ‘crony socialism,’ many intellectuals, mediapersons and politicians have now discovered ‘crony capitalism.’ 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 (politicians and bureaucrats), initially used to generate money to run parties and fight elections, but gradually became a means of generating personal income and wealth. Controls on pricing, production, investment and foreign trade in manufactured goods were reduced in the 1980s and lifted in the 1990s. There was also a reduction in controls on banking and finance and some simplification of taxes. This reduced the scope for corruption in reformed areas.

Incentive for corruption

But controls remained in other areas, of which the most important (from the corruption perspective) are government ownership of and/or control of land, minerals, energy and infrastructure. 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.

As noted by Thakurta (2003), during the socialist era, “... Indian politicians were known to curry favour with businessmen — licences and permits would be farmed out in return for handsome donations during election campaigns. Indira Gandhi returned to power in 1980 and Dhirubhai [Ambani] shared a platform with the then Prime Minister at a victory rally. He had also become very close to the then Finance Minister Pranab Mukherjee and the Prime Minister’s principal aide, R.K. Dhawan.” For instance, in 1981, the then Maharashtra Chief Minister A.R. Antulay had to resign following a media exposé alleging that he extorted millions of dollars from businesses dependent on state resources and put in a private trust named after Indira Gandhi. “ The Indian Express detailed a host of ways in which the government had gone out of its way to assist the Ambanis.” (Thakurta 2003) “In 1987, a customs show cause notice to Reliance Industries alleged that: “Reliance appears to have unauthorizedly imported four additional spinning machines (valued at Rs. 53.02 crore) a clandestine manner and without payment of customs duty (Rs. 119.64 crore) on these machines.” (Ninan 1987) No industrialist in India could dare to undertake such activity in the heydays of Indian socialism, without making ‘campaign contributions’ to cronies in the self-labelled “socialist” government.

More harm than good

A paper presented at the Rajiv Gandhi Institute for Contemporary Studies, New Delhi ( Economic and Political Weekly , 2002), argued that the “government’s power to do harm has increased, while its power to do good has reduced.” It detailed through examples and experiences how pervasive and systemic corruption had become at all levels of government. Systemic corruption has been on a worsening trend over the past four decades. The Commonwealth Games scam was exceptional only in that money was spent in a short time to produce shoddy work under the nose of the national media. It was merely a tip of the corruption iceberg that imposes a cut of one-fifth to half on all payments for goods and services purchased by Central and State governments, the Department of Public Enterprises (DPE) and Public Sector Undertakings (PSU) from suppliers. The 2G scam was in contrast an example of the use of government policy controls over resources to create and extract rents. An Economic and Political Weekly (2000) paper on telecom reform had argued that the only way to determine the correct market price for the spectrum over any geographical area was through a competitive auction, which would allow any “natural resource rents” inhering in the spectrum to be captured by the government. The 2G scam would have been very difficult to execute if these policy recommendations had been adopted by the government earlier. The manipulation of policy by the political executive to extract rents obviously requires business partners (cronies) who will share the “resource rents” with the minister (thus jointly cheating the national exchequer). But this has nothing to do with ‘crony capitalism’ and everything to do with ‘corruption.’

Regulatory systems

A new opportunity for corruption in public contracting has arisen in the form of Public-Private Partnership (PPP) contracts. Given the limited experience in this area, initial contracts had flaws that could create opportunities for corruption. There is now sufficient experience of PPP in ‘natural monopoly’ infrastructure, to modify these contracts and build corrective mechanisms into them. Governments have also failed to build independent professional regulatory systems. Ministers who treat regulatory appointments as sinecures for favoured officials need to be exposed as indulging in (non-monetary) corruption.

Ideological labels like ‘crony capitalism’ are likely to mislead by channelling the debate into philosophical-ideological issues of capitalism and socialism and detract from finding and addressing the real problems. 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.

(Arvind Virmani heads

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Printable version | May 7, 2022 10:00:05 am |