India’s crony capitalist model
The News International, May 12, 2007
Prime Minister Singh in an unusually reflective speech critiqued a collusive business-government relationship which has led to persisting inequality in India, yet Praful Bidwai argues that he has failed to see how his observation applies both to himself and his policies.
On May Day, Prime Minister Manmohan Singh struck an unusually reflective and candid note while speaking at the Institute for Studies in Industrial Development in Delhi. He said he's "puzzled by the persisting regional imbalance in industrial development… in India." He expressed serious concern that most Indian businessmen operate in "oligopolistic markets and in sectors where the government gives them special privileges".
Singh then went on to ask: "Are we encouraging crony capitalism? Is this a necessary but transient phase in the development of modern capitalism? Are we doing enough to protect consumers and small businesses from the consequences of crony capitalism…?"
Singh's self-critical observation about "crony capitalism"
or a collusive business-government relationship, which produces undeserved gains for corporations must be welcomed. He's absolutely right to say, "We cannot depend only on a few large industrial houses and capitalists for driving our industrialisation process…" His warning about "oligopolistic markets" which unfairly favour Big Business doesn't come a day too soon.
Yet, Singh seemed to be trying to pre-empt serious criticism of elitist economic policies, which would logically lead to their correction. His attempt to present "cronyism" as a "necessary" (if "transient") phase in capitalist development in India gives it the ring of inevitability.
Evidently, far from being "transient", cronyism has proved lasting and abiding for decades -- whether during the much-maligned "licence-permit raj" of the 1960s and 1970s, or its partial dismantling in the 1980s, or under full-throttle liberalisation and privatisation launched by Singh himself in 1991.
Cronyism's forms have certainly changed. Three decades ago, corporate-state collusion meant the grant of out-of-turn industrial licences. In the early 1990s, cronyism consisted in temporarily amending import regulations to benefit certain industrial magnates. It also meant a wholesale rewriting of the ground-rules even of privatisation, as in basic telephony -- where the state wrote off obligatory licensing fees.
Today, it means establishing Special Economic Zones, promoting organised retail and hypermarkets, and allowing companies to borrow $22 billion abroad at low interest rates. Cronyism's basic content remains unaltered.
Singh's criticism of cronyism was further muted by his remarks that industrial growth would pose "challenges like displacement of people, environmental damage and alienation of the working class." And yet, "one cannot throw the baby out with the bathwater." The "baby" in question is rapid industrialisation -- a magic formula to help India emerge as "a major industrial power." But this totally disregards the social consequences of industrialisation.
Singh is himself guilty of favouring Big Business in countless cases. Recently, his office intervened on behalf of the Korean company POSCO, which wants to build a giant steel plant in Orissa -- India's largest-ever foreign investment project (Rs52,000 crores).
Singh has earmarked 3,000 acres of forest land to POSCO. He is pushing the state-owned Kudremukh Iron Ore Co to transfer its mining lease to POSCO. This falls squarely within the definition of cronyism. Singh's discourse about cronyism, then, is a half-apology, mixed with a little regret -- transient enough to allow a mere shrug of the shoulders.
Its second most important feature is that the "cronyism" confession comes from a person who, with due respect, is himself a crony. Singh wouldn't have been appointed finance minister in the crisis year 1991 without prior approval by the international financial institutions (IFIs), including the World Bank and the IMF.
Former Prime Minister P.V. Narasimha Rao, an intelligent but deeply cynical man, decided to obey the IFIs' dictates. After the collapse of Soviet Union, he felt, non-alignment would have no future; India would have to play the only game left in town -- neoliberalism. Singh would perform that function. Rao repeatedly hints at this in his autobiographical novel The Insider.
Singh, a long-standing friend of the IFIs, proceeded to play the cronyism game with unmitigated zeal -- not least through the appointment of other cronies like Montek Singh Ahluwalia and P. Chidambaram to key positions in 1991-95, and then again after the United Progressive Alliance came to power three years ago.
The positioning of top bureaucrats dedicated to neoliberalism in key ministries was integral to the process. They included N.K. Singh, Vijay Kelkar, Rakesh Mohan, R. Vasudevan, R.V. Shahi, Anwarul Huda, Arvind Virmani, Ashok V. Desai, S. Narayan, Tejinder Khanna, Y. Venugopal Reddy, to mention only some.
Equally important were the "Revolving Doors": former IFI employees and consultants would join as secretaries of economic ministries. Contrariwise, Indian civil servants would join the IFIs upon retirement or on deputation. At one time, 21 out of 27 economic bureaucrats passed through such "Revolving Doors"!
The change of economic orientation was reflected in foreign policy too. India moved away from non-alignment, and towards the United States. The process was hesitantly begun by Rao, and acquired momentum under the National Democratic Alliance.
It's now peaking under the UPA with the India-US nuclear agreement, and India's willingness to cut a deal on services and non-agricultural market access in the World Trade Organisation, behind the backs of other developing countries.
A glaring instance of cronyism today is the appropriation of vast powers by planning commission deputy chairman Montek Singh Ahluwalia, a quintessential World Bank-IMF crony. The commission has never been more powerful than it is today -- ironically, under the sway of anti-planning free-market policies.
Ahluwalia decides everything -- whether the Northeast will develop or not, how many districts the National Rural Employment Guarantee will cover (without adequate funding), and whether primary schools will run.
Since 1991, the Indian state has mollycoddled Big Business through massive tax breaks and excise/import duty concessions. Indian companies pay an average of 17 per cent tax on their profits, less than one-half the rate in the west. Thanks to reduced taxes, cars and air conditioners cost less in absolute rupees than they did 10 years ago -- inflation notwithstanding.
The single-minded devotion with which crony capitalist policies have helped business is starkly evident in the growth of India's high net-worth individuals, whose disposable income exceeds $ 1 million. Their number grew from 61,000 to 83,000 between 2003 and 2005.
Even more shamefully, India has, according to Forbes magazine, the world's fourth highest number of billionaires. India (with 36 billionaires) has just overtaken Japan (24). Their total wealth equals one-fourth of India's GDP! India has three of the world's top 20 billionaires, a number exceeded only in the US (five).
At the other pole, there is steady accumulation of poverty and destitution, aggravated by dispossession and displacement. The neoliberal years have seen the slowest reduction in poverty. But the true extent of deprivation is probably growing faster than before. India's global human development rank is a miserable 126.
Needless to say, Indian growth is increasingly mal-distributed. Capitalism always builds on the best, on the most developed regions. SEZs will further aggravate disparities. So it's completely hypocritical for Singh to say he's "puzzled" by growing disparities. Disparities and imbalances follow directly from his own policies.
If he wants this to change, the UPA must tax the rich more, reinforce the death duty, discourage inheritance, and launch an incomes policy which sets upper limits on salaries and bonuses. It must also promote public investment in backward areas -- to reduce regional disparities. Only then can cronyism be cured.