The term ‘crony capitalism’ grew out of flaws in a capitalist economy where a few well-connected individuals benefitted immensely due to their connections and affiliations with those in power.
These ‘crony capitalists’ flourished through unfair advantage given to them in core industries like mining, infrastructure, construction, energy, telecom, defence, etc.
In an attempt to map crony capitalism worldwide, The Economist magazine came out with ‘Crony Capitalism Index’ that uses data derived from IMF, Forbes and other popular sources, to monitor how crony-specific sectors and non-crony sectors contributed to wealth creation of certain select billionaires, as a percentage of the GDP.
India and the Crony Capitalism Index
In the latest list released by the Economist for 2016, India ranks 9th on the Crony Capitalism Index.
While it is no surprise that India makes it to the Top 10 list, the fact that India’s rank in crony wealth creation has actually come down from 18% of GDP in 2008 to 3% of GDP in 2016, marks a sea change in how India now conducts its business. That’s a significant improvement for a country that popularly bemoans its widespread corruption and crony capitalism.
How did this significant ‘drop’ in crony capital come about?
To explain this change, a good example would be to study recent developments in the coal sector in India.
Coal is an important natural resource that has been driving the energy and manufacturing sectors ever since harnessing of coal was first discovered. In early 70s, when coal industry was nationalised, public sector companies took over mining and supply of coal through controlled distribution.
In recent years, as privatisation of coal industry seemed a necessity in wake of India’s rapid growth and industrialisation, the UPA II regime took the decision to open coal mining to the private sector once again.
However, instead of auctioning coal mining through a transparent and open bidding process, the UPA II regime decided to ‘allocate’ mines to certain ‘select’ companies. It was widely understood that whoever got the limited licenses that was on offer, would profit significantly.
The then government had explained that open auctioning of coal mines would drive up the price of coal and result in higher production costs in recipient industries, which in turn would further fuel inflation.
Transparent and Corruption-free Measures
The resulting scam is well documented and those who benefitted from crony capitalism stood exposed. But what needs to be noted is that the NDA government, after coming to power in 2014, cancelled the earlier mine allocations and offered the same mines under a transparent and open auction process.
This resulted in the government actually realising highest revenues from the auction process, while the price of coal to user industries did not increase, as was predicted by the previous regime.
The same story was repeated in the 2G telecom spectrum scam, where a select few were allocated spectrum. The NDA regime once again demonstrated through 3G and 4G spectrum auction that an open and transparent auctioning process achieved highest revenues for the government, while ensuring only those bidders that needed the spectrum and who were willing to pay the corresponding price, won the bid.
Transparent and corruption-free measures like these in various critical sectors have resulted in not just making these industries more efficient but has resulted in higher revenues for the government.
RBI’s role in Reducing Crony Capital
The second important development that helped in reducing crony capital in India has been the proactive and alert approach of the Reserve Bank of India in exerting pressure on banks to curb Non Performing Assets (NPA) and reduce ‘sweetheart lending’ to a favoured few, based on their proximity to the ruling elite.
Ever since the NDA came to power in 2014, there has been a paradigm shift towards a more transparent and corruption-free auction process through open bidding, and curbing of easy bank loans to a favoured few, both of which have resulted in India improving its ranking in ease of business, as also in reducing the crony capital wealth as a share of GDP.
How have other countries performed on the Index?
Russia retains the dubious distinction of topping the list followed by three Asian countries – Malaysia (2nd), Philippines (3rd) and Singapore (4th). Eight countries out of the Top 12 are Asian and that does reflect poorly on the region.
A country like Singapore, which otherwise ranks high on corruption-free economies’ Index, actually ranks 4th, ahead of China’s 11th, on the crony capital index.
Interestingly, China ranks 11th on the list, despite having the world’s largest concentration of crony capitalists (in absolute terms), generating $360 billion.
By Economist’s own admission, the Index does not take into account individuals that made less than a billion dollars but created significant wealth through state favours and support in non-rent seeking sectors like technology. If this list were to be included, China would then rank 5th on the global list.
However, a positive change is the fact that, globally, crony wealth has witnessed a drop to $1.75 trillion, representing a fall of 16% since 2014.
So how is crony capitalist wealth dropping globally?
Crony capitalism worldwide saw its best years between 2000 and 2010, when China was experiencing rapid expansion of its economy and driving global demand for commodities and energy.
This resulted in significant increase in wealth for all those involved in natural resource mining and supply. The insatiable demand for energy also drove up oil prices, giving a massive boost to existing members of OPEC and those relatively new to the oil extraction business such as Russia.
In countries such as Russia, Nigeria, Brazil and even India, capitalists, who had close proximity to the government, cornered licenses to mine natural resources and they are the ones who profited the most.
During this period, Russia produced the fastest number of new billionaires, along with China. India, too, saw its share of new-age billionaires, many of whom profited from selective largesse of the government and banks, during the golden run.
But since 2011, the global economy has been slowing down, led by China, and this has resulted in a drop in demand for commodities and oil, resulting in record low prices. The holiday is over and all those who benefitted from crony capitalism are now facing increasing opposition from local people and political groups, who are now demanding answers from their respective governments.
Fortunately for India, the change in regime in 2014 was well-timed and if reforms were to continue, India could well see it evolving as an efficient, friendly and relatively corrupt-free business destination. A natural fallout of that would be a further ‘drop’ in rankings in the Crony Capitalism Index.
